Eli5 What’s the difference between declaring bankruptcy and just being broke?

Declaring bankruptcy is when you go before a Judge and make the case that you flatly can’t service your debts. If the Judge is satisfied this is true you get to go through bankruptcy.

There are two general versions.

The one you’re probably more familiar with is along the lines of goin “I’m trying but there’s no feasible way I’ll ever repay these debts”. If true the judge will order any assets not protected by bankruptcy laws (pension, retirement funds, sometimes primary home unless if the debt you’re defaulting on is your mortgage and primary vehicle unless the debt in question is a loan secured on it. The proceeds, if any, get divvied up between your creditors and they take a loss on any remaining debt. You then emerge with debts discharged but absolutely tanked credit that will severely limit any loans you can get for a while.

The other type is “I’m good for the money I just need more time”, where the goal is to restructure your debts in a way you can actually pay them - longer loan terms, asset swaps and so on. This is possible for individuals, but is more commonly done by companies.

/r/explainlikeimfive Thread