Who pays for outstanding bankruptcy debt?

Discussion in 'Economy' started by Dark Starscream, Feb 7, 2009.

  1. Dark Starscream
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    Dark Starscream Rookie

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    When someone files bankruptcy, who pays for all of their outstanding debts? Do the banks (lenders) have to pay for it, or does the government reimburse the banks... or do the debts simply cease to exist?

    EDIT: I am referring to chapter 7 bankruptcy, where the borrower is freed from any debt obligation.
     
  2. Dark Starscream
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    Dark Starscream Rookie

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    Does anyone know where this outstanding debt goes?
     
  3. RodISHI
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    RodISHI Gold Member

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    I've heard the banks lump it. Yet then again I think it depends on how or why they get that person into bankruptcy in the first place.
     
  4. Toro
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    Toro Diamond Member

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    If a company goes bankrupt and goes out of business, the costs are absorbed by the lenders. Depending where they are on the capital structure, the creditors liquidate the company's assets and use the proceeds to pay back the amounts owed, though they usually are not paid back the full amount. The higher one is up the capital structure, i.e. the more secured the debt is on the company, the more one will receive in bankruptcy.

    Companies may stay in business in bankruptcy however. In this case, a deal is made between the company and the lenders with the lenders usually getting stock in the company or better terms on their debt.
     
  5. American Horse
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    American Horse AKA "Mustang"

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    Individuals or even corporations are not caused to or "gotten into" bankruptcy by their lenders. Their business plan failure is their own responsiblity. Banks will have "first" mortgage paper on their customers and so all the others including 2d mortgage loans and unsecured loan holders end up taking the hit and get what little if any that may be remain after first mortages and personal guarantees are satisfied.

    Customarily your small corporation borrowing from a bank will have to sign a "personal guarantee" because the corprate assets would be so hard to pin down. Same thing with partnerships borrowing on so called "floor plans" from manufacturers.

    In my own case I've sold "work product" to customers and upon their bankruptcy the bank got payed out of dissolved assets first, 2d mortager next, with nothing for subcontractors and vendors like me for what I had provided.

    If you are wondering if the losses go to everyone in the market place, unlike that of "shoplifting" for example, little or none of a debt default can be passed on to customers because competition for any new business won't allow it.

    If your are wondering about credit card debt, lots of bankruptcies would have to drive up the cost of credit to all other customers if card companies are interfered with from being able take those who are most likely to default into account by charging them higher rates beforehand. These potential "losers" have a profile which would predict that likelihood, and they could be charged more to pay for that risk up front.

    When the debt is written off by the lender, it is written off and to that degree they may get a tax reduction because their earnings were less. That is the only way the treasury shares in the loss.
    ...
     
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    Last edited: Feb 8, 2009
  6. mikepierre09
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    mikepierre09 Rookie

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    This is an interesting discussion. thank you for sharing
     
  7. william the wie
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    william the wie Gold Member

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    What is important is that the write downs come out of bank capital after the allowance for bad debts is tapped out. That has a huge inverse multiplier effect writing down $10 of bank capital takes $100-$300 out of the money stock and that in turn is multiplied by velocity. An unexpected 1% increase in write downs can have big effects.
     
  8. loosecannon
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    loosecannon Senior Member

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    The debts are absorbed by the lenders. Who must write them off, by law.

    But of more interest is the fact that the money supply created by those loans also disappears, forever.

    Money is created as it is lent and disappears forever when it is either repaid or defaults.
     
  9. California Girl
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    California Girl BANNED

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    Oh, how very convenient for you. Join the site, dig into the archives to find a discussion on debt that you can resurrect to flog your company. Do you think we're stupid?
     
  10. Toro
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    Toro Diamond Member

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    He's a spammer.
     

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