What is Bankruptcy?

• 26 April 2017 | 1879 Views | By Mint2Save

Bankruptcy is a legal status that works like a crash helmet for individuals/businesses that have a difficulty in serving their debt. It involves consumers and businesses to repay some or all outstanding debts to creditors under the protection of the federal bankruptcy court. Bankruptcy is the way of clearing debts which you can’t pay. If you can provide evidence that you are entitled to it then the bankruptcy court will defend you during your bankruptcy proceeding.

Filing up the bankruptcy is a complicated process which consist many rules that state the types of debts enclosed, exceptions, requirements for filing it and what property petitioners can/cannot keep. When you are bankrupt then your non essential assets which include property and possessions and surplus income are used to pay off to your creditors.

So, after a person or corporation goes into bankruptcy then the creditors are usually prevented from taking legal action against the debtor or its property. By operations of law, creditors are prevented to pursue lawsuits, distress and similar related proceedings against the debtors without any permission of the court. The Bankruptcy and Insolvency Act provides the relief to the honest debtor against domineering creditors and affords the debtors with the second chance to begin him or himself or to set up a new business.

Once a debtor takes bankruptcy defence, the process under the law allows for the orderly and fair distribution of a bankrupt’s assets between all the debtors creditors according to a scheme of priority. The Bankruptcy and Insolvency Act sets out this scheme so that there is no argument about the distribution of the money once the assets are sold.

The provision allows a debtor who is overloaded with debt but have some assets to transfer them to a trustee who will sell and distribute in equitable and fair manner. This transfer occur automatically when the debtors takes protection. In brief, Bankruptcy allows honest debtor to start all over again without the burden of debt.

Occurrence of following events makes an individual or a corporation Bankrupt:

• Job loss
• Martial separation
• Hospitalisation
• Death or incapacity of key management
• Under capitalisation
• Poor financial information
• Competition in marketplace
• Abuse of drugs (Leading of loss of self control)
• Over-extension of credit cards/not servicing the debts regularly
• Unexpected huge expenditures
• Harassment of several creditors or agencies
• Desire to buy for merchandise that is actually unnecessary and using credit cards for payments
• Garnishment of wages and many more.

Bankruptcies can be divided into two types

1) Liquidation- This means that the trustee sells off all non exempt assets held by the debtor by which the debts can be repaid to the full level as possible. Corporations, individuals and partnerships all are eligible for Chapter 7 bankruptcies. The part of the debt that cannot be repaid through liquidation is free.

2) Reorganisation– It refers to the form of bankruptcy that comes under Chapter 11 and Chapter 13 of the US Bankruptcy Code. The method of re-organisation is used as a protection when debts go above assets and cannot be paid back. The big benefit to re-organisation is that the business owner will normally retain possession of his or her business in its current form. They will persist to operate the business as a debtor in possession.

How do you become a bankrupt?

You are declared as a bankrupt by High Court by issuing a bankruptcy order once it’s been presented with a bankruptcy petition. An appeal may be presented by:

1) The debtor

2) One or more creditors

3) And the supervisor or a person bound by, an individual voluntary agreement.

How does one qualify for Bankruptcy?

Any corporation or individual debtor must meet the following conditions:

1) The debtor must owe at least $1000 to any of his/her creditor.

2) The debtor must be unable to meet the regular bill payments to creditors. For instance if debtor is unable to pay his or her accounts within 30 days as stated by creditors then debtor is unable to pay those debts in ordinary course,

                                                                                        Or

Debtor must not have enough property which if sold at fair market sale, would be enough to pay all the creditors in full.

If the debtors meet above two conditions then debtor is said to be ‘Insolvent’. The debtor will qualify to go bankrupt voluntarily or he or she can be make bankrupt by anyone of the creditor.

Debtors can have three types of debts:

1) Secured Debt:

With secured debt, creditors have the legal authority to something of yours if you fail to make the proper payments. For example, your mortgage is a secured debt or a car loan or rented furniture etc,. A creditor here holds an item as a security for debt. The bank that loaned you the money to buy the house holds a mortgage or trust deed lien on the house as a security for the loan, though, the mortgage company is a secured creditor.

2) Unsecured Debt:

Debts which cannot be take back or foreclosed on such as personal loans, credit card debt and medical bills. An unsecured creditor is one who holds no security for its loan.

3) Priority Debt:

Debts which are granted special status by the bankruptcy law, such as debts to a government agency like state income tax board; child support payment and student loans.

As obvious from the above data, being bankrupt is not a not child’s play and is highly research and investigation intensive. Any false data can lead to high penalties that can vary from hefty fines to imprisonment.

For any business or an individual, bankruptcy can have lifelong repercussions. A few noteworthy ones are:

1. Soiled Credit Report: When going for the process, forget the idea of having a decent credit report. One of the major effects of bankruptcy is the credit report being severely degraded.
2. Leakage of Personal Details: Being a public legal record, bankruptcy is going to tarnish your public image and the data would be easily accessible to the common.

Further, the process itself needs quite a money and is certainly difficult for anyone who does not have any asset via which he can manage the process.

In the recent times, sudden bankruptcy of a lot of organisations have raised concerns over fair accounting practices and

In the books of finance, bankruptcy resides as a necessary yet unpleasant exit which no one wants to take.