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Business LibreTexts

24.1: Introduction

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  • Bankruptcy occurs when an individual or business is financially unable to pay off debts and meet financial obligations. Bankruptcy is a proceeding under federal law in which an individual or business is relieved of most debts and undergoes a court-supervised reorganization or liquidation for the benefit of the creditors. Bankruptcies may be either voluntary or involuntary. A voluntary bankruptcy is a proceeding initiated by the debtor. An involuntary bankruptcy is a proceeding initiated by creditors to force the debtor to be legally declared bankrupt so the creditors may recover their assets.

    The purpose of bankruptcy is to preserve as much of the debtor’s property as possible and to divide it as fairly as possible between the debtor and creditors. Bankruptcy encourages businesses to take risks and engage in entrepreneurial activities. It ultimately allows debtors in difficult financial situations to have a fresh start financially. However, critics allege that it allows some businesses to avoid the consequences of their mistakes and mismanagement. The United States has the highest bankruptcy rate in the world, with individuals filing for bankruptcies more frequently than businesses.

    Counselor’s Corner Bankruptcy is a vehicle for individuals and businesses to get out of crushing debt. But it comes at a cost: bankruptcy upends a person’s life and may end a business. Before filing for bankruptcy, people and businesses should see if they can negotiate a settlement to some of their debt. Often creditors will accept partial payment that is guaranteed over a claim for a larger debt that they will never receive. Cash in hand has value to unsecured creditors. So pick up the phone and put your negotiation skills to work. It just may save your business and prevent needing to file for bankruptcy. ~M. Mo, attorney

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