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    Bankruptcy- A detailed overview

    Bankruptcy! It is such a term that you all may be acquainted with. It is such a condition when you are unable to pay your debts and file a petition to the court to be declared as bankrupt.

    But before filing for bankruptcy, do you have in-depth knowledge about it? Do you have a proper idea of what can be its disadvantages and which alternatives you can take to save yourself from becoming bankrupt?

    Read the article below and find all your queries to be resolved.


    What is bankruptcy?

    Bankruptcy is a legal procedure in which the people or other entities that are unable to repay their debts to the creditors may get some relief from all of their debts. In most of countries, bankruptcy is generally imposed by the order of the court. But it is initiated by the debtors.

    So basically it is a process that gives a person some legal means for a financial start over when he is unable to pay the debts.

    In theory, the ability to file bankruptcy benefits the economy as it allows people and other entities a second chance to acquire access to credit and provides creditors with a portion of debt repayment.

    The word bankruptcy is derived from the word banca rotta which means broken bench but more identically broken bank.

    The process of bankruptcy starts with a petition filed by the debt on behalf of the creditors. After that, all the debtor’s assets are evaluated and measured so that the assets can be used to repay the outstanding debts.

    After the successful completion of the bankruptcy proceedings, the debtors become relieved from the debt obligations which are incurred before filing the bankruptcy.

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    History of bankruptcy

    In ancient times, there was no such thing as bankruptcy. If a person has taken some debt and he is unable to pay it, he and his family were forced into debt slavery, until the creditor regained all the losses through their physical labor.

    In ancient Roman law, an unpaid judgment creditor would have the estate sequestered of the debtor and it is sold for the benefit of all creditors. This process causes a loss of civil rights.

    To alleviate this thing, a debtor was given the privilege of relinquishing his assets to the creditors voluntarily by petitioning a magistrate.

    The statute of the bankruptcy of 1542 was the first statute under English law that dealt with bankruptcy. Bankruptcy is also documented in East Asia. So there are a lot of cases seen in the past for bankruptcy.

    How does bankruptcy work?

    If you want to file for bankruptcy, you must have has credit counseling from an approved agency to file for bankruptcy within 180 days. Once you have been counseled by an approved agency, you need to file a petition regarding bankruptcy in the judicial district court.

    The court verifies, evaluates, and determines whether you are eligible to file for bankruptcy. Then it proceeds with the case or denies it 

    You don’t need to appear near the judge if you filed for chapter 7 of 13 bankruptcy unless an issue is raised which requires you to appear. 

    If the court files your case in your favor in a chapter 7 bankruptcy, you will be given some discharge of debts but not other things like alimony or child support, etc.

    You also need to be required to attend the debtor’s education course before your debts are discharged. Besides these requirements, each chapter of bankruptcy also has some qualifying factors, paperwork, and fees.

    Types of the bankruptcy filing

    Filing bankruptcy comes under one of the several chapters of the bankruptcy code which are given below.

    Chapter 7

    Persons and businesses in certain cases that have few or no assets can file for chapter 7 . This chapter helps them to dispose of their unsecured debts like medical bills, credit card balances, etc.

    Those who have non-exempt assets like a family heirloom, cash, bonds, stocks, and second homes may liquidate their property to repay some of their debts.

    A person who files for chapter 7 basically tends to sell off his assets to clear the debts. People who have no valuable assets may end up repaying no part of their debts.

    Chapter 9

    Chapter 9 is applicable for financially stressed municipalities like villages, cities, towns, countries, and districts. Under this chapter, the municipalities don’t need to liquidate their assets to repay their debts but they develop a plan for repaying them.


    Chapter 11

    Businesses often file for chapter 11 , whose goal is to reorganize by remaining in the business and once again profitable.

    Filing Chapter 11 allows a business to create plans for its profits, find new possible ways to increase revenue, and cut costs. The preferred stockholders, If any, can still receive payments but the common stockholders may not receive the payment.

    In certain cases, individuals also can file for chapter 11 .

    Chapter 12

    Under chapter 12 , family farms and fisheries can get relief. As per this chapter, they are allowed to continue their business along with working out a plan to repay the debts.

    Chapter 13

    Persons and in rare cases businesses who make too much money to file for chapter 7 , can file for chapter 13 . Chapter 13 also names the wage earner’s plan.

