Monday, September 18, 2006

Bankruptcy - Last Resort

by Martin Rogers

Regardless of the short and long term consequences related to filling bankruptcy, this particular population filling for bankruptcy is rapidly growing.

Statistics show that 5.4 people out of 1000 filled for bankruptcy on 2005 and this trend is increasing by 7%. Governments and financial organizations are concerned with the incredible easiness with which people opt for bankruptcy.

Let us define the meaning of bankruptcy; the word bankruptcy literally means "broken bench". In the past, when a debtor could not pay off his debts, his workbench was broken in two pieces as a warning to future debtors. Nowadays, it is defined as a legal term to help an individual or a business in a financial hardship and ease down the burden of the debts. The legal term "bankruptcy" is defined as an individual that cannot, within reason, pay off all of his debts and agrees to let the government take over his finances in order to ease off his debts.

Bankruptcy laws were created to protect both debtor and creditor. Laws maintain the balance and permit equal conditions in order to satisfy all people involved in the process. The main function of bankruptcy can be shown in two ways:

- Giving a debtor a new start by relieving him of the majority of his debt

- Creditors do not lose their money completely

Several studies show that the main cause for filing for bankruptcy is the increased levels of consumer debt which is normally tied up with an unexpected event, like losing your job, a medical emergency or the loss of a relative. According to economists, the average person that files for bankruptcy is a middle class worker, with no superior studies, just high school graduate and usually the head of a family that has a heavy usage of credit.

There are different types of bankruptcy around the world, which are defined by specific laws for certain purposes. Each bankruptcy is different from the every other, especially within countries. For instance, in the United Kingdom, bankruptcy can only legally be filled by individuals and partnerships, whereas in the United States and Canada, bankruptcy can be filed by businesses, as well.

In the US, there are two ways for filing for personal bankruptcy. One is known as Chapter 7 and the other as Chapter 13. Chapter 7 plan demands debtor to liquidate all assets, with no exception, and to distribute them equally among all creditors. In Chapter 13, the debtor does not need to liquidate: The debtor agrees to a payment arrangement, which pays for a portion of his unsecured debt and the rest of the balance is forgiven. The majority of people opt to file for Chapter 7.

When you apply for bankruptcy, you are required the services of a lawyer, especially a lawyer that deals with bankruptcies and that has experience with these kind of issues. After filling for the bankruptcy, court will designate someone to arrange the payments for you to make to your creditors and to define how much of your income will be used to repay your debts. Court will let the person make payments, or withhold some money of this individual's paycheck toward this goal. One of the secondary effects of this process is that your credit options will be very limited, as a result of the legal action and the unwillingness of creditors to issue credit lines to those who have filed for bankruptcy. Once the money designated by court and has been paid off, bankruptcy will be cleared from your credit history and you will be able to start rebuilding your credit "status" once again; this could take years to regain creditors trust again, but it is worth it.

Due to the remaining effects off filing bankruptcy, it is advisable to take bankruptcy as a last resort. Loop up for another alternatives or consult a lawyer to see if there are any other alternatives to consider before declaring yourself or your business in bankruptcy.

- Sell some material goods to pay-off your bills, especially when your financial situation starts to decline. - Minimize expenses and cut down on all unnecessary expenses. - Let a specialist review your case or consult an accountant. They could help you make a plan to progressively pay off your debts without filing for bankruptcy. Also, saving could pull you out of a financial breakdown in no time. - Refinancing some assets and using the surplus to pay off your debts

If nothing else works, consider bankruptcy as your last option. This way you will stop the situation from becoming worse. Remember, bankruptcy should be applied to as last resort.

Check these links to learn more about the topic: 1 | 2 | 3 |

Martin Rogers is a contributing writer to and is currently writing some special articles to orient business on how to manage debt and avoid bankruptcy

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