According to Sandage (2006), bankruptcy can be described as the inability of an individual or business entity to pay debts owed to them. When an individual or entity files for bankruptcy and they are declared so, they can be exonerated from major debts that they owe. There are times in history when cases for bankruptcy have been high, depending on the economic status at the time.
For example, according to Irby (2010), bankruptcies increase during times of economic hardships.
There are different types of bankruptcies in the United States of America and elsewhere in the world. In the United States of America, bankruptcies are named according to the chapter of the bankruptcy law that they fall under (Balleisen, 2001).
There are three main classifications of bankruptcies under this classification. These are chapter 7 bankruptcy, chapter 11 and chapter 13 bankruptcies. There are different eligibilities for these bankruptcies.
Chapter 7 is the most common of these bankruptcies, and it is what most people refer to when they talk of personal bankruptcy. Silverman & Grabianowski (2010) also refer to this as the straight bankruptcy.
In this type of bankruptcy, the assets of the debtor are sold and the proceeds are used to pay the creditors (Silverman & Grabianowski, 2010). When this happens, the creditors hold no right pertaining to the earnings that may be made by the debtor in the future.
For a person to file for chapter 7 bankruptcy, several criteria must be met. An individual residing in the United States, or who owns property or business in the country, is eligible for this bankruptcy (Reeder, 2010).
The intentions of the individual filing for bankruptcy under this chapter should not include getting out of debt. An individual who has no residual funds apart from expenses of his basic living is also eligible for this bankruptcy, given that they are indebted (Sandage, 2006).
Balleisen (2001) is of the view that a borrower with history of chapter 16 or 7 bankruptcies in the past six years is not eligible for this bankruptcy. Also, if the individual have tried to file for the same bankruptcy but which was unsuccessful in the last six months, they become automatically ineligible for this bankruptcy (Sandage, 2006).
There are many reasons that make people file for bankruptcy in the United States and other countries in the world. The borrower may do so if they wish to exonerate themselves from legal obligations to settle their debts. If the debt involves mortgage on a house, the individual may file for bankruptcy to avoid foreclosure of the same (Irby, 2010).
The borrower may also have the intention of stopping the creditor from repossessing their property. A person who was in debt when in employment, and after losing their employment feels that they may not be able to settle their debt, may also file for this bankruptcy (Reeder, 2010).
Bankruptcy has far reaching effects on the individual’s interest rates on loans and credit cards. This is given the fact that the borrower’s credit score card is negatively affected by a bankruptcy history (Sandage, 2006).
This is especially so considering the fact that the records of a bankruptcy remain on the individual’s credit file for at least ten years. This being the case, the individual is labeled as a high risk for future defaults, this means that interest rates on loan and credit cards are high to cover for this risk.
Irby (2010) is of the view the interest rates on credit cards may surpass 25% levels. For other loans, such incentives such 0% pay on APR is eliminated (Sandage, 2006).
In conclusion, it should be noted that individuals and organizations file for bankruptcy to prevent creditors from taking legal actions against them. While the idea behind the introduction of bankruptcy laws to protect the borrower may have been noble, there are cases where borrowers abuse the same.
This is for example when an individual files for bankruptcy after every seven years (Irby, 2010). This abuse makes it hard to recognize individuals who are genuine about bankruptcy filings.
Balleisen, E. (2001). Navigating failure: Bankruptcy and commercial society in Antebellum America. Chapel Hill: University of North Carolina Press.
Irby, L. (2010). Basic types of personal bankruptcy: Personal bankruptcy options for consumers. Retrieved 3 October, 2010 from http://credit.about.com/od/debtmanagementsolutions/a/bankruptcytypes.htm
Reeder, C. (2010). How bankruptcy affects interest rates on loans and credit cards. Retrieved 3 October, 2010, from http://ezinearticles.com/?How-Bankruptcy-Affects-Interest-Rates-on-Loans-and-Credit-Cards&id=211857
Sandage, S. A. (2006). Born losers: A history of failure in America. Cambridge, Mass.: Harvard University Press.
Silverman, J., & Grabianowski, E. (2010). How bankruptcy works. Retrieved 3 October, 2010 from http://money.howstuffworks.com/personal-finance/debt-management/bankruptcy1.htm