I’ve been watching documentaries on bailiffs recently and a lot of people file for bankruptcy due to having no assets etc. How does it work for those in debt, and what happens to their debts?
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At a very high level, bankruptcy is what happens when a company or individual can no longer pay the money it owes right now, i.e. it has payments due today it can’t make (insolvency). Continuing to operate an insolvent business is illegal and it will fall apart regardless.
Bankruptcy is basically a orderly process that determines what to do with any remaining assets (e.g. land, vehicles, money owed by other companies, etc). The aim is to have a vaguely fair, systematic way of dealing with an insolvent company (i.e. a disaster).
Typically the company is liquidated. A liquidator (a kind of lawyer) arranges for everything to be sold.
Then typically salaries will be paid out first (so people don’t get robbed of income they worked for), then secured creditors (e.g. when you loan a truck, and the creditor has an agreement to take back the truck if you don’t pay) then unsecured creditors. Stakeholders/owners get any leftovers.
In another form of bankruptcy, a company might be reorganised by the owner, creditors and a judge. The idea is that they’ll try and make a profitable company so that the creditors lose less money – particularly when whatever assets the company has aren’t worth much if they’re just liquidated.
Bankruptcy for people is similar. People who go bankrupt often have restrictions placed on them (e.g. being unable to direct companies, take loans, etc) for a period following the bankruptcy.
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