Why do people file bankruptcy
An inability of an individual or organization to pay their creditors, when declared legally is termed as bankruptcy. There are many ways in which an individual or organization might go bankrupt. The main purpose of declaring bankruptcy is to give the debtor a chance to relieve his debts legally and to repay creditors according to the insufficient funds available from the debtor. Usually, bankruptcy is declared by the debtors themselves but in certain cases, a creditor may file a bankruptcy petition against the debtor in order to receive whatever payment is possible.
There are interesting historical perspectives to the modern bankruptcy proceedings. According to the Hebrew scriptures, there should be one year in every fifty years when all debts should be cleared and debt slaves set free. The Bible also prescribes the same but reduces the time to seven years. In places like Greece and India, bankruptcy did not exist and debts had to be paid one way or another. If a man is unable to meet the demands of his creditors, his family including children and servants are forced into debt slavery. Though there were laws stating the time period feasible, more often the debt slaves were badly treated and remained slaves for life. There is also documentation proving that Genghis Khan advocated death penalty for any individual becoming bankrupt for the third time.
There are two theories as to the origin of the term Bankruptcy. In medieval Europe, the first bankers sat on benches in public places to do business. When a banker lost all his money, he broke the bench to indicate that he was unable to do business any longer. This was apparently a frequent practice in Italy and the term bankruptcy is said to be derived from the Italian Banco rotto meaning broken bench. It might also refer to the Latin bancus ruptus meaning the same. The second theory is based on the fraud Roman bankers who when they ran away with the publics money, left only the sign of a table. The term is derived from the French banque route, which means trace of a table. Whatever the origin of bankruptcy might be, the fact remains that it is very much in existence today.
The results of declaring bankruptcy may restrict a debtor in a lot of ways. The first and foremost is that one loses control over ones assets since they will be claimed by the court to be distributed among creditors. One may not be able to start a business or to take part in the management of any company without the courts permission. It would be impossible to obtain credit for any purpose for many years after annulment. Apart from all this, the tediousness and shame of court appearances and the public awareness created of the debtors bankruptcy and the stigma attached to it may make the debtor s social life harder.
There are certain advantages in adopting this measure against insolvency. Though the bankrupt individual is restricted in plenty of ways, he or she is legally free of overwhelming debt that could not be paid in any way otherwise. Apart from the relief of not being responsible to the creditors and the peace of mind derived from it, there is also the added attraction that the debtor is exempted from most other legal actions by creditors. The creditor loses all rights to compel payment, legally or otherwise, once the matter is in the hands of the court. The bankruptcy order is usually annulled after the period of one year. The creditors have the advantage of receiving a fair share of the debtors assets in full settlement.
Bankruptcy may be considered as an option only after completely considering the pros and cons. One question that needs to be answered before going for this option is whether there are any alternatives to declaring bankruptcy. It is important to contact the creditor and attempt to negotiate payments before deciding to plead bankruptcy. Another alternative is to consult Credit Counseling Service or other such organizations for advice on making a repayment plan along with the cooperation of the creditors. One way is to take a huge fresh loan with reasonable monthly repayment and use the funds from this loan to pay off all other creditors.
After considering all above alternatives and deciding on bankruptcy as the best way out, it is advisable to consider the different types of bankruptcy. A lawyer will be of immense help in helping the debtor during the proceedings. It is also important to meet with the creditors at this time to negotiate with them.
Whatever the reason behind the decision to file for bankruptcy, the debtor should make a complete research on his options and method for filing. After considering the pros and cons of the individual case, the debtor must arrive at a decision.
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