What is bankruptcy?
Bankruptcy, also known as insolvancy, is theÂ legal status ofÂ people, businesses, and governments thatÂ have more debt than they are able to pay.Â Bankruptcy also describesÂ the process of resolving a situation where a debtor has anÂ unsustainable levelÂ of debt,Â protected from creditors byÂ aÂ bankruptcy court. Title 11 of the United States Code outlines theÂ various forms ofÂ bankruptcy available in theÂ U.S.
The bankruptcy process offers both creditors and debtors the chance to resolveÂ liabilities that cannot be paid. In exchange for debt forgiveness, debtors place their assets under control of a bankruptcy court and agree to give up most or all of their wealth in repayment, while creditors get the chance to see at least some of their loans repaid. BankruptcyÂ aids the broader economy by giving people a second chance to start again, instead of burdening them permanently with unpayable debts.
When you fileÂ for bankruptcy, creditors are prevented from taking legal action to collect money you owe them. Filing for bankruptcyÂ prevents or delays repossessions,Â foreclosures, andÂ wage garnishment. ItÂ also carries negative financial consequences that affect petitioners for years. A Chapter 7 bankruptcy appears on credit reports for 10 years, and a Chapter 13 bankruptcy appears forÂ seven years.Â Loans becomeÂ very hard to obtain, insurance premiums may rise, and landlords may refuse rental applications.
U.S. law contains provisions for several types of bankruptcy, called chapters.Â Chapter 7 allows businesses and individuals toÂ liquidate all their assets to pay outstanding debts.Â Chapter 13 bankruptcy is an option for people who have a reliable source of income and the ability to pay back their debts.Â Chapter 11 is a very restrictive form of reorganization.Â Chapter 9Â deals specifically with municipal entities, such as utility companies, school districts, and cities.
Could a home equity loan help you avoid bankruptcy? Compare home equity rates.
The fall of Enron Corporation ranks as one of the most notorious bankruptcies in history. Enron began in 1985 as a pipeline company through the merger two smaller firms. The company rapidly moved into new fields, and became a major player in commodities trading. By 2000, the company’s annual revenue reached $100 billion, making it the sixth-largest energy company in the world.
Cracks began to appear in Enronâs business by 2001 as the tech bubble burst, financing became more expensive and accounting scandals were exposed in which the company used various dubious practices to hide billions in debt from failed deals and unsuccessful projects. In October 2001, Enron reported a huge quarterly loss of $618 million, and by late November the company’s stock had fallen to less than $1 from a peak around $90.
On Dec. 2, 2001, Enron filed for Chapter 11 bankruptcy protection, with an estimated $23 billion in liabilities from both debt outstanding and guaranteed loans. This figured ballooned to $67 billion in liabilities. Public shareholders were wiped out, and Enronâs employees lost their pensions.