What is Bankruptcy

Definition

Bankruptcy is a term used to describe an individual’s or organization’s inability to make payment to its creditors or fulfill its outstanding financial obligations. Though the term is more common with organizations. A company files for bankruptcy when it's unable to meet pressing financial needs. By doing this, the company would be able to free itself from every debt obligation. Companies that file for bankruptcy may be freed of any outstanding debts, however, bankruptcy also comes with its downsides such as bad credit rating (in some countries).

Understanding Bankruptcy

Without any doubt, bankruptcy can affect both the image and credit rating of a company making it secure financial assistance (loans) in the nearest future. In the US bankruptcy law, three chapters clearly state the laws binding companies that file for bankruptcy—chapters 7, 11, and 13.

Chapter 7: An organization which files for the chapter bankruptcy would be required to liquidate its assets to repay all debt obligations.

Chapter 11: Filing for chapter 11 bankruptcy requires that the organization will make an attempt at restructuring their debts to pay off all outstanding debt obligations. An organization that files a chapter 11 bankruptcy shows that it is still interested in fulfilling all its financial obligations, and it gives the organization an opportunity to continue functioning.

Chapter 13: Only individuals or the self-employed can file for a chapter 13 bankruptcy, whereas, corporation and partnership organizations cannot file for this type of bankruptcy. It will be required of the individuals filing Chapter 13 bankruptcy to restructure their resources and make an attempt to pay off all outstanding debts.