What constitutes a bankruptcy?

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What constitutes a bankruptcy?


Updated: December 25, 2012

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Bankruptcy is legal procedure that declares a person or a business establishment`s incapability to pay the outstanding debts to the creditors. The bankruptcy proceedings are initiated with filing of a petition by the debtor voluntarily. Similarly a bankruptcy petition can also be filed against a corporate or business debtor to recover at least some part of the outstanding debts. This is involuntary bankruptcy.

Bankruptcy procedure is mostly initiated by the debtor. This is the voluntary bankruptcy petitioned by an organization or individual who is broke or bankrupt. An involuntary bankruptcy plea may not be admitted against an individual debtor who is not dealing in any business. The bankruptcy procedure involves assembling all the debtor`s property or belongings, evaluating them and repaying a part of outstanding debts to the creditors. Once the bankruptcy proceedings are concluded, the debtor is legally freed of his debts before filing the petition for bankruptcy.

Bankruptcy is an offer given to insolvent business establishments or individual consumer to start afresh by writing off their debts they owed to creditors. This procedure also gives an opportunity to the creditors to recover some of the money they lent to the debtor, based on the asset value available. Theoretically a bankruptcy petition can economically compensate a business or an individual who had the misfortune of going bankrupt and at the same time offer relief to the creditors by returning some portion of the credit lent. Overall a bankruptcy offers certain degree of relief to all affected parties.

A bankruptcy in the United States can fall under any one of several categories. A liquidation of assets falls under Chapter 7 of the Bankruptcy Code, company or individual reorganization under chapter 11, and debt repayment with lowered debt covenants or repayment plans under chapter 13. The pattern for filing bankruptcy varies from country to country. The filing rate is based on these varying patterns, leading to lower or higher ratios.

In the United States, bankruptcy cases are governed by Federal Laws and are filed in the United States Bankruptcy Courts; a part of the United States District Courts. However, state laws come into play while deciding on the property rights. The rules protecting certain properties of the bankrupt individual or business from the creditors are drawn by the state law.

The concept of bankruptcy and the bankruptcy law that is in existence in the US was initially has originated from England.

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