Bankruptcy is the process by which a federal court helps a business or individual to repay their debt. With the protection of a bankruptcy court this allows businesses to either wipe out or repay their debts.

The word bankruptcy has now become a common term brought about by what happened at the Lehman Brothers Holdings, Inc. This does not allow any creditor to claim the debts even without court approval. Bankruptcies have two types: liquidation and reorganization.

Liquidation Bankruptcy

In this type of bankruptcy, personal properties are turned over to the court in order to have them sold. The proceeds will then go to the creditors as payment for the debts. This may stay for about ten years and credit may be denied on that period but will not let your creditors take hold on you any longer regarding your debts.

In 2005, a new bankruptcy law was passed. It stated that personal income must be below the median income of your family size within your state. Otherwise, there will be a requisition to undergo a bankruptcy means test. This will severely restrict your spending.

Reorganization Bankruptcy

A repayment proposal will be filed by the individual to the bankruptcy court. Debts can either be paid full or in percentage of the original debt. Payments in this type of bankruptcy generally cover for 3 to 5 years. The court itself will be the one that will place the restrictions on how the money should be spent.

There are certain cases in which a particular amount will be taken from the individual’s wages and court personnel will be the one who will make the payments to the creditors.

Avoiding Bankruptcy

Practicing good money management, such as avoiding spending too much and limiting the use of credit cards that often, are some of the several ways to avoid bankruptcy. Making investments that are high-risk in nature should be avoided as well. In addition, do not go into a partnership with a questionable financial background.