Bankruptcy is a phrase heard and used by many. Individuals tend to have pre-conceived notions about bankrupts that they are individuals who are totally broke. But bankruptcy information can be a real eye opener for debtors who are contemplating bankruptcy and individuals who are seeking information about bankruptcy. It helps debunk all the myths attached to bankruptcy.
1) What is bankruptcy?
Bankruptcy is a legal term to formally identify an individual as bankrupt. It refers to the inability of any debtor or organization to pay their creditors. In majority of the cases, bankruptcy is initiated by debtors or organization themselves. The main purpose of bankruptcy law is to provide any honest debtor a chance to start afresh and to help a debtor repay his/her creditor/s in an orderly manner to the best extent possible by the debtor. Debtors are discharged of most of their financial obligations after their non-exempt assets have been distributed. Creditors can no longer harass debtors or continue any lawsuits once the debtor has opted for bankruptcy.
2) Implications of bankruptcy:
Filing bankruptcy is one of the hardest financial decisions. Debtors must carefully examine the implications of bankruptcy and choose it as a last resort to deal with financial troubles. Following are the implications of bankruptcy:
- Lose control over your assets (except items/equipment required for work/household purposes)
- Cannot act as director of a company/practice as a lawyer/chartered accountant
- Negative publicity as a bankruptcy is advertised in 'London Gazette' and a local newspaper
- Bankruptcy remains on record with credit agencies, land registry and other organizations
3) Common terms to understand bankruptcy
- Bankruptcy petition: Individuals who opt for bankruptcy need to formally request protection of the federal bankruptcy laws. It involves filling of two important forms-The petition (Insolvency Rules 1986 form 6.27) and the statement of affairs (Insolvency Rules 1986 form 6.28).
- Chapter 7 bankruptcy: This chapter of the bankruptcy code provides for 'liquidation'. The debtor's non-exempt property will be sold and the proceeds will be distributed among his/her creditors.
- Chapter 13 bankruptcy: This chapter of bankruptcy provides a reorganization plan for individuals with regular income. It allows a debtor to retain his/her property and pay back his/her debt within 3-5 years.
Debtors could also consider various alternatives to bankruptcy before filing for bankruptcy. IVA, debt consolidation loan, debt management etc are proven alternatives to bankruptcy which the debtor can consider before he/she files for bankruptcy.
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