Utilization of Debt - Avoiding the Threats of Bankruptcy

How to Get Out of Debt or Stay Out of Debt
How to Get Out of Debt or Stay Out of Debt

The Scope of Debt

In financial dictionary, the term debt denotes the money owed, usually as a result of borrowing. Otherwise, debt is something which is owed. The scope of the term varied with regard to individuals and institution. It is the future purchasing power, we use in the present. For individuals, debt is the amount of money they need to repay others. Where as for institutions debt is a liability arising out of past borrowings or transaction that created such a liability.

Effects Of Debt

Debt is a double edged sword. It could be highly favorable and unfavorable. Debt enables us to meet an expense which should have been impossible to meet with the cash in hand at present, with agreed later repayment along with the cost for using others’ fund. At the same time, if the same could not repay within time, or else, the cost for using the fund is too high, it could be highly unfavorable. If the total amount one owes to others exceeds their total value of assets, they will be unable to pay off the debts fully and the situation may lead to bankruptcy.

Various Types of Debts

Following are the different types of Debts

  • A debt could be a secured debt or unsecured debt. As the name denotes, if the debt is obtained by transferring the interest on a property, then it is a secured debt and otherwise unsecured debt.
  • It could be a public or private debt. If the debt is created by collecting the amount from general public or all financial instruments which is freely tradable among general within the legal structure. A private debt denotes debt raised with the banks and such institutions.
  • The syndicated and bilateral debt is another classification of debt. When there is only one lender and one borrower then it is bilateral debt. But if the amount involved is very huge, it would be a very risky affair for the lender. So as a risk management tool the syndicated debt is being used. In such a loan, a syndicate of lenders together provide the loan to a single borrower and spread the risk among that syndicate as a whole.

There could be other forms of debts with one or more of the above characteristics

Debt Management Tips : How to File Bankruptcy

Getting Out of Debt
Getting Out of Debt

What is Bankruptcy?

Bankruptcy is a legal process of acquiring federal protection from the creditors when the borrower is not able to repay his debts. Bankruptcy is when an individual or an organisation is legally declared as unable to pay off its creditors. It is a state of insolvency. The legal declaration of insolvency must be acquired from the court.

The creditors may file for the bankruptcy petition against a business concern or corporate body, as an attempt to get their payments back as much possible if not fully. However, normally, it is the debtor who initiates the bankruptcy petition to get protection from the creditors whose debt he is not able to repay with his resources. A petition of involuntary bankruptcy cannot be forwarded against and individual if he is not engaged in any business.

The bankruptcy law defers in each country, but in nutshell, everywhere it provides the federal protection for debtors whose resources are not enough to meet their liabilities. This law not only pave the ways for liquidation, sometimes it gives another chance for the business organisations by providing for restructuring and remodeling.

The advantages and disadvantages of Bankruptcy

The main 10 Disadvantages are

  1. Your costly possessions such as your house and car can be seized.
  2. You will ruin your credit for at least 7 to 10 years.
  3. Certain debts are not irrecoverable. Student loans, child support, overpayment of benefits and court fines are such debts.
  4. You are not allowed to obtain credit over £500 without disclosing your bankruptcy.
  5. Your career can be spoilt and there are chances to lose the job too. This applies only if you belong to certain professions. But yet you are not limited to the police, judiciary and certain financial positions.
  6. You are also restricted from being a director for limited liability
  7. A record of your bankruptcy will stay on your credit file for six years even after you’ve been discharged.
  8. The fact of your bankruptcy, name, address and occupation is published that can affect your social status.
  9. Based upon your bankruptcy, tax refunds from federal, state or local governments may be denied.
  10. All debts will not be discharged.

When is Bankruptcy the Best Option?

bankruptcy sign
bankruptcy sign | Source

Bankruptcy Poll

Which best describes your current financial status?

  • Will not file for bankruptcy.
  • Still considering filing for bankruptcy
  • Plan to file for bankruptcy.
  • Filed for bankruptcy
See results without voting

5 Advantages of Bankruptcy

  1. The experience usually isn’t as shocking as it is supposed by the public in general.
  2. The notice of your bankruptcy is usually not read or noticed by most people when it is published in the newspaper.
  3. You gain a degree of freedom and a certain peace of mind as most of the debt is written off.
  4. Usually most of such cases are automatically discharged after one year.
  5. If you are self employed, you are allowed to keep basic possessions and the tools of your trade.

Debt is an effective financial aid but if not handled properly could lead to insolvency i.e. bankruptcy. Bankruptcy even though provides for protection from creditors, have its severe negative impacts too. It damaging effects on one’s personal and social life are very deep. It will take a few years to cover up these damages and to regain his credit scores. So while going for debts, one should make sure about the repayment possibilities to avoid life sized hazards.

Though debts are very useful in cases of emergency, if not handled in the proper manner can cause a lot of problems. In some cases if a person is not able to pay back the amount it may lead to bankruptcy. Both the disadvantages and advantages of bankruptcy are mentioned in the hub

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