Bankrupt

Although there is not a formal definition for bankrupt within bankruptcy law, it is generally defined as insolvency. To determine if a debtor is bankrupt they should compare his or her net income to their current living expenses and debts. If a debtor's debts plus normal living expenses cannot be paid, including the interest payments, fees, and penalties, and reduce at least some of the principal amount on all outstanding loans over a five year period, the debtor is technically bankrupt. Five years has been chosen because it is the maximum time allowed to pay off debts for individuals in a bankruptcy reorganization plan.

If a debtor can sustain the rule, unless there are other reasons to file bankruptcy (i.e. stopping a lawsuit), there may be other alternatives available to the debtor to reduce their debts. If a debtor cannot reduce principal on outstanding loans during this time, it might be wise to seek professional legal help to determine if bankruptcy protection is right for them. Bankruptcy, however, should be a debtor's last resort. Bankruptcy will lower a debtor's credit score, remain on their credit report for 7 to 10 years and make it more difficult to buy a home or borrow money at an affordable interest rate.