Bankruptcy is a legal declaration of inability to pay the creditors of an individual or organization. The term originated from the ancient Latin word bancus which means bench or table and ruptus which means broken. There are two ways to declare it either by the debtor called voluntary bankruptcy or by the creditor called involuntary bankruptcy.
Each country has different laws and qualifications governing this matter. In the United States, individuals and companies declaring that they are bankrupt are placed under federal jurisdiction based on the Article 1, Section 8 of the Constitution and special laws. To know whether you are qualified for the status you must have the minimum criteria.
1. Your debt must be at least $1,000.
2. You are unable to pay or have ceased making payments during maturity date of the debt.
3. You have insufficient assets to pay.
If you have these three you are eligible for Assignment in Bankruptcy. Here, all your assets which are not exempt will be handed over to a trustee for liquidation and payment of outstanding debts. As debtors you have the responsibility to submit monthly statements of income and expenses, attend meeting with creditors if requested, make voluntary payments, attend examination by official receiver, attend counseling session regarding the source of financial difficulties, disclose all relative information and hand over all non-exempt assets. In return, the trustee will notify your creditors and file your tax returns.
There are advantages and disadvantages to this situation. Advantages includes freedom from you debts, automatic discharge after one year and you get to keep the tools of your trade if you are self employed. Disadvantages are the seizure of your assets, selected debts which cannot be written off, loss of credit cards, unable to obtain mortgage for a specific period and of course embarrassment.
To avoid the hassle here are some alternatives before you filing:
1. Reduce your expenditures. Analyze what are your needs and wants and segregate the two. Cut off expenses for things that you can live without.
2. Negotiate with creditors. If it is possible, take your way out of the deadline and ask for a deadline that would work better for both of you. You can also ask them to limit your liability to a certain amount in return for prompt payment.
3. Resort to Debt Restructuring. This may be obtained through court order or out-of-court.
4. Consolidate debt. Apply for a loan that has lesser interest rate and pay outstanding loans. This will replace many payments with one monthly payment to one creditor.