How Bankruptcy Helps a Capitalist Economy

Record numbers of bankruptcies have taken place in the United States recently. Not only business enterprises, but individual consumers have been flocking to the bankruptcy court (a federal court), seeking relief from their creditors' claims. They file their petitions under either Chapter 7, Chapter 11, or Chapter 13 of the bankruptcy law. Usually individuals files under Chapter 7 and businesses under Chapter 11 for complete liquidation. Filing under Chapter 13 indicates that a petitioner wants the court to call off the petitioner's creditors for a while, giving the petitioner breathing room and time to draw up a plan (to be approved by the court) to pay off the creditors.

Once upon a time, there appeared to be something of a stigma attached to filing for bankruptcy. As a result, people made every attempt not to take that route. However, pride should not deter anyone from taking advantage of a key cornerstone of the capitalist system - getting a fresh start after experiencing failure.

Put quite simply, capitalism is based on the willingness of people to take chances. Someone - an entrepreneur - comes up with an idea for a business, obtains the necessary financing to get that business up and running, strives to generate sufficient revenues to cover expenses, and hopes to make a profit from engaging in the business. Each step in that process is susceptible to things not working out as expected and causing the business to run into trouble.

Consider, for example, the following:

1) a new product catches on and attracts an appreciable number of customers. Competitors, seeking the possibility of profiting, begin to produce the product as well. Can the original entrepreneur compete effectively against them?

2) while generating new sales, an entrepreneur finds himself in a cash crunch. He has to expend funds to meet production schedules before he is able to collect on the sales he's already made. How skilled is that entrepreneur in managing his cash flow?

3) suppose production and/or delivery of the finished product relies upon petroleum. How does increased costs for oil affect the entrepreneur's cost structure, resulting in lower profit margins?

Clearly, not every business venture will succeed. Even when skilled management is in charge, circumstances can develop which leaves it scrambling to keep the business on an even keel financially. In recognition of the possibility that a business may not succeed in covering its costs, becoming effectively insolvent, the legal system in the United States allows for bankruptcy.

Through bankruptcy, an entrepreneur is allowed to declare officially that a particular venture did not succeed and needs to be ended as satisfactorily as possible. The bankruptcy court allows for the legal recognition of the business' failure and enables an entrepreneur to move on to another venture.

Personal bankruptcies operate in similar fashion. Consider some of the reasons why individuals in recent years have found themselves heading for the bankruptcy court in record numbers. They include, for example, (1) catastrophic illness, (2) job loss, (3) premature death of a spouse, etc. Under such circumstances, individuals find themselves in positions where they cannot pay their bills.

When they file for bankruptcy, the court can recognize officially their inability to pay their creditors. If the case goes through to completion, individuals can leave court with their financial slate wiped clean, positioning them to make a fresh start in their lives financially.

There are no guarantees in life. While the capitalist system provides incentives for individuals and corporate entities to seek profits wherever they can, it allows for the very real possibility of failure. In a sense, bankruptcy can be viewed as a self-correcting mechanism built into capitalism. Without it, the system could not function effectively.

THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY. THIS IS IN NO WAY GIVING ANY LEGAL ADVICE OR REPRESENTATION. THE INFORMATION CONTAINED HEREIN WAS COMPILED FROM VARIOUS ARTICLES. FOR ANY LEGAL ADVICE OR REPRESENTATION SEEK YOUR OWN LEGAL COUNSEL.