Bankruptcy refers to a legal proceeding wherein a business or an individual is unable to pay off pending debts due to the lack of funds. The process is initiated by filing a petition. This petition can either be filed by the debtor or by creditors on behalf of a debtor. The latter scenario is least likely to occur and most bankruptcies are filed by the debtor.

Once the bankruptcy is filed, the debtor’s currently owned assets are evaluated and they are used to pay a certain percentage of the outstanding debt.

The benefit of filing bankruptcy

Filing for bankruptcy allows debtors to make a fresh start. Debts are forgiven for the fact that the debtor simply does not have the money to pay them off. Creditors also benefit from bankruptcy filings in that they are paid some part of the debt through the liquidation of the debtor’s surviving assets.

To put it simply, bankruptcy allows individuals and businesses to wipe the slate clean and make a new start without having to worry about creditors knocking on their door at all times. Plus, creditors have a good chance of recovering some of the debt which can be impossible otherwise. The process is good for the economy as well.

Once bankruptcy has been filed, the debtor is cleared of all debts that were incurred prior to the filing.

Who files a bankruptcy?

As we mentioned earlier, bankruptcy is filed by businesses or individuals who have pending debts that outweigh the money currently held by the debtor. In other words, if the debtor is sure that the debt cannot be repaid, bankruptcy is the only option left.

An interesting fact related to bankruptcy is that it is rarely a business that files for bankruptcy. More often than not, it is an individual. This is because some individuals take on massive financial obligations that they cannot afford to pay back. This could include taking on an expensive mortgage or auto loan; sometimes, a combination of several loans.

However, plans can always go wrong and when that happens, they enter a scenario where bankruptcy is the only way out. In 2015, the US saw over 840,000 bankruptcy cases being filed; 97% of them were by individuals.

Should you opt for bankruptcy?

A very important thing to note here is that bankruptcy, despite the fact that it frees one from his/her debts, is actually a negative item in terms of creditworthiness. People who file for bankruptcy often have to start their 'financial' life from scratch; many of them are forced to significantly downgrade their lifestyles.

There are financial troubles as well. The low credit score can prevent them from qualifying for a loan. So, the best option is to invest and spend wisely, thereby preventing a scenario that necessitates a declaration of bankruptcy.