Bankruptcy and Procedures

What is Bankruptcy?
Bankruptcy is a process, laid down by law, which deals with debts a person cannot pay. It is a term used for the formal procedure for individuals who are declared by the court as insolvent (i.e. they do not have sufficient funds to pay their debts).

Bankruptcy only applies to people, either as individuals not in business, or individuals in business as sole traders or partnerships. bankruptcy does not apply to companies, as a company is a legal entity (or a legal person) in the eyes of the law, so when they cannot pay their debts, they go into a process known as liquidation.

A person can become bankrupt even if they are in business as a sole trader, or in a partnership, or some other structure other than a company, because the law does not look on these structures as separate entities in the eyes of the law. Therefore, the liability for paying those debts remains with the individual who owns the business.

Many individuals in these types of business structures also give personal guarantees for the debts of the business, or even for the debts of the company they operate, and in that case they are personally liable if those debts are not met by that particular business.

The Main Aims of a Bankruptcy
The aim of the bankruptcy system is to set up a procedure by which people who cannot pay their debts can have those debts eliminated and enable them, with certain conditions, to make a fresh start. When the bankruptcy process is under way, the person who handles the bankruptcy procedure will take into account the assets owned by the person going bankrupt.

If there are insufficient assets to cover all the debts, then people who are owed money will receive a portion of the money raised from the sale of assets held. Because bankruptcy is a legal process it is fully controlled by the law and this means that certain rules and regulations have to be complied with.

No One Plans to go Bankrupt
No one ever plans for bankruptcy, but there are occasions where even smart, decent business owners find that it's the only viable choice. bankruptcy can result from economic conditions, local conditions and other events beyond your control, as well as mismanagement, mistakes or because of your own actions. If you are a sole proprietor or a partnership, your business' bankruptcy will mean personal bankruptcy as well.

The term bankruptcy literally means "broken bench". In days gone by, when a debtor couldn't pay his bills, they would break his workbench in two as a warning to other tradesmen and to punish the debtor. Today, bankruptcy is a tool that can legally help your business to survive or allow you to discharge the business' debts.

Bankruptcy is the process of asking the court for protection from your creditors if you are unable to meet your obligations.

Creditors can repossess equipment, refuse to sell to you anymore, and can even petition to force you into bankruptcy. bankruptcy can be handled as a total liquidation of your business by which all assets are sold off and liabilities paid as cash allows. But other types of bankruptcies can keep the wolves away from the door while you try to work things out with your creditors.

Filing for bankruptcy is not the only way out of a precarious position but should be considered a last ditch effort. If you can work out arrangements with your creditors without having to go to court, you are much better off.