Bankruptcy filing is at an all time high. This has caused a new bankruptcy law to be passed called the “Bankruptcy Abuse and Consumer Protection Act.” Many people are having a tough time with debt and are now facing new rules for filing.

What is Bankruptcy?

Bankruptcy, or insolvency as it is otherwise known, is a legal declaration of an inability or an impairment to pay for the debts owed to creditors. To put it simply, it is an option that debtors and creditors have whenever an individual cannot pay his debts when they fall due.

There is admittedly a bad stigma around bankruptcy. However, when it comes to dealing with individual insolvency cases, it should always be considered. Note that bankruptcy is not permanent. It is a temporary case, thus, allowing you, the debtor, to gain a fresh start.

Who should file for Bankruptcy?

As a general rule, anyone can go bankrupt. Even individual members of a partnership can become insolvent. However, the rules governing company or partnership bankruptcy and the procedures to follow may be different from that filed by an individual.

There are three ways by which one becomes bankrupt:

• Voluntary

The insolvent debtor files for bankruptcy in a voluntary capacity.

• Involuntary

The creditor takes the initiative to request that debtor should file for bankruptcy for the purpose of collection.

• Supervisor-Initiated

Or anyone bound by an IVA.

More often than not, bankruptcy is legally declared by the debtor himself. However, there are cases wherein a case of bankruptcy may be requested by the creditors in order to get reimbursement from the debtor for the portion of the total amount owed to them. This is what is meant by involuntary bankruptcy.

In an involuntary bankruptcy case, a court order is usually issued to the debtor who is obliged to acknowledge the proceedings or agree to them.

If you are the debtor, it is advised that you fully cooperate with the bankruptcy proceedings, even when you are disputing the creditor’s claim. Any attempts at settlement should be addressed before the bankruptcy petition is due to be heard. To do so otherwise would be both expensive and difficult.

Why is there a law on Bankruptcy?

What is the purpose of bankruptcy?

Bankruptcy is seen as a graceful way out of a debt. Its primary purpose is to give an honest debtor a “fresh start” in life. Hence, bankruptcy is essentially for the benefit of the debtor who can no longer pay for the debts that he owed.

Most of the time, individuals or organizations owe money to more than just one people and when the assets are no longer enough to pay for all the debts owed to each creditor, it is but fair to take the sum total of the assets and divide it up equally among the creditors in proportion to the debt owed.

The legal principle behind bankruptcy is that “one may not unjustly enrich himself at the expense of others.” If the bankrupt person were only to pay one creditor, what happens to the other creditors?

Hence, the other purpose of bankruptcy law is to repay creditors in an orderly manner to the extent of the total amount of properties and other assets that the debtor has available for payment.

The resolution of the debtor’s debts is accomplished through bankruptcy by dividing all his assets among the creditors. The assets may not be enough to pay all, but the declaration does allow the debtor to partially pay off his debts and other financial obligations.

If you retain a bankruptcy attorney be sure to have all the details of the new laws explained to you. An effective bankruptcy attorney should at least take the time to explain all the details before you file and give you an idea of how to manage your debt and how to eliminate your debt burden altogether.