Bankruptcy is a situation where an individual or an organization
is not in a position to pay off its debts. Its a resort to
an indebted person or organization to get rid of the trouble
of listening to the creditors phone calls and receiving endless
letters for payment of bills due.
Bankruptcy can be applied for by the debtor or the creditor. However, in majority of cases its the debtor who files for bankruptcy to save him from the burden and stress of paying off all the debts.
Main reasons for a person applying for bankruptcy could be as general as not being able to pay off the debts after divorce because of reduction in income, because of unexpected illness and huge medical bills, and huge credit card bills. Sometimes it is also because the person applying for bankruptcy wants to earn some time to be able to pay all those debts.
Not everyone owing huge debts is allowed to file for a bankruptcy. Only an insolvent person can be declared a bankrupt. To be an insolvent one should not be already declared bankrupt, should owe a minimum amount of debt as stated by the law, and should not possess enough assets to pay off the debts by selling them off.
Once the bankruptcy has been granted to the debtor, many of the debts will
be paid off by selling off the non-exempt assets. These are
the assets which are exempted by the law and will be retained
by the bankrupt person and cannot be sold or taken away. Also,
the pledged assets will be sold and will be used to pay off
the due debts.
The debtor is especially interested in the bankruptcy status because of an automatic stay on some of the actions against the debtor which can be taken by the creditor. These actions include continuation of basic utilities like water and electricity for a minimum of 20 days, any kind of action by the creditors for payment of debts through phone of letters or court proceedings, continuation of driving license if the living of the debtor depends on driving, staying in a rented house without paying the rent, keeping the vehicle if no installments have been paid, wage garnishment etc. But this stay is only till the bankruptcy proceedings are going on and the order is pending..
The above stays are very alluring to a person who is burdened with debts and might push the person towards the court for seeking the bankruptcy status, but it is not the best resort to all debt related problems. The first and foremost reason for this is it might become difficult for the bankrupt debtor to get a credit in future. The bankruptcy status is there in the credit report for somewhat close to 10 years. So if you are in a habit of being unable to pay your debts too often, then declaring bankruptcy will not be a wise step to take.
Also, in order to get the bankruptcy status, one needs to consult first of all a good trustee who can analyze the bankrupts financial situation correctly and suggest ways to the most beneficial decision and will try to hold meetings with the creditors for finding any alternative way to get out of the situation along with selling off the non-exempt assets to pay off the creditor..
A lawyer is also needed to complete all the paper formalities and file work required to be done in the court proceedings.
Therefore it its not entirely cost-free to obtain the status of a bankrupt. A debtor applying for bankruptcy will have to pay the court fees for the legal proceedings, the trustee fees, and the lawyers fee too. Therefore one should keep in mind all these costs before filing for bankruptcy. If the costs of declaration exceed the debts actually owed then the whole process will be futile.
Other options like informal settlement with the creditors outside the court or periodic payment of the debts can also be taken into consideration. The creditor might bargain and get ready to accept a smaller amount instead of the entire debt or might accept the debt in installments instead of a lump sum amount.
The bankrupt can also take a credit at low interest rate to discharge the current debts and to save him of the embarrassment and bad relations with the creditors.
The debtor can also take the help of various legal tactics before being proved bankrupt like converting the non-exempt assets into exempt assets which means that they will not be sold to pay off the debts.
Its not even entirely beneficial for the creditor who files a suit to prove a person or organization bankrupt. The creditors get paid through the selling of the non-exempt assets and the selling of the pledged assets. The pledged assets will be sold and will first be used to pay off the entire amount of debt on that asset and later on, if anything extra is left is used to pay off other debts. Therefore the creditor might not be paid the entire amount owed by the debtor and also the cost of the bankruptcy might exceed the amount actually received.
The main purpose of declaring bankruptcy is not to ward off the troubles after taking lots of credit, rather it focuses on justice being provided to both the parties, the creditor by paying off the maximum amount possible out of the total amount due to him, and the debtor by saving him from the many troubles arising from being unable to pay debts in time and giving him a fresh start so that he can learn to manage his funds in a more appropriate way. Therefore only a genuine party, who really is in need of it, should go for it because there are laws to help the sufferer if the bankruptcy is applied for with a fraudulent purpose. Therefore it is essential that benefit of the law is taken in genuine cases and avoided to the last moment.
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