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Reviewed by Sep 23, 2021| Updated on
When a bank or an entity is finding itself unable to pay off all its debts and meet its liabilities, then the entity may file for the process of bankruptcy. The process helps banks/entities free themselves off its outstanding debts and offer repayments to all creditors.
Bankruptcy starts with a petition to the court made by the entity that owes money to its creditors (the debtor). Officials investigate the actual amount of outstanding debt, and depending on the type of bankruptcy and the nature of the applicant’s debts and business (a firm, an individual, a company: public or private). Via bankruptcy, the debts owed to creditors are forgiven and written off, either completely or in part, or paid off by selling off the company’s assets. The filing process and execution varies in different countries. It is natural for a bankruptcy filing to severely impact the bank’s credit rating negatively. This means that availing loans in the future will be a difficult process. There are various kinds of bankruptcies that will affect the credit rating and the bankruptcy process at an individual and national level. In the US, the process is carried out via Chapters 7, 11 and 13—in Chapter 7, the assets of the company are completely liquidated to repay the debts; in Chapter 11, only companies attempt to restructure the debt obligations and pay them off without liquidating all the business. Chapter 13 is for individuals and self-employed entities to pay off the obligations by restructuring their assets.
Bankruptcy has no positive highlights, and is often considered as a last resort since the credit rating will fall low. Though the credit rating may dive low, bankruptcy is actually a buoyancy effort to stabilize the debt obligations and start afresh. It is thus not synonymous with insolvency. In India, Bankruptcy is carried out under the Insolvency and Bankruptcy Code 2016 (New Code) that seeks to provide relief to all suffering entities.