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When to Declare Bankruptcy – Some Early Warning Signs

Bankruptcy is a legal recourse taken by an individual or a company that is badly in debt with no resources to pay or clear the debt. This includes the present and the future prospects being as bleak.

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Bankruptcy is a legal recourse taken by an individual or a company that is badly in debt with no resources to pay or clear the debt. This includes the present and the future prospects being as bleak. Bankruptcy provides legal protection through either a discharge of debts, as in chapter-7 or allows a reorganization of debt whereby the debtor gets time to clear them by paying out of his monthly earnings, as in bankruptcy files under chapter 13.

The debtor or the company’s management may even be permitted to continue business operations under the supervision of the bankruptcy court, if it is filed under chapter 11.

Bankruptcy is an extreme step that also comes with its fair share of problems, and is not an easy route to adopt just to wriggle out of debt. Most people try to fight this eventuality and ignore the warning signals in the financial segment that all point towards the need to file for bankruptcy.

Warning Signs Pointing towards the need to file Bankruptcy

  • Cutting expenses-facing a cash crunch, you find you have to cut even your daily expenses
  • Inability to pay all bills– you find you can either pay your mortgage or the credit card dues, and that too just the minimum amount-paying one bill means you have to hold back on the other payments
  • Loss of sleep, excessive stress– your mind is full of your debt burden and you spend sleepless nights trying to figure out a solution. Tensions build up at home, with partners, the need for solitude, inability to laugh, thoughts of suicide, depression, all become the norm.
  • Looking for other ways to raise revenue, even illegal ones– So desperate are you for additional resources that despite your ideals and principles, you are willing to consider illegal ways of making money.
  • Inability to provide basics for family– your family is having to make do with less food, clothes, and no extras due to your tight money situation.
  • No savings cushion left– you have used up all your savings and even liquidated some assets like a piece of land etc.

All these are warning signals pointing towards the need to approach a bankruptcy lawyer. He will be able to provide the best advice and clarify whether the only solution is bankruptcy or another form of financial reorganization may help in salvaging the situation. If he decides that bankruptcy is the only option left, the next step would be to decide which type of bankruptcy to apply for, the pros and cons of each type, and the long term repercussions of having been bankrupt once.

Bankruptcy may provide legal protections and relief from being hounded by creditors and put a ceiling on court proceedings against the debtor, but it also come with a social stigma, since secrecy about a public issue is not possible. It also affects his ability to continue his business, his ability to raise funds, new purchases, and his credit rating. In fact it is these aspects that make him fight the urge to file bankruptcy in the first place.

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