In a lot of adverse circumstances consumers have no choice but to file bankruptcy to improve their credit report. This is also a way in which a consumer can start afresh. In a situation where the consumer is over burdened by debt and there is no way out, an individual may legally file for a bankruptcy as per the United States bankruptcy law.

Declaring Bankruptcy: Legal Definition

Declaring bankruptcy may be defined as “The legal inability to pay debt” or the state where a person is legally declared bankrupt according to bankruptcy laws. Simply stated when the debts of a consumer are far exceeded by his/her income/assets an individual is considered to be bankrupt and needs to file a bankruptcy.

File A Bankruptcy – Types of Bankruptcy

If your credit standing is irreparable even after debt consolidation, debt counseling and other kinds of credit help, you may have no other option but to file for a bankruptcy. You should know that the most common types of bankruptcy as laid out by bankruptcy laws are:

• Voluntary: This is also referred to as a Debtor’s petition. When an individual or organisation owes another money, he/she may either enter voluntary bankruptcy or may file a debtor’s petition to file a bankruptcy. On the acceptance of this petition the individual is automatically declared bankrupt.
• Involuntary (Creditors Petition): If the amount owing to a creditor exceeds $2,000, they may join with other creditors in an attempt to declaring bankruptcy of the individual. In order to do this the creditor must first obtain a judgement from the court and then apply to the official receiver to issue a notice to the debtor demanding payment within a set date (usually 21 days). If the debtor fails to do so then the creditor can appeal to the Federal Magistrate court asking for the debtor to be declared bankrupt.

Bankruptcy Law: Declaring Bankruptcy Facts

In general, bankruptcy gives honest debtors a new start and helps them rebuild a credit report from scratch when they file a bankruptcy. However, it is advisable to think carefully before filing a bankruptcy as it has many repercussions. The following are a few characteristics of the laws of bankruptcy:

• Bankruptcy law is a federal law and is contained in Tier 11 of the United States code. The states have no regulation over this.
• Filing for bankruptcy allows debtors a chance to resolve their debts.
• Declaring bankruptcy allows debtors to be freed from all obligations once their assets have been distributed even if their debts have not been paid in full.
• Bankruptcy law allows for the interest of all creditors to be treated with a certain amount of equality.
• In certain cases the bankrupt debtor may continue to remain in business and may be allowed the use of the revenue generate to dispose of his/her debts.
• Bankruptcy cases are litigated in the US bankruptcy courts.
• Bankruptcy is of 2 types, i.e. voluntary and involuntary.

Declaring Bankruptcy: How To File Bankruptcy

The process of filing a bankruptcy starts with the filing of a petition with the Bankruptcy court. This further gives rise to a bankruptcy estate which includes all the assets and liabilities of the person filing for a bankruptcy. The taxation obligation may vary depending upon on the chapter under which the bankruptcy petition was filed. When a debt is owed to a person and is cancelled, the cancelled debt is usually treated as income and adds to the tax obligation of the individual. However if the debt is cancelled when filing for a bankruptcy, the debt is not taxed but would in turn reduce the tax benefits the individual would otherwise be entitled to.