Meaning and definition of bankruptcy
Bankruptcy can be explained as a legal proceeding which involves a business or individual being unable to repay his outstanding debts. As explained by Investopedia, bankruptcy proffers another chance to an individual or business to start afresh by absolving the debts which can just not be paid while offering a chance for the creditors to get some amount of repayment based on the availability of assets.
The process of bankruptcy instigates with a petition filed by the debtor or on the creditors’ behalf. As a part of the process, all the assets of the debtor are evaluated and measured and a portion of these assets is then used to repay the outstanding debt. Theoretically, the capability of filing for bankruptcy is beneficial for the overall economy through the way of another chance of providing the creditors with a way of repaying the debt.
After the process of filing a bankruptcy is accomplished, the debtor is comforted from the debt obligations incurred on him before he has filed for bankruptcy.
Causes of Bankruptcy
One of the leading causes leading to bankruptcy includes medical bills resulting from serious illness. Some common causes other than this are garnishments/lawsuits, unemployment, auto repossessions, highly over-extended credit, foreclosures, marital problems, sudden large expenses, and high interest loans. In addition to these causes, there are also some other business causes leading to bankruptcy. Some important ones are:
- External business conditions like increasing competition, troubles created by local hooligans, general running costs for a business, and alike.
- Internal business conditions like an inappropriate location, weak management, inappropriate location, trade credit problems, client loss, and similar more.
- Financial problems including inability to secure new capital when required, loss of capital, difficulties with cash flow, or high debt.
- Problems related to taxation might also lead to bankruptcy. This is due to the fact that small business owners, generally, do not keep a watch on the tax structure. Moreover, when they realize this tax, their resources are crushed by the hefty amount of tax.
Accidents are also important cause leading to bankruptcy. Even though this is supposedly covered by insurance, the bureaucratic red tape can prevent the business owner from getting the money.