What is Bankruptcy?

Bankruptcy, or insolvency because it is otherwise known, is really a legal declaration of a failure or an impairment to cover the debts owed to creditors. Simply put, it is an option that debtors and creditors have whenever an individual cannot pay his debts once they fall due.

There's admittedly a bad stigma around bankruptcy. However, with regards to dealing with individual insolvency cases, it should always be considered. Note that bankruptcy is not permanent. It's a temporary case, thus, enabling you, the debtor, to gain a fresh start.

Who should file for Bankruptcy?

As a general rule, anyone can go bankrupt. Even individual members of a partnership may become insolvent. However, the rules governing company or partnership bankruptcy and the procedures to follow may be different from that filed by an individual.

There are three ways through which one becomes bankrupt:

o Voluntary

The insolvent debtor files for bankruptcy inside a voluntary capacity.

o Involuntary

The creditor takes the initiative to request that debtor should file for bankruptcy for the purpose of collection.

o Supervisor-Initiated

Or anyone bound by an IVA.

More often than not, bankruptcy is legally declared through the debtor himself. However, there are cases wherein a case of bankruptcy may be requested through the creditors in order to get reimbursement from the debtor for the portion of the total amount owed to them. This is what is meant by involuntary bankruptcy.

In an involuntary bankruptcy case, a court order is usually issued to the debtor who is obliged to acknowledge the proceedings or accept them.

If you are the debtor, it's advised that you fully cooperate with the bankruptcy proceedings, even if you are disputing the creditor's claim. Any attempts at settlement ought to be addressed before the bankruptcy papers are due to be heard. To do so otherwise would be both expensive and difficult.

Bankruptcy is seen as a graceful way out of a debt. Its primary purpose is to give an honest debtor a "fresh start" in everyday life. Hence, bankruptcy is basically for the benefit of the debtor who are able to no longer pay for the debts that he owed.

Most of the time, individuals or organizations owe money to more than just one people so when the assets are no longer enough to pay for all the debts owed to each creditor, it is but fair to take the sum total of the assets and divide it up equally among the creditors compared to the debt owed.

The legal principle behind bankruptcy is the fact that "one may not unjustly enrich himself at the expense of others." If the bankrupt person were simply to pay one creditor, what happens to the other creditors?

Hence, another purpose of bankruptcy law is to repay creditors within an orderly manner to the extent of the total quantity of properties and other assets that the debtor has available for payment.

The resolution of the debtor's debts is accomplished through bankruptcy by dividing all his assets among the creditors. The assets may not be enough to pay all, however the declaration does allow the debtor to partially repay his debts along with other financial obligations.