Bankruptcy is the legal status of a person, an entity or a corporation to be unable to pay back the debts it owes to creditors.
Although bankruptcy may be complicated and its exact steps vary depending on state, different chapters from various states follow the same process and terms.
Usually it’s a legal status, which means it must be imposed by court order to be meaningful.
In modern business times, deciding on whether to be declared insolvent is a critical decision to make because it has ramifications which can either be positive or negative.
Usually, it affects one’s self image because of the societal perception towards bankruptcy.
It will also affect the person’s future credit and the financial decisions he or she makes.
This is simply because people will always raise questions when an insolvent person makes a huge financial decision.
On the positive side, it can improve one’s life quality considerably during the time of insolvency because the creditors will slow down on demands for the repayment of their debts.
Effects of declaring insolvency may include:
- The bankrupt person or entity may lose some of the property they own and other luxurious possessions that are not exempt from sale by the bankruptcy trustee as per the earlier agreed terms.
- It may make it very difficult for one to acquire a mortgage in the future. This is simply because many lenders will find it difficult to offer a long-term loan to someone who has had financial distresses in the past; lenders feel there may be probabilities of insolvent individuals experiencing the same status at a future date making it hard for them to repay the mortgage.
- Also, declaring insolvency once may make it hard to do it at a future date; some laws in different states may not allow this because questions might arise on the reasons of declaring it. It may mean the individual has some hidden agenda in declaring themselves bankrupt. There are some undertakings that bankruptcy will not exempt you from doing. For example, family obligations such as acrimony and child support.
Some Types of Bankruptcy
- Liquidation Bankruptcy – in this case, trustees sells off all the non-exempt assets held by the debtor as per the credit terms to repay the debt. This can be applied by individuals, business entities and corporations.
- The other type of insolvency is where the debtor owns and controls his or her assets but works out a repayment plan and submits it to creditors within a set duration of time. If the debtor fails to submit the repayment plan within the set duration, the creditors apply their own plans.
In conclusion, people need to understand bankruptcy exhaustively before declaring it.
As Robert Reich once said, bankruptcy may allow companies to smoothly reorganize, but not graduates burdened by student loans.