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Understanding Bankruptcy

What Is Bankruptcy?

Money that is owed is referred to as DEBT. The person or organization that owes the money is called a DEBTOR. The person or organization to whom the money is owed is called the CREDITOR.

Anything of value which is owned by a person or an organization and can be used to pay a debt or fulfil a financial obligation is called an ASSET. Examples of assets are money, real estate, cars, stocks, bonds, and so on. If a debtor owes more money than the value of his assets, we say that he is INSOLVENT.

As an example, let's say that Sam owes $55,000: $10,000 to Jack, $5,000 to Jill, $25,000 in federal income tax, and $15,000 to a credit card company. Sam is the debtor, with a total debt of $55,000. The creditors are Jack, Jill, the federal government, and the credit card company. If Sam's assets are worth less than $55,000, Sam is considered to be insolvent. This is another way of saying that everything that Sam owns, put together, would not be enough to pay back all that he owes.

It often happens that people, companies or governments find themselves in a position where they are unable to pay their debts, and the debts are large enough to create a great deal of continuing hardship. Sometimes it is their fault; sometimes it isn't. Regardless, in such cases, the law provides a remedy: bankruptcy.

BANKRUPTCY is a legal procedure that can be used by people, companies and governments that are insolvent; that is, when they owe more money than they are able to repay. Bankruptcy allows a debtor to be released from all or part of his debts.

When a person or an organization initiates a bankruptcy procedure, we say that they FILE for bankruptcy.

The importance of bankruptcy is that it provides a way out of an otherwise hopeless position. As such, bankruptcy is an essential economic instrument, one that can transform an over-burdened individual back into a productive and useful member of society. Similarly, bankruptcy can also be used to restore the usefulness of governments or the profitability of companies.

The bankruptcy process is coordinated by a licensed professional called a BANKRUPTCY TRUSTEE (or, more simply, a TRUSTEE), who works under the supervision of a bankruptcy court. As a general rule, trustees are hired by — and paid by — the person or organization filing for bankruptcy. In the U.S., many bankruptcy trustees are lawyers.

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