What is Bankruptcy?

3 min read

What is Bankruptcy?

Bankruptcy is a legal process undertaken by an individual, family or corporation when they are drowned in debt and unable to pay off their creditors. The process involves filing a case to a state or federal court and an independent assessment of the resources held by the individual or corporation done by the bankruptcy court.

Whilst bankruptcy laws vary from country to country, the general guideline is that the individual or corporation pays off as much of the debt they can through the sale of their resources to the creditors. And the rest is forgiven and don’t need a repayment. Today, we’ll discuss it further in simple words so that everyone understands.

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What is Bankruptcy?


Why Do Bankruptcy Laws Exist?

Why Do Bankruptcy Laws Exist?

The idea behind bankruptcy is that it allows individuals and corporations a second chance to start afresh, albeit, some penalties and low credit scores that make them ineligible for loans in the next 5 to 10 years.

In a capitalistic society, lawmakers deemed it necessary to allow consumers or businesses to overcome bad financial decision making, bad market, and stock collapses and rise from the ashes.


Who is Eligible to File for Bankruptcy?

Who is Eligible to File for Bankruptcy?

That’s a tricky question that doesn’t have a definitive answer. There are a lot of factors that come into play whilst considering if an individual or corporation is eligible. The primary criteria being, the individual or corporation has far more in debt than resources to pay them.

What this means is that all the assets including but not limited to stocks, bonds, deposits, real estate, luxury goods, and other items are assessed to represent a monetary value by an independent and unbiased arbitrator assigned by the court. The reported figure is then used to balance the books against the debt. If they fall staggering short, then the consumer or corporation is deemed fit to obtain bankruptcy.

We subconsciously associate bankruptcy with large corporations. And although they do receive the largest amounts defaults, it’s mostly individuals and families who file for bankruptcy. Most people who couldn’t pay off the mortgage on their houses, student loans or medical expenses are at the forefront of filing for bankruptcy.


What are the Repercussions of Bankruptcy?

What are the Repercussions of Bankruptcy?

Bankruptcy may seem like this ever-forgiving way to get rid of your debts and start anew. In reality, it’s not the entire story. You still have to pay a certain amount of your outstanding debt. Which may result in you losing a lot of your resources.

You receive a low credit score and a bad report. Which makes you unqualified for any loans in the space of about 10 years. And even after that, banks or lenders may not trust you enough. So getting loans will be hard. Starting new businesses or ventures will be difficult due to the overall lack of trust and confidence on behalf of investors.


When Should Bankruptcy Be Filed?

When Should Bankruptcy Be Filed?

Again, you shouldn’t just file for bankruptcy because you think you’re broke and can’t pay off your debt. You need to have tangible proof and documentation to show to arbitrators that you are in a condition to pay off your debts.

A rule to help you decide whether or not to file for bankruptcy is to evaluate your earnings and assets. Then check if you can pay off your debt within the next 5 or 10 years. If not, then you should probably start contacting an attorney and start with the legal proceedings.


Why Choose to File for Bankruptcy?

Why Choose to File for Bankruptcy?

Well, the answer is simple, to restart your career. Bankruptcy is the legal method of getting debtors away from you back. It gives you some leeway and some semblance of mental peace. Legally, banks and lenders can’t send you letters, call you incessantly at odd hours of the day, show up at your doorstep and demand money in any form whatsoever. So, you get a legal blanket that allows you to be tension free.

If you file for bankruptcy on your home mortgage. And it is accepted by the court, the homeowner, bank or lender can’t legally throw you out or cut your utilities such as electricity, gas, water, internet, etc. This is termed as “automatic stay” and is mostly recognized in the United States.

However, the process from filing for bankruptcy to getting a court approval is a long and tedious one. Given the bureaucratic delay and court dates. It takes about a year for the entire process.

In that time, debtors will try to intimidate and persistently contact your colleagues, family, and kin to try to settle for a sum or threaten you to withdraw your file. These come to a stop and you can sleep in peace once you’re approved by the court, till then your mental state takes a toll.


What are the Types of Bankruptcy?

What are the Types of Bankruptcy?

The laws of bankruptcy vary from country to country. But the most recognizable and template for the law is used in United States courts. They are:

1. Chapter 7

This entails you to keep hold of your exempt resources such as a home, car, pension, and welfare. Nonexempt resources such as savings, second home or car, stocks, collectibles are sold and the money is used to pay lenders.

2. Chapter 13

This is undertaken when you don’t want to lose your assets. But, this type is only applicable if your debt doesn’t cross a threshold which is adjusted periodically, so better get in touch with your attorney and see if you qualify. You also have a 3 to a 5-year repayment plan with creditors, after which the outstanding amount is forgiven.

3. Chapter 11

This is applicable for a business undergoing restructuring to keep them financially afloat and run their organizations to pay off debt. Also, termed as a big corporation bankruptcy scheme as companies like GM, Lehman Brothers, etc. have opted for this type of bankruptcy.


All things considered, going bankrupt isn’t the ideal scenario. Filing for bankruptcy doesn’t protect you from medical expenses, student loans, taxes, and other federal or state deductibles. So, it’s best if you plan your finances and stay ahead of your repayments to avoid a bankruptcy mess.

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3 min read

kacnika mom kacnika mom
3 min read

kacnika mom kacnika mom
3 min read

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