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.
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