    This bankruptcy allows people and businesses with a consistent income to create workable debt repayment plans. The repayment plans are generally paid through installments over the course of a three to five years period.

    In exchange of repaying the creditors, the court allows the debtors to keep all of their properties apart from their nonexempt properties.

    Chapter 15

    Chapter 15 deals with cross-border cases that involve debts z creditors, assets, and other parties that may be in different countries. This petition is filed by the debtor from his home country.

    Advantages and disadvantages of bankruptcy

    Although declaring bankruptcy has numerous advantages like it can help you to relieve from legal obligations to pay debts and save homes, entity, and enable you to function financially, but there are also numerous disadvantages of it that include lower credit rating, problems in getting a loan mortgage, credit card, rent an apartment and buy a home or business.

    Let’s look at some advantages and disadvantages of bankruptcy.

    Filing for bankruptcy allows the debtors to emerge from the default loans. It allows them to wipe cleanly certain insecure debts. Besides, it helps them to avoid legal judgment.

    But on the other hand, bankruptcy leaves a scar on the person’s credit score. The secured debts of the person can have the collateral seized. Apart from them, there are certain debts like child support that are not eligible for discharge, etc.

    So if you are trying to file for bankruptcy, it can damage your credit. But it is worth nothing that a chapter 7 will stay up to 10 years on your credit report whereas a chapter 13 lasts for 7 years. 

    If you get bankrupt, any creditors you applied for a new debt will look at your discharge on the report which can prevent you from getting any credit.

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    Alternatives of bankruptcy

    Sometimes, there are some people and businesses who want to avoid bankruptcy, but they also want some alternatives that can reduce their debt obligations.

    Here are some of the alternatives of bankruptcy that can help you to reduce your debt obligations.

    Negotiating with creditors

    Sometimes negotiating with the creditors without involving the bank may work for the benefit of both sides. Apart from the risk of receiving nothing if you declared bankruptcy, the creditor might agree to your repayment schedule which can spread your payments for a longer period of time or reduce your debts.

    Let you are unable to pay your mortgage payment, you can negotiate with your loan servicer to find out other options apart from bankruptcy for the payment. This may include forbearance that enables you to stop making payments for a short period of time to make a repayment plan for smaller monthly payments for a longer period.

    Loan modification

    Another alternative to bankruptcy is a loan modification, which includes changes in the terms of your loans like lowering the interest rate and increasing the payment period on a permanent basis to make it easier to pay.

    However, you should be careful of unsolicited offers from companies that claim that they can keep your home out of foreclosure. it might be nothing more than scam artists.

    Offer in compromise

    If you owe tax money to IRS, you might be eligible for an offer in compromise that allows you to settle with the loan servicer for an amount less than what you owe.

    In some cases, the IRS also offers various monthly repayment plans for taxpayers who can’t pay their tax obligations all at once.

    Bankruptcy vs insolvency

    Bankruptcy is not the legal status that an insolvent person may have, so bankruptcy is a way different from insolvency. So let’s have a look at some key differences between bankruptcy and insolvency.

    Insolvency and bankruptcy are both quite similar as it refers to a situation when a company or individual are unable to pay the debt in the present or in the future. In both cases, the value of assets is less than the liability.

    But insolvency is a situation that arises due to the inability to pay off the debts for insufficient assets whereas bankruptcy if a situation where an application is made to an authority for declaring bankruptcy which will continue until discharged.

    Insolvency is regarded as a state in which the assets are unable to meet the liabilities. If insolvency is untrue, it can lead to bankruptcy.

    So we conclude that insolvency is a state and bankruptcy is the conclusion of that state. But all states of insolvency may not lead two bankruptcy. It also has two options apart from bankruptcy that is liquidation or resolution and recovery.


    Bankruptcy is basically the removal of certain debts in its easiest term. Although it has a lot of advantages, it also comes with certain consequences.

    For some businesses and individuals, bankruptcy is a good choice, but also it can damage your credit and reputation.

    So before filing for bankruptcy you need to check whether the debts are very large to manage or if there are any alternatives or not. If not then you can file for it, but if it is manageable, it is recommended to not file for it.

    *image source from Google

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