Bankruptcy
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Bankruptcy is essentially a declaration of a person’s inability to fulfill all pertinent debt obligations effectively. Going bankrupt is one of the hardest things that a person or company can experience. It means that you are unable to pay your debts tothose entities who have lent youmoney – your creditors.
Bankruptcy is a legal concept that was originally designed to allow creditors to seize the assets of debtors who could not pay their debts. It was first enacted as law in 1542 in England, during the Reign of Henry VIII and debtors could also be sent to debtor jail.[br]
Today, bankruptcy proceedings are managed by bankruptcy courts. They have the power to decide how to resolve outstanding debts. This may involve seizing debtor assets and granting them to creditors, as with the original law that favored creditors almost exclusively. Bankruptcy has increasingly come to protect the interests of the debtor, however, and seeks where-ever possible to re-instate them as going concerns. This means that solutions can also include writing off some debts, or re-structuring debts and payments such that the debtor can regain solvency.
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Types of Bankruptcy
There are 2 types of bankruptcy cases. A voluntary bankruptcy is one in which the debtor files for bankruptcy. An involuntary bankruptcy, on the other hand, is petitioned for by creditors who have unpaid debts, and believe the debtor is unable to pay them – or needs an official nudge.
When someone files for bankruptcy, s/he is relieved from the obligation to pay-back the dues. However, this debt relief option is not as easy as it sounds. Filing for bankruptcy leads to a significant drop in the credit score. This discourages creditors from granting loans and employers from hiring an individual who has filed for bankruptcy. Consequently, these may lead to debtors struggling hard for years to reinstate a satisfactory credit standing.
When to Avoid Filing for Bankruptcy
An individual must not file for bankruptcy in the following situations:
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If a bankruptcy filing has already been made once within the preceding six years.
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A bankruptcy petition was filed in the past 180 days, which was dismissed.
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If majority of the debt is non-dischargeable.
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If fraudulent methods were used to obtain a loan, which has been defaulted on.
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If a source of credit has been co-signed (guaranteed) by someone. In this case, the co-signer will wind up in trouble.
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If s/he owns a home and lives in a state having unfavorable bankruptcy exemptions. This could lead to repossession of the property.
What Happens After Filing Bankruptcy?[br]
A bankruptcy filing is immediately reported to the major credit bureaus in a nation and informed to the relevant creditors. Subsequently, the following events take place post a filing:
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Issue of an automatic stay, which prevents creditors from carrying out further collection activities. An automatic stay also leads to barring of repossessions, evictions, foreclosures, wage garnishments and tax collection by the IRS.
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Meeting with creditors to discuss the bankruptcy terms. This meeting is moderated by a court-appointed trustee. Creditors are not obligated to attend this meeting; they can do so at their discretion.
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Handing over of non-exempt assets for liquidation.
Once the proceeds from sale of assets are received by the trustee, s/he allocates it to the debtors appropriately. If the proceeds fall short of the actual debt, the outstanding amount is discharged.
The time between bankruptcy filing and acquiring a discharge typically lasts for four to six months. The debtor can back out of a bankruptcy, which implies dismissing the filing, until s/he obtains a discharge.
