In plain words, Bankruptcy means the inability to pay debts which a person or an organization (like an incorporated company) may owe to others. It becomes a legally recognized status of a person or an organization after prescribed legal process is complied with, and the court declares that person or the organization as bankrupt. Two main purposes are served by someone being recognized as a bankrupt:
- Some persons or organizations may have become bankrupt for genuine reasons or for reasons beyond the control of that person or that particular organization. Bankruptcy gives that person or that organization a new financial life and a fresh start - the earlier debts are taken care by earlier assets, if any, and the shortfalls are basically ignored. During the process of bankruptcy, if it is legally declared, any creditors are barred from pursuing lawsuits or any other legal route to recover outstanding debt.
- By following the legal process of bankruptcy, the creditors get an orderly and organized way to claim whatever repayments may be possible from the assets of the bankrupt person or the organization.
It is the general perception that bankruptcy rids oneself of all debts and liabilities, and one becomes free to start their financial life afresh. While elements of that are true, there is other side to that story; bankruptcy wipes out debts, and it also wipes out the credit rating of the person or the organization involved. Therefore, it is more prudent to avoid bankruptcy if at all possible.
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