Bankruptcy occurs when an individual or business applies at a court for a bankruptcy settlement. If they provide enough financial information and the court agrees to grant them a bankruptcy, all past debts will be dealt with and the debtor has a chance to start over. The law provides for several different types of bankruptcy, most notably chapter 7 and chapter 13. These bankruptcies not only affect the people who file them, but also the society in which they conduct business.
People do not always consider the amount of work that court administrations do to handle bankruptcies. While specific court departments deal with civil and financial issues like bankruptcies, it still takes time away from other court activities. Bankruptcies increase the amount of paperwork that courts must deal with and decrease government efficiency, sapping funds. On the plus side, debtors must pay fees to file for bankruptcy, which helps pay for the work.
Business bankruptcies create more of an impact than individual bankruptcies. Even with chapter 13 bankruptcy options, businesses may start anew, but their stock is typically replaced by an entirely new issue and the old stock becomes defunct. This affects all investors who hold shares in the company, losing them money. With chapter 7, the business ends permanently and leaves a niche in the market for other businesses to fill while also affecting investors.
Bankruptcies have long-term financial impact on all those who file them. People recovering from bankruptcies have trouble finding lenders who will willingly lend money. Banks will refuse to give these people mortgages unless they build up two years of good credit after their bankruptcy. When large numbers of people file for bankruptcy at the same time, this lowers the amount of money that people can spend on large purchases and slows the economy down.
Lenders also watch bankruptcies carefully. When they see the number of bankrupt cities rise significantly, this tells them that something is wrong with the market, and that they stand to lose money through defaulted loans. Lenders respond giving loans out more selectively and making more conservative business decisions; other companies typically follow suit.