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How Relevant is Bankruptcy

Updated: May 10, 2023

Business or personal, is bankruptcy relevan? How many of us would like a do over, especially when the error is no fault of your own; or maybe it is your fault... it happened on your watch and you are the responsible person. Most people will appreciate second chances when they are in over their head under financial pressure.

I think of bankruptcy as an extreme form of insurance. It may help to put bankruptcy in perspective this way... under normal circumstances, insurance is based on insuring a large number of people. Based on actuarial math which is concerned with the laws of probability. It is concerned with predicting births, deaths, accidents, loss; and risks in general.

An insurance company expects to pay claims because accidents, deