What happens when a company or a person declares bankruptcy?

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What are the pros and cons? Can they default on the loans that they’ve taken?

In: Economics

2 Answers

Anonymous 0 Comments

The person/company who owes is essentially saying they are unable to meet their debt obligations. A trusted third party helps them manage selling off assets and paying creditors what they can. Sometimes there is a structured payment arrangement for a while after declaration but before the bankruptcy procedure is complete. After that is done any remaining amounts owing are zeroed.

Pros: Debt can be removed without being fully repaid. Can allow a “fresh start” if the situation is dire.

Cons: Will be difficult to access reasonable credit for years afterward. Debtor has to sell most assets. Social stigma.

Anonymous 0 Comments

That is going to depend a lot on what jurisdiction the entity declaring bankruptcy is in. How it works here in Belgium, more or less:

For a company to declare bankruptcy, they have to be in a situation where the assets on hand cannot pay outstanding debts, and this procedure can be initiated not only by the management of the company, but also by certain debtors. For instance, if your company is far enough behind in payment in taxes, the government can also initiate bankruptcy.

When there is a bankruptcy, step 1 is that the courts will appoint a liquidator for the company. This person becomes the effective head of the company, with as sole responsibility to extract as much value from the company in order to satisfy as many of the debts as possible. This MAY involve selling the company to someone else who then takes on the debts and starts paying them off again, but in many cases the company is so deep under/not interesting enough for prospective buyers, in which case the company is liquidated. This means all remaining assets will be sold off, and the proceedings go to paying off the debt, in order of priority, which is generally employees first (back wages and such), the State next (back taxes etc.), then any bank loans, then any other creditors. When the money/assets run out, then that’s that. Anyone who was still owed money by that company is out of luck.

Note that depending on the form of incorporation, the owner of the company may be financially liable for the bankruptcy and the assets that can be seized and sold may include personal property of the owner.

A “person” cannot declare bankruptcy here, with the sole exception of natural persons who effectively work as a non-incorporated one-man company, for instance doctors can fall under this. I for instance, as a regular employee of a company, cannot declare any form of bankruptcy, there is no legal provision for that.

In the case of a personal bankruptcy where allowed, it is treated pretty much as a company bankruptcy, with all personal assets always being considered a part of the company.