what is bankruptcy, how does it work, how does it affect your credit, and what does it do?
Bankruptcy is officially declaring that you cannot pay what’s being demanded of you.
You ask the court to step in, stop all your debts, and adjudicate what needs to be paid and how and from what. You basically give control of your finances and assets to someone (a bankruptcy administrator), they sell what you have, pay what they can, and then everything else is declared done. That means some people who you owe money to won’t see it all, or even anything at all.
As part of that, you basically have to declare to the court EVERYTHING you own or have in banks, etc. Every asset, penny or share you own. If you’re found to have lied – even years later – then you can go to jail for that. Your entire finances will be sacrificed and all assets (apart from those that are strictly necessary, which might mean keeping your car so you can get to work, or being made to sell it and buy a cheaper car) will be taken and sold, and all the reasonable monies that the “administrator” of the bankruptcy can possibly get from your stuff will be taken to pay off your debts, most important first.
In effect, it’s like going “All In” in Texas Hold’em. You can’t match the bet that was just placed, but you can go “all-in” and everything you own is taken as a stake against everything you owe, even if it’s not technically enough to cover the debts.
After it’s all wrapped up, you will have a severe stain on your credit record (because usually people who you owe money to, like banks, mortgage companies, etc. will severely lose money on any bankruptcy and they won’t want to be hurt again), but all those people who are chasing you for money will be ordered to stop by the court, even if you didn’t have enough to pay your debts. It wipes the slate clean, no debts, no saleable assets, no funds in your bank account, so at least you can start again, but it has a heavy effect on your future ability to get any form of credit, loan or mortgage. Most places simply won’t offer a bankrupt any of the above, not even a credit card, not even YEARS after your bankruptcy.
In some places, you’re also banned from running companies and certain jobs if you’ve ever been bankrupt.
It’s basically a method by which, rather than be in completely unsustainable debt that you can never hope to pay off and would likely become homeless, jobless, a serious suicide risk, etc. you can ask the court to wipe everything out for you and start again, but at the cost of EVERYTHING you have, and a severe stain going forward. But at least you can live again, at least you *can* earn a wage, put it into a bank and not have it just disappear into interest, fees, charges and debts. You can start over. Imagine the alternative if bankruptcy didn’t exist – working a full day, the whole cost of your debts then just taking all that money from you, and you still go home with nothing, owe more at the end of the day than you did at the start, and still can’t afford food, housing, etc.
Bankruptcy is not something to enter into lightly, and it’s not something anyone would ever want to do. Do everything in your power to avoid ever being put into that situation. It’s really very bad, but better than the alternative.
Generally speaking, most places in the world also have a less-severe alternative that is like a “partial” bankruptcy. You’re basically doing the decent thing and saying “Look, if I keep on, I’ll go bankrupt, so instead let’s combat this early”. In the UK, that’s called an IVA or similar, in the US it’s a “different type” of bankruptcy. It usually involves the same kind of process, but the administrator has the power to force the debtors to co-operate, so they are made to accept partial payment of your debts, they are banned from chasing you for any more, you are forced to give up a substantial chunk of all your income, but hopefully the maths works out that they see most of the debt paid, you still have enough at the end of the day to live in your house and buy food, and eventually you’ll pay enough back that you avoid a full bankruptcy. And things like interest and fees are generally stopped so that you don’t spiral into further debt. It still has a hit on your credit record, but less so because you were smart enough to try to combat it earlier.
And, of course, the even smarter thing is to make sure you never get into that kind of debt at all.
Bankruptcy is a legal process to alleviate the burden of debt without dealing with some of the consequences. In other words, you “declare” that you are unable to pay a debt and then legally it goes away. Well, that depends exactly, as there are several different kinds of bankruptcy. The idea is that if an individual or company absolutely cannot pay, it is better to resolve it officially and everyone move on with life than to destroy someone’s life over the matter. In the old days something like debtor’s prison could be an option if someone couldn’t pay debt.
In the early days of the US, bankruptcy was a particularly controversial subject. Many thought that bankruptcy laws were essential, otherwise few people would be willing to take risks to start new businesses or borrow money for research or to build new technology. The fact that bankruptcy is an option is a type of incentive towards risk taking and innovation. Others thought that a society of simple honest hard working people should not need bankruptcy and it was a conduit for fraud and corruption, and at odds with the esteemed philosophies associated with work ethic and honesty.
Bankruptcy can be very difficult to observe because sometimes you see someone who made some honest mistakes, got in over their head so to speak, or had a string of bad luck. Other times you see people who abused the system, ran reckless with credit and lived it up frivolously and then take advantage.
In very general terms the fact that bankruptcy is a possibility kind of builds in higher borrowing rates for everyone. I’m not saying it’s bad. But if a borrower goes bankrupt then the bank has to absorb those debts and it does that by charging other borrowers more.
In the US it has significant consequences for a credit record, but they can also be mitigated especially over time.
Bankruptcy is when a person or a company owes a lot of money that they can’t pay back. It’s like when you borrow some money from a friend and you can’t pay them back because you don’t have enough money.
When this happens, a person or a company can ask the court for help.
The court will look at how much money the person or company owes and how much they can afford to pay back.
Sometimes the court might say that the person or company doesn’t have to pay back all the money they owe, but they might have to sell some of their things to help pay back some of the money.
But don’t forget that you have to Declare It !
Bankruptcy is a situation where you are unable to pay back what you owe (without subjecting you to inhumane treatment*, of course), so to solve this problem you register with a government office, and they take an inventory of the assets you owe, sell off some of them (to pay off some of the debt), let you keep what they deem as essential, and free you from responsibility of the rest of the eligible debt. Your credit obviously goes to the shitter, because you’ve proven to be an unreliable person whom creditors shouldn’t give loans to in the future, but over a long time it can be repaired.
*Because you could argue that technically you can enslave this person and force them to work to pay off their debt since they still have their body, but this is unethical, so… this used to be the case in the old days but we don’t do it like that anymore
there is a bit more nuance ot this due to location and local law but Declaring Bankruptcy is effectively saying:
“i no longer have the capacity to service this debt and i wish ot defer this process to a legal authority that can assist me ni sorting this out.”
in the US at least you got 2 types of declaration for the invidiual:
– chapter 7: which in a super simplied sense just reads “liquidate whatever non essential assets you still have(meaning you cant be made homeless of put in a position where you cannot work)” and pay off the debtors whatever this result in. thwey will likely not get ALL Of their money back, but theyll get some.
– Chapter 11: this one is essentially asking the authority to assist you in restructuring your debt and work out a financial plan that lets you still function but also pay off your debt over time: this often means youll have your ages/profits garnished until all is payed off.
in both cases this declaration will og in your record which will impact your ability ot get further loans for a number of years/until its settled. but ib both cases once the plan is in motion all debt that can be discharged, will be and your current debtors will be prohibited b ythe courts from continuing ot hassle you for this specific debt.