Bankruptcy Definition
Bankruptcy is a legal status that usually ensues when an individual or entity is unable to meet its financial obligations to creditors due to an array of reasons such as poor finance management, reduced cash flow and economic downturns. This condition leads to a court proceeding in which legal judgement is sought to relieve the debtor of some or all of their debts.
Bankruptcy Key Points
- Bankruptcy is a legal process for individuals or entities that can’t pay their debts.
- This condition is declared by a court order, usually instigated by the debtor.
- Bankruptcy may forgive debts, but also has severe financial and legal consequences.
What is Bankruptcy?
Bankruptcy is a state of insolvency. When an individual or corporation finds itself in a situation where they are unable to pay off their debts, they can opt to file for bankruptcy. This allows them some protection and potentially some relief from their outstanding debts.
Why Bankruptcy?
Forty percent of all bankruptcies are due to medical bills, making this the leading cause of this financial condition. Unemployment, poor financial management, divorce, or reduced income can also cause people to go bankrupt. People facing high debt stress might consider bankruptcy as a way to start fresh financially.
Who Can Declare Bankruptcy?
Individuals, partnerships, and corporations have the ability to file for bankruptcy, but municipalities and other government entities cannot.
When is Bankruptcy Declared?
Bankruptcy is usually declared when the debtor is unable to settle their bills or fulfill their financial obligations. The timing of the bankruptcy can greatly impact the debtor’s financial future.
Where Does Bankruptcy Apply?
Bankruptcy laws differ from country to country and even within regions of the same country, but the concept remains the same: to provide debt relief to those who are unable to pay their debts.
How Does Bankruptcy Work?
When bankruptcy is declared, the debtor’s assets (if they have any) are measured and evaluated, and if necessary, used to repay a portion of outstanding debt. Therefore, bankruptcy isn’t a get out of jail free card. Debtors who file for bankruptcy still have to deal with the consequences, which typically include a reduced credit score and the inability to secure credit for years following the declaration.
