Bankruptcy

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Definition of Bankruptcy:

Bankruptcy is a legal process to reduce or eliminate debts when a person or business cannot repay them.

Detailed Explanation:

Families or businesses may encounter financial hardships resulting from a drastic drop in income caused by a severe illness or long-term unemployment. Companies may expand, only to be forced out of business when an aggressive competitor unexpectedly enters the market and seizes many of its customers. Bills cannot be paid.

People and businesses file for bankruptcy with the Federal courts if they cannot pay their bills and want legal protection. In the United States, Chapter 7 and Chapter 13 are the most common declarations. Chapter 7 involves the selling of assets to repay creditors. Chapter 13 is the reorganization of debt to make payments more affordable. An advantage of Chapter 13 is that filers are usually permitted to retain ownership of many of their assets, but the court usually imposes restrictions until creditors are repaid. 

Bankruptcy provides businesses or individuals a release of obligation, enabling them to begin again. It also provides creditors with a means of partial repayment. Bankruptcy is common when the filer’s liabilities exceed its assets. An asset is something that has value—usually monetary value. These include cash, stock, real estate, and a good or service that is in inventory or in the process of being produced. Liabilities are obligations to others. They include loans and contractual obligations such as wages owed to employees and vendors.

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