When attempting financial planning the importance of bankruptcy laws and the wider role that they play in protecting people from going completely broke must be understood. The chapter 7 bankruptcy laws and clauses give a minimum protection against action that result in debts and the non-serviceability of debts. They are thus important tools that need to be used at the right time to bring added cover to the concerned person.
The role that such laws play must be understood in the context of going broke. It is often the case that they are the protective clauses. It provides a minimum cover that ensures a minimum protection from debt to people seeking protection when things go horribly wrong.
The role of chapter 7 bankruptcy laws in financial planning
It is the common practice for most people that are in business or are promoting a venture to borrow money for uses. This can be to buy assets or for the normal business activities that do occur in day to day functioning of enterprises. The modern trend to use other people’s money to further the personal business interests would only make the act of borrowing money a more common occurrence. Thus entire empires are built on the strength of borrowed capital.
The characteristic of borrowed capital or money is that it has to be serviced or repaid. When a borrower cannot repay a debt the debt is said to have gone bad. Usually to prevent defaulting of payments that are due for borrowed money, it is customary to ask for collateral security to be kept with the lending body. There are a number of instances when the credit worthiness of borrower’s is sufficient as guarantee for repayment of debts.
Thus the amount of money that a person can borrow is a factor of the credit worthiness and the ability of the person’s repayment capacity. This could mean that the debtor could end up taking a loan that is multiple times his net worth. This situation is quite all right in good times and the debtor is able to meet the repayment schedules.
When things go sour and the business climate moves away from the favoring condition that it had for the debtor, the repayment of the borrowed money or loans would not be possible. The lending bodies then would seek the liquidation of the borrower’s property and assets to recover the money due. The role of the bankruptcy laws like the Chapter 7 is to accord a minimum protection to the borrower to help tide over an unfavorable business condition.
The minimum protection clauses
The bankruptcy laws help maintain a minimum protection to total liquidation and help business and people to plan and utilize to the maximum the available capital. Without such a protection it would not be possible for entrepreneurs to take risks and engage in business activities that ensure growth and prosperity in society. Thus in short, the bankruptcy laws help people venture out and engage in activities that would bring about further advancement of the society in general.