On June 28th, Puerto Rican officials said
the island’s debt of $72 billion dollars was too high to repay. However, the commonwealth
isn’t left with many alternatives – since US bankruptcy laws only apply to cities, and
other municipalities. So, what are the different kinds of bankruptcies? Well, bankruptcy is the legal term for when
you are unable to pay off your debts. Instead of gathering interest charges and perpetually
being indebted to creditors, bankruptcy allows you to to dismiss some obligations to pay.
However, this isn’t a “get-out-of-jail-free” card. There are many limitations and consequences
to filing for bankruptcy. In 2005, 1 in 55 US households went bankrupt, nearly all caused
by major medical expenses. In the US, Chapter 7 and Chapter 13 are the
top two most popular types of bankruptcy. They are specifically geared towards individuals.
Chapter 7 filings account for 70% of non-business bankruptcy claims, and involve selling the
debtor’s possessions to recoup some of the debt. Chapter 13 Bankruptcy accounts for the
other 30%, and is utilized by those with higher incomes, whose possessions are too valuable
to be sold. In Chapter 7 bankruptcies, much of the debt is forgiven after assets are sold,
while Chapter 13 involves paying creditors back over time. Both options ruin your credit,
making it much harder to receive loans in the years to come. On the other hand, businesses tend to file
for Chapter 11 bankruptcy. It involves a combination of debt forgiveness and restructuring loans.
This restructuring can involve lower interest rates, or longer time allowed to repay loans. For larger entities, things get even more
complicated. “Municipalities”, like cities or townships, are allowed to declare Chapter
9 bankruptcy, which similar to Chapter 11 business bankruptcy. However, municipalities
are given exclusive access to special accountants and federal judges, who expedite refinancing
options, and help decide action on a case-by-case basis. In 2013, the city of Detroit filed
the largest municipal bankruptcy in US history.. But states and countries aren’t allowed
to legally file bankruptcy in the same way. That’s why it’s a big deal that Puerto
Rico and Greece are presently threatening to default on their loans. There is a huge
web of creditors and lots of money on the line. Yet, there are no hard-set rules for
these large entities to relieve their debt burden, and defaults can be devastating for
all parties involved. At every level, bankruptcy has very serious
consequences to all those affected. But rather than bury the person, business, or municipality,
in unending debts; bankruptcy laws are meant to relieve harsh burdens, and give back life
without stress over debts. So you may now be wondering… “Can a country
go bankrupt?” Well, it’s complicated. Take a look at our video here to learn all
about it. Thanks for joining us on TestTube News… subscribe now and we’ll see you
tomorrow!