From the beginning of the history of money, there were people lending money from other people. To state the terminology: When someone lends money that person is called the Debtor. And the person who gives away the money is called the Creditor. The debtor now owes the money he / she borrowed. Now there is a problem here. That is, what happens if the debtor cannot pay back the money to the creditor on time? If we look into the early history, in this kind of situation, in Ancient Greece there was a practice of slavering away the debts. That means, the debtor and his family becomes slaves to the creditor, and do whatever work until the creditor says that his debts are over. And later, in early 1800s’ there was notion called “debtor’s prison”, which means, if you can’t pay back the money, you go to prison that was built specifically for debtors. You can’t come out of prison until your family or friends pay off the money your creditor owns. This might be worse than being a “debt slave”. Because, what if your family or friends can’t or won’t pay your creditor? You might have to be in prison for your entire lifespan. Being a “debt slave”, at least you have the chance to work away your debts.

In modern days, the situation which is the debtor cannot pay off the creditor is called “Bankruptcy”. To avoid the above mentioned craziness, in modern days they have created rules or code on Bankruptcy. The most important is the Chapter 7 and chapter 13 of the bankruptcy code. First lets look and Chapter 7.

Chapter 7 of the Bankruptcy code describes something called “Straight Bankruptcy”. In “Straight Bankruptcy”, what they do is they use your assets that are belonging to you to pay back the creditor(s). For example, if you have a pricy Rolex watch or a diamond ring, they can take that watch from you to turn it to money to pay your creditor(s). This seems a better and simpler option if you really don’t have the money to pay back your debts. But there are the bad side effects to it. First, it stays on your credit report for 10 years. And, if your debt is high, there are those rules that make it difficult to use this method to pay off your creditors. For example, student loans, certain kinds of taxes, child support etc, is not forgiven under the chapter 7 straight bankruptcy.

The other method of dealing with bankruptcy issue is stated in chapter 13 of bankruptcy code. It is often referred to as “Reorganization”. The idea behind this is, that you are not bankrupt because you are not purposefully reckless, but because you had this unexpected expenses (for example, a medical emergency) popped up and your salary and income are just not tally with your expenses. The method of payment here is that you negotiate with your creditor(s) to change their pay back plan, a little bit. For example, if you owe $50,000 to your creditor(s), you could try to negotiate with them to reduce your debt to $40,000, and to pay that in the next 3-5 years. You may think that this is a good plan. You go to your creditors and you lower your debts and such. But again, there are penalties to this. One is, if you have negotiated to pay back your debt in 3 years, that will be recorded in your credit report for 7 year from there.