Bankruptcy

Definition

Bankruptcy is a legal status of a person or other entity that cannot repay debts to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor. Bankruptcy is not the only legal status that an insolvent person may have, and the term bankruptcy is therefore not a synonym for insolvency. In some countries, such as the United Kingdom, bankruptcy is limited to individuals; other forms of insolvency proceedings are applied to companies. In the United States, bankruptcy is applied more broadly to formal insolvency proceedings. In France, the cognate French word banqueroute is used solely for cases of fraudulent bankruptcy, whereas the term faillite is used for bankruptcy in accordance with the law.


Bankruptcy

Bankruptcy is a legal proceeding that occurs when the person or a firm defaults on the loans. When a debtor is not able to pay the outstanding loans, a petition is filed in the court. This petition is usually filed by the debtor, but it can also be filed on behalf of the lenders.

The bankruptcy process involves examining every asset of the debtor that can be used for repayment of the unpaid debt. After the end of the bankruptcy process, the debtor is relieved of all the debt obligations, and the creditors receive partial or full payment of the loan.

Explanation of Bankruptcy

The bankruptcy process allows the debtor to get relief from debt obligations. The procedure eases the burden of individuals and corporations in making debt payments. It also allows creditors to receive payments that are based on the available asset of the individuals.

A bankruptcy process starts with the filing of a petition in a court. The petition can be filed solely by an individual, and jointly by both the partners, and by a legal representative of a company. Filing for bankruptcy can allow a company to continue its operations, and pay the debt obligations during dire financial times.

Individuals benefit from bankruptcy filing in the sense that it eases the debt repayment burden, allowing them to meet important financial expenses, when they are facing financial difficulties. Individuals can file for bankruptcy through an attorney or on their own. When the individual files for bankruptcy on their own, it is known as filing pro se.

Types of Bankruptcy Protection Plans

In the US, all the bankruptcy cases are filed in federal courts as per the U.S. Bankruptcy Code. The code specifies different type of bankruptcy protection plans such as Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15.

Companies file chapter 7 to liquidate the business, while chapter 11 is filed to reorganize the business. Chapter 9 is filed by municipalities including villages, towns, cities, taxing districts, school districts, and municipal utilities to reorganize. Chapter 12 offers relief to farmers and fishermen, while Chapter 15 involves cases that involve parties outside of the US. Chapter 13 is also known as a salaried person’s plan that allows an individual to develop a plan to pay the entire or partial debt amount.

Further Reading