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What is Bankruptcy?

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When a person is bankrupt, it means that they have acquired an overwhelming debt to at least one person, company or organization. The person that owes the money in these cases is called a debtor. The people to whom he owes money are called his creditors. Bankruptcy is the state of being unable to pay one's debts in their full amount to one's creditors.

There are two types of bankruptcy; voluntary and involuntary.

  • Involuntary Bankruptcy: Involuntary bankruptcy is declared by a debtor's creditors against the debtor. In the cases where a debtor has less than twelve creditors, it only takes one debtor to petition for the bankruptcy. That creditor, however, must have over ten thousand dollars worth of unpaid money due them from the debtor. In the case of more than twelve creditors, at least three must petition for the bankruptcy.Involuntary bankruptcy may be declared against a debtor when there is reason to believe the debtor is mishandling the money in a way that the creditor will not be able to recover most or all of the sum at any point. A debtor may file a petition against involuntary bankruptcy by demonstrating that he or she is paying their debts more or less on time.
  • Voluntary Bankruptcy: Voluntary bankruptcy is declared by a person or business when they know that they will not be able to handle their debts any longer. Individuals that apply for voluntary bankruptcy have the choices to apply for different bankruptcy "chapters," beginning with a chapter seven bankruptcy. A more in-depth view of voluntary and involuntary bankruptcy and the chapters involved, look here.

Bankruptcy is an institution that allows a debtor to restart their life with an essentially clean slate. This comment was made by the Supreme Court on the purpose of bankruptcy during a court decision on the matter in 1934:

"It gives to the honest but unfortunate debtor. a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt."

When an individual or business declares bankruptcy, they go before a bankruptcy court. The court and bankruptcy judge will study the evidence to determine if the person or business has or will have the ability to pay their creditors in full. Bankruptcy may be denied if this is the case.

If this is not the case, however, and bankruptcy becomes official for the person or company, then the bankruptcy court will go about selling and allotting the debtor's property, assets and liquid funds for the purpose of paying as much as possible to the creditors. This is done through a trustee.

An individual may apply for a chapter thirteen bankruptcy. In the case of a chapter thirteen, only what is more than necessary for them will be sold. For example, a second or expensive car, a vacation home or a mansion might be sold. A speedboat or four-wheeler might be auctioned off. An individual may be allowed to keep their property and even continue to run their business.

In the case of bankruptcy, a person is not stripped bare. They are left with enough in personal assets to survive in the world. They are not thrown in prison, nor do they become automatic victims of being socially outcast.

Obviously, bankruptcy destroys a person's ability to easily obtain a decent credit limit with a bank until they build up some sort of trust with the financial world by proving over time that they are able to handle their monetary affairs properly. As one way to look at it, the person restarts their financial history to where they may have been as a teenager; with a low credit limit and high interest rate.

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