What is bankruptcy?

What is bankruptcy

Key Takeaways

  • An individual or a business files for bankruptcy when they are unable to repay their debt or honor their financial obligations
  • There are various reasons why someone might file for bankruptcy, but the goal is always the same—to clear debt and get back on track.
  • Filing for bankruptcy essentially means filing for protection from your creditors.

In simple terms, an individual or a business files for bankruptcy when they are unable to repay their debt or honor their financial obligations. The default can be due to financial problems, such as a lack of income, or legal issues, such as facing a lawsuit. In most cases, bankruptcy is a last resort—it’s used when all other options are exhausted.

Sometimes, declaring bankruptcy may allow individuals and businesses to start afresh by wiping away any outstanding debt or restructuring business operations to regain financial stability. It would be helpful to understand the bankruptcy process and the potential consequences.

Which kind of bankruptcy would work for me? There isn’t a one-size-fits-all solution. Individual and business situations are unique. However, knowing your options will help you make informed decisions about how best to proceed based on your financial situation.

Types of bankruptcies

There are various reasons why someone might file for bankruptcy, but the goal is always the same—to clear debt and get back on track.

Before we dig in, it is important to note that different countries have varying bankruptcy filing procedures. A bankruptcy filing in India, for instance, will immediately hurt your credit rating. Consequently, you will find it tough to avail of a new loan though you will be protected from creditors. In 2016, the Indian Parliament passed the Insolvency and Bankruptcy Code, a landmark legislation to overhaul the bankruptcy procedure in India. However, the IBC largely serves corporate entities as the process for individual filing has yet to be streamlined.

Conversely, bankruptcy filing in the US falls under three main chapters—Chapters 7, 11, and 13—named for the relevant selections under the United States Bankruptcy Code. There are other chapters as well, but individuals and businesses commonly use these three.

Chapter 7: Liquidation

This kind of bankruptcy applies when a business or individual has accumulated large amounts of debt that they can’t afford to pay off. Under this provision, a bankrupt entity can sell its assets and possessions at auction and use the proceeds to settle the debt. The method can be very beneficial because it eliminates all your debt at one go. It’s an “easy” filing since there isn’t much paperwork involved.

Chapter 11: Reorganization bankruptcy

The most common type of bankruptcy. It’s typically used by businesses that are in trouble, but don’t want to go through the hassle and expense of filing for Chapter 7. A corporation can reorganize its finances and continue business operations while paying off creditors if it has filed for Chapter 11 bankruptcy protection.

Chapter 13: Repayment plan

The filing under Chapter 13 provides relief from creditors by allowing people who owe them money to make repayments over a period of time rather than immediately. This option works best if you have regular income and don’t need cash quick—like Chapter 7 liquidation does.

However, this plan comes with certain restrictions. Notably, you cannot own any property under Chapter 13 protection, and your credit score will be hit as a result. A repayment plan will also increase your monthly payments, so it’s important to weigh all pros and cons before choosing this route.

How does one file for bankruptcy?

For the purpose of this article, we will focus on how to file for bankruptcy in India as it is more relatable.

The first thing that you need to do is speak to a lawyer who can provide you with information and guidance. However, before that, you should gather all available data about your financial situation. The process involves understanding your debt load, how much money you have available in savings, and what assets are worth selling.

Once you have consulted with a lawyer and determined that bankruptcy is the right solution for you, you will need to fill out a petition (a formal request) before a court. This document must accurately reflect your income and debt at that specific time.

After gathering all necessary documents and submitting your petition, you will likely receive a hearing date. At this hearing, the court will consider whether or not granting bankruptcy would be in either party’s best interests. If so, the process moves forward accordingly and if not, the court might terminate the proceedings.

Who can declare bankruptcy and when?

Bankruptcy is usually filed by an individual or an entity, depending on their income and assets and the debt they owe to creditors. For individuals, their health and marital status also count. In most cases, the spouse will usually agree to file jointly with his or her partner to reduce the complexity and stress associated with the process.

The timing of the bankruptcy filing also depends on the individual situation. However, some general rules may apply: If you can’t pay back your debts as they come due, chances are that declaring bankruptcy will give you a better chance at resolving them. Nevertheless, even if filing doesn’t solve everything immediately, going through the process will likely worsen things before they get better. Therefore, weigh all options carefully before making any decision.

What happens if I declare bankruptcy?

Filing for bankruptcy essentially means filing for protection from your creditors. Depending on your financial situation, you can choose to repay your debt over time or even eliminate some portion of it. Creditors will not have access to your movable or immovable assets—bank accounts, real estate, shares etc. during this period. However, the specifics of assets protected will depend on the country where you file for bankruptcy, and the respective rules will apply. The court grants you time to pay back your debt while you work closely with your creditors.

Pros and cons of bankruptcy

Bankruptcy filing has its upsides and downsides, as we discuss below.


  • Regained financial stability—no longer at risk of foreclosure, eviction, or repossession.
  • Improved credit rating—lowered rates on loans and mortgages.
  • Reduced payments on high-interest debt such as car loans and student loans.
  • Increased bargaining power when negotiating with creditors.


  • Bankruptcy can be costly in terms of legal fees and out-of-pocket expenses.
  • It can be disruptive. It may affect your job, cell phone service, home loans, etc.
  • It may be stressful. The process can be lengthy and can tire you out.
  • Long time frame for resolution. It may take several months or years to restructure your debts.

    Alternatives to filing for bankruptcy

    If you’re considering filing for bankruptcy, a few alternatives could work better for you. These can help struggling businesses get back on their feet. Some of these include:

  • Formal insolvency proceedings through a court will give you more time to work out a settlement with your creditors.
  • Debtors could negotiate a debt reduction agreement with creditors to reduce the amount of money they owe them.
  • Creative financing involves finding new and innovative ways to borrow money, such as through peer-to-peer lending platforms or crowdfunding campaigns.
  • Restructuring or making changes to the company’s debt agreements to lower its overall cost of borrowing and improve its credit rating.
  • Mergers & acquisitions (M&As) allow companies to combine their resources to become more competitive and expand their market reach.

Whichever route you choose, it’s important to carefully weigh your options before making any decisions.


Bankruptcy is certainly not a pleasant experience and may also lead to severe financial challenges that might even put your career on the line. However, it can be the best option for some people when there is no other way out. It can save you from hefty penalties and a long period of indebtedness if you handle your financial issues well.

Once you decide to file for bankruptcy, you should consult an experienced lawyer who can guide you through the whole process step-by-step. Always remember that debt isn’t invincible. You just need to be smart about managing your money and resist the temptation of overspending to turn debt-free.


What happens when you go bankruptcies?

Bankruptcy provides relief to individuals or entities unable to repay debts. Consequences include a negative impact on credit, potential loss of assets, and a fresh financial start.

What do you lose if you declare bankruptcy?

Declaring bankruptcy may result in the loss of personal assets, a negative impact on credit scores for up to a decade, higher insurance rates, and limited access to credit.

Does bankruptcy clear all debts?

Bankruptcy can discharge certain debts, providing relief, but not all debts are cleared. Secured debts, student loans, and some tax debts may persist after bankruptcy.

Who gets paid first in bankruptcy?

Secured creditors have the highest priority in bankruptcy, followed by priority unsecured creditors. After them, general unsecured creditors share whatever assets remain.

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