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Understanding Bankruptcy

Welcome to Understanding Bankruptcy, a personal guide to understanding our modern bankruptcy system.


Bankruptcy is a process whereby people or companies who are not able to pay their creditors are able to discharge (get rid of) their obligations under the supervision of a special bankruptcy court.

Although some people believe it is shameful to go bankrupt, the truth is, this is rarely the case. Indeed, the well-being of economic system requires us to have well-structured procedures that, when appropriate, make it possible for individuals and companies to discharge their debts fairly and expediently.


In our culture, many people consider personal bankruptcy to be so shameful that, even when they are deeply in debt, they will avoid bankruptcy for years, even at the cost of immense suffering, both for themselves and their families. If they are ever forced into bankruptcy, they are so ashamed they don't want anyone to know.

At the same time, it is common to hear about companies -- often large, well-known companies -- that enter bankruptcy, shed their debts, emerge from bankruptcy, and keep going as if nothing happened.

So how do we think about this? Is using bankruptcy shameful, or not? Is it a last ditch effort, only to be used reluctantly when everything else fails? Or is it a useful alternative to crushing debt, an important economic tool we should all understand?

The truth is, bankruptcy is an important part of our modern economic system, a complex set of procedures that took a long time to be developed and many more years to be fine tuned.

My goal in writing Understanding Bankruptcy is to teach you the basic concepts related to bankruptcy and explain why bankruptcy is so important. By the time you finish reading, you will be able to think about bankruptcy with knowledge and compassion. If, one day, you need to use bankruptcy for yourself or your business, you won't be ashamed, and you won't feel like a failure.

To start, we will discuss the basic ideas: What is bankruptcy? Why is it so important. How is bankruptcy used?

We will move on to cover the history of bankruptcy as an economic tool, followed by a discussion of how bankruptcy law has evolved, particularly in the United States. We will then do a quick survey of the various types of bankruptcy. Along the way, I will explain the important technical terms I want you to understand. (To help you, I have created a comprehensive glossary, which you can use as a reference.)

Once we have covered the history of bankruptcy and its basic principles, we will discuss the major types of bankruptcy in more detail, at which time I will explain how each type of bankruptcy can be used, particularly by individuals. We will then talk about student loans and how they relate to bankruptcy.

To complete Understanding Bankruptcy, I will explain what you are likely to experience should you ever need to file for bankruptcy yourself. I will then leave you with some thoughts as to the best way to think about the bankruptcy system and how it exists to serve us.

The most important idea we will discuss is that if you yourself are ever forced into bankruptcy, it will almost certainly be because of circumstances beyond your control. If that happens, I want you to understand that personal bankruptcy is the legal solution our economic system provides to help people in such situations. As such, using bankruptcy to get your financial life back on track is often the best decision you can make. Certainly, it is no reason for you to ever feel ashamed.

My overall goal is for you to come to understand that bankruptcy is an important — and interesting — economic tool, one that is crucial to the operation of a modern, healthy economy.

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