Question

What is bankruptcy? What are the different types of bankruptcy? Do you think bankruptcy protection is a good thing or should it be eliminated? Explain

Answer 1

Bankruptcy is the legal position or legal status of a person or an entity, in which the person or the entity is not in a position to repay its outstanding debts. In other words bankruptcy is the legal procedure for liquidating a business and in case of an individual the property of the individual.

There are two main types of bankruptcies – discharge of debts and payment plan. Discharge of debts comes under Chapter 7 and is the traditional bankruptcy. Under this type of bankruptcy the individual/entity either pays or gives up his/her property for secured debts. Second type of bankruptcy is chapter 13 bankruptcy. Under this type of bankruptcy the individual (this is not applicable for entities like companies) is not seeking to pay off all the debts but rather focuses on restructuring the payments in such a way so as to make them more manageable. The individual can also get rid of part of the debts to make the overall debt position more manageable. A third type of bankruptcy also exists (and this exists for companies) – chapter 11. Here business of the company is reorganized so that it can continue its business in future. The reorganization is done under a court-appointed trustee.

Bankruptcy protection is a good thing and should not be eliminated. Unforeseen events can derail the operations of certain companies and finances of individuals. These companies and individuals, more often than not, are honest and deserve a chance to revive itself. A bankruptcy proceeding gives them this chance.