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What Is Bankruptcy? 

Bankruptcy is a legal proceeding in which an individual or business overwhelmed by debt and unable to pay it seeks relief from some or all of its obligations.

Deeper Definition

When a person or a business can no longer fulfill their financial obligations or pay their debts, they may file for bankruptcy. Bankruptcy is a legal process that helps debtors get a fresh start by liquidating their remaining assets to cover some of their debts while the remainder is forgiven.

A bankruptcy case begins when a debtor who has no foreseeable means to pay their debts files a petition with the bankruptcy court. Generally, an individual, a couple, an organization, or another entity may file the petition. Afterward, a bankruptcy judge will then decide whether they are eligible to receive relief from their debt or not.

When the court allows a bankruptcy proceeding, it assigns an officer of the court, known as a bankruptcy trustee, to take ownership of a debtor’s remaining assets. A bankruptcy trustee’s duty varies depending on the case. Typically, their duties include but are not limited to:

  • Selling the debtor’s remaining assets to pay some of the debts.
  • Distributing proceeds to creditors according to the priority of their claims:
  • Reviewing the debtor’s proposed repayment plan (if any)

Declaring bankruptcy can release a debtor from most debts, provide relief and allow them to make a fresh start. However, it has long-term financial and legal consequences. For instance, it can significantly lower the debtor’s credit rating, making it more challenging to get a loan. That is why seeking advice from a qualified lawyer before embarking on the process is recommended.

Bankruptcy Example

When a person is bankrupt, their non-essential assets and excess income are used to pay off the creditors. For creditors to be entitled to receive full or partial payment, they must file a “Proof of Claim.”

Lehman Brothers Holdings Inc. was the fourth-largest investment bank in the United States, with 25,000 employees worldwide. It was involved in investment banking investment management, private equity, and private banking. On September 15, 2008, it filed for bankruptcy, declaring that it had $639 billion in assets and $613 billion in debt. 

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