Insolvency or bankruptcy is a legal state of an individual or a legal entity for instance a company that is unable to pay its debts. Only a court of law can declare insolvency after a voluntary or involuntary bankruptcy petition. In voluntary bankruptcy, the debtor petitions the insolvency court to declare them bankrupt. On the other hand, involuntary bankruptcy petitions are filed by creditors against an individual or an organization.

Insolvency laws vary from country to county but the principle is just the same. There are two main types of bankruptcies that can be declared by a court. In the first type, the debtor is totally discharged from paying his debts. The court then appoints a trustee to liquidate the assets belonging to the debtor and distribute the proceeds to all the creditors. It is the simplest form of insolvency.

In the second type of insolvency, after the debtor has been declared insolvent, he or she must design a plan to consolidate all the debts and repay all the creditors within a certain period of time. The court will then decide if the plan satisfies all the legal requirements, is sound and is agreed upon by all the creditors.

The second option is only available for people with regular income. The payments are not made directly to creditors. They are forwarded to the trustee before being sent to the respective creditors. A state of insolvency is usually advertised in a gazette advertisement in some countries.

While filing bankruptcy is the best thing to do when a debtor is unable to repay a debt, it usually comes with a number of disadvantages. First of all, insolvency will be reflected on the credit report of the debtor for more than 6 years. This will make it impossible for them to access any kind of financing.

After the court has declared you insolvent and appointed a trustee to oversee your estate, you must declare your wealth. Anything short of complete disclosure might be taken to be fraud which is a white collar offense punishable by jail time. The state of insolvency usually lasts around one year but if you were involved in fraud, committed crimes or you are simply careless, you may not be discharged of your insolvency for more than 15 years.

Another disadvantage of insolvency is that your income can be used by the trustee to repay your debt for up to 3 years. This can only be done if your income is enough to cover your debt in the given period. If you run a business with a few employees, they will be sent packing and the business closed. You will also not have any financial interest in your home. All the bank accounts in your name will also be frozen.

When You have been made bankrupt, your life will be dissected piece by piece, as you will be required to give every single detail about your income, assets, properties, bank accounts and any other thing the trustee may want to know. However unpleasant, that might be, filing bankruptcy is still a debt settlement option that should be considered when deep in debt.

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Category: Finances
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