The majority of us have probably heard of the ominous word known as bankruptcy. The negative connotation of the word is rightfully placed due to bankruptcy generally being caused by unfortune situations. Bankruptcy is a legal process that occurs when a business or individual can not pay their debts.
The formal beginning of the process is when the debtor or the creditor files a petition. The debtor is the one who owes money, and the creditor is the one who gave money to the debtor. Most usually, the debtor is the one who begins the bankruptcy process. The next main step is for the debtor's other assets to be measured and analyzed. Depending on the amount/quality of assets, those will be used to pay off an amount of the debt. Once this is done, the debtor's remaining debt will be forgiven. In the United States, this all occurs in federal courts and the specifics are outlined in the U.S Bankruptcy Code.
There are benefits and negatives that come from filing for bankruptcy. To start, the pros include giving the debtor a way to escape their debts that they can't afford to pay off. In addition to this, creditors have a chance to get back part of what they had given. The benefits don't stop at just the two parties, but the economy progresses as well since companies will have a second chance to succeed. A main disadvantage associated with bankruptcy is that the debtor's credit score will go down drastically. With a low credit score, getting loans, a mortgage, or even a credit card will be much more difficult. Furthermore, much of the debtor's assets will be lost in the process..
Overall, bankruptcy is a means to relieve a situation in which a debt can not be paid off. It is something that should not be taken lightly, as the consequences are severe. Nevertheless, it is a valuable process that gives people a much needed second chance.
Tuovila, Alicia. “Bankruptcy Definition.” Investopedia, Investopedia, 26 July 2020, www.investopedia.com/terms/b/bankruptcy.asp.