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Every entrepreneur who starts a company wishes to be successful. Further, on an individual level, those who borrow generally have every desire to repay their creditors. Unfortunately, things in life and business don’t always go according to plans and companies as well as individuals can find themselves saddled with debts for which they are unable to repay. In such a case, and in the absence of some financial bailout or refinancing plan, a company or individual has a limited range of options to choose from, one of which could involve filing for bankruptcy.
Bankruptcy is a legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.
Though there is often a stigma attached to the notion of “being bankrupt”, bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid, while offering creditors a chance to obtain some measure of repayment based on the individual’s or business’ assets available for liquidation. In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons and businesses a second chance to gain access to consumer credit and by providing creditors with a measure of debt repayment. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy. As such, how bankrupts are treated can affect economic growth. If bankrupts are punished too severely, would-be entrepreneurs may be discouraged from taking the financial risks needed to make the most of their ideas. However, letting off defaulting debtors too readily may discourage potential creditors because of moral hazard i.e lack of incentive to guard against risk where one is protected from its consequences.
In different countries around the world, bankruptcy proceedings, and the status of being bankrupt are handled quite differently. In the United Kingdom for example, bankruptcy is limited to individuals, and other forms of insolvency proceedings (such as liquidation and administration) are applied to companies. In the United States, bankruptcy is applied more broadly to formal insolvency proceedings.
Bankruptcy filings in the United States fall under one of several chapters of the Bankruptcy Code: Chapter 7, which involves liquidation of assets; Chapter 11, which deals with company or individual reorganizations; and Chapter 13, which is debt repayment with lowered debt covenants or payment plans.
In T&T, the Bankruptcy and Insolvency Act (which was passed in 2007 and proclaimed in 2014) governs how bankruptcy proceedings are to be treated for both individuals and companies. The Act details the roles of debtors, creditors and even what assets can and cannot be liquidated to resolve the bankrupts’ debts.