Introduction
Bankruptcy is a state in which an individual or a business unit is declared financially incapable of taking care of its activities. This is usually done to protect debtors and creditors even as they carry out their business transactions. Bankruptcy to an individual means that he or she could be having more debts than his income can manage (Media, 2005). For a business unit, it is a state in which its operating expenses are much more than its income and hence being able to effectively run the unit. Due to the risks that come with bankruptcy, the government came up with a law that was at first meant to protect creditors and later on modified to also protect debtors. In this paper, we will focus on three main types of bankruptcies and how they are applicable.
Bankruptcy
According to chapter 7 of the U.S. constitution, the assets of an individual or a business unit can be liquidized to cater to the creditors. It is usually considered to be the fastest and easiest means through which creditors can be cleared off. This kind of bankruptcy is also known as straight-line bankruptcy. An individual that applies for this kind of bankruptcy will be relieved of all his or her creditors after the assets have been used to pay off the debts. Chapter 11 bankruptcy’ is mostly applicable to business units where they prove to have substantial debts and assets that can be used by the court. The business unit is allowed to function as normal and the creditors paid through a stipulated plan. Chapter 13 bankruptcy applies to individuals with a regular form of income. They can proceed with their normal business transactions but derive a plan through which they can settle their debts.
Some of the reasons why people file bankruptcy
People file for bankruptcy for various reasons, but the main reason is basically to avoid the possibility of being taken to court by their creditors when they become bankrupt. An individual or a business unit will file for any of the different bankruptcies available that will be beneficial to them (Elias, et al, 2009). The court will always take action according to the preferred bankruptcy option that the debtor applied for. It will also protect a business unit and an individual that desires to carry on with their business transactions from any inconveniences by their creditors. This also serves as a means through which their creditors can be assured of getting the debts back without having to push their creditors to do so. There is usually a set plan that will facilitate the clearance of their debts. It is hence not only a relief to the creditors but also the debtors.
How does bankruptcy affect interest rates on loans and Credit cards
Bankruptcy will affect the interest that is charged on loans and credit cards depending on the kind of bankruptcy that has been applied for by an individual. For instance, before an individual place an application for bankruptcy, they need to reveal all their financial positions which include their secured and unsecured loans (Dunscomb, 1969). For secured loans; an applicant of chapter 13 will not be affected by such an interest rate. This is simply because of the stipulated plan that has been set to settle his or her creditors. However, for a person who has applied for chapter 7, it may not matter if they are still paying for some of their assets or not. They will still be liquidized and the money used to pay all their pending debtors.
Reference list
Dunscomb, S. (1969). Bankruptcy: a study in comparative legislation. Virginia: AMS Press.
Elias, S. et al. (2009). How to File for Chapter 7 Bankruptcy. New York: No.
Media, S. (2005). Bankruptcy: An Action Plan For Renewal. California: Socrates Media, LLC.