This checklist offers an overview of the global regulations concerning insolvency and bankruptcy.
An individual or legal entity is considered insolvent if he/she/it is unable to pay debts when they are due.
Insolvency procedures differ around the world, but all of them allow debtors to find a solution to their indebtedness and protect them from creditors.
In the United Kingdom, the bankruptcy procedures available to an individual depend on the amount of money that individual owes. If the debts are less than £5,000, an administration order can be obtained. The order is issued by the local county court, which administers the debts. The effect is that the creditors cannot take any legal action against the individual. If the debts are over £5,000 but under £15,000, a debt management plan (DMP) could be suitable if the individual can pay all his/her debts within a five-year period. If an individual has assets to protect or is restricted by his/her employment from bankruptcy, has more than three creditors and debts over £15,000, and can afford to pay £200 per month, an individual voluntary arrangement (IVA) might be appropriate. This is, however, expensive.
Declaring oneself bankrupt is only suitable for someone who has no assets to worry about. Bankruptcy gives that individual the right to protect himself from a crippling level of debt. If there are any assets, they transfer to a trustee, who will administer them and pay off creditors. The debt will be written off, but control of the individual’s outgoings and earnings will be in the hands of the trustee. Once declared bankrupt, an individual will find it very difficult to find credit, and his or her reputation will be tarnished.
In the United States, bankruptcy is regulated by the Bankruptcy Code, which was enacted in 1978. This is also known as Title 11 of the United States Code and is recognized as the federal law that governs all bankruptcy cases. Each US district has a bankruptcy court, which deals with the bankruptcy procedure. The court’s decisions are made by a bankruptcy judge.
The purpose of bankruptcy is to obtain a bankruptcy discharge, which will release the debtor from personal liability for specific debts and prohibits any creditor from taking action to collect those debts. In the United States there are six types of bankruptcy case, which are known by the numbers of the chapters that apply to them: Chapters 7, 9, 11, 12, 13, and 15.
Chapter 7 covers liquidation, a court-supervised procedure in which a trustee is appointed to take over the assets of a debtor’s estate, transform them into cash, and distribute this cash to creditors. Chapters 9 and 11 deal with reorganization, which is used by companies that intend to continue their business while repaying creditors through a court-approved reorganization plan. Chapter 9 deals with indebted municipalities. Chapters 12 and 13 cover the adjustment of debts of an individual with a regular income. The individual can keep his/her main assets, such as a house, and repay debt over a three- to five-year period. The procedure under Chapter 12 applies to farmers or fishermen. Chapter 15 deals with cross-border cases of insolvency.
Insolvency and bankruptcy regulations protect debtors by allowing them to schedule payment of their debt.
The regulations prevent a company or individual from acquiring irresponsible and unlimited debt and allow creditors to take charge of the future of an indebted business.
Insolvency and bankruptcy regulations are very complex.
Specialist financial and legal advice is always required when someone is declared bankrupt or insolvent.
Insolvency and bankruptcy should be used as a last resort and not as a shield or an escape from debt or responsibility to creditors.
Once declared bankrupt or insolvent, an individual or entity will find it very difficult to obtain credit. Their credit record will be damaged and their credibility undermined.
Dos and Don’ts
Carefully weigh up the implications of declaring yourself or a business bankrupt or insolvent. Understand that the consequences can be very serious. Your creditworthiness, reputation, and future can be put in jeopardy.
Obtain relevant legal and financial advice on any decision to declare yourself bankrupt or the business insolvent.
Research the consequences carefully before making a decision.
Don’t underestimate the need for proper research and professional advice.
Don’t use bankruptcy and insolvency as an escape. It could influence your financial and business dealings for the rest of your life.