Friday, September 10, 2004

Bankruptcy "Fundamentals"

Nothing is certain in this world. We humans cannot predict the future. A millionaire business man today, can become an insolvent tomorrow due to financial fluctuations. We are only the helpless players, in the hands of destiny. Neither we can do anything to avoid themisfortune, nor can we run away from it. Great men have always said “One should be bold enough to face whatever bad happens”. So let’s talk about a financial failure, called as bankruptcy and discuss the various remedies for it.

Bankruptcy refers to that financial position in which a person is totally ruined, impoverished and totally depleted of all his financial belongings. In simple terms, it is a declared inability of an individual or a firm to pay to their creditors. It is a legal process.

There are two ways by which a debtor is declared bankrupt. They are:
1. Involuntary Bankruptcy- where creditors or lenders file a petition against the debtor (person in debt).
2. Voluntary Bankruptcy- where the debtor files a petition claiming inability to meet creditors' requirements. A court decides whether or not a debtor can declare bankruptcy. Borrowers, who have undergone bankruptcy, usually agree to give up their assets and control of their finances, so that they can get protection from legal action by their creditors.

In general, a bankruptcy process involves:
1. Debtor- person who files bankruptcy, also known as “the petitioner”.
2. Bankruptcy judge- Who presides over any hearings on dispute.
3. Creditor- any person, businesses, corporations or governmental agencies that claim money from debtor.
4. Case trustee- a person representing the interest of all unsecured creditors.

Bankruptcy is divided into four types, called chapters. They are:
1. Liquidation bankruptcy or chapter 7- It is commonly used by individuals who simply want to walk away from their debts. It may also be used by businesses that want to terminate their operations and liquidate their assets.
2. Wage earner plan bankruptcy or chapter 13- It is generally used by people with stable incomes, who want to repay at least some of their debts but currently are unable to do so.
3. Chapter 11- It allows the debtor to remain in operation while working out a reorganization plan, in which he proposes a plan of paying or settling the debts.
4. Chapter 12- It is designed to allow family farmers to remain in the business of farming, while reorganizing and attempting to pay off their debts.

Features of Bankruptcy are as following:
When a debtor is declared bankrupt, he is discharged of most of the financial obligations.
2. It allows the debtor to resolve his debts through the division of his assets among his creditors. 3. The bankruptcy rate is one indicator of the general economic wealth and prosperity of a country.
4. High bankruptcy rates may indicate a weakening of the overall economy.
5. It gives a debtor an opportunity to have a fresh start, by eliminating all debts and obligations.

Alternatives to Bankruptcy:
Anyone in financial trouble undoubtedly receives many letters from creditors demanding payment on debts owed. Even a very demanding creditor may have a change of heart because they know that bankruptcy means that they may only get a fraction of what is owed them. To avoid such circumstances the following alternatives can be undertaken:
1. Anyone confident that his or her financial problems are only temporary may want major creditors to accept new repayment plan that is-
a. To accept reduced payments for a short period.
b. To accept a short delay in making payments.
2. It is better if one takes the help from consumer credit counselor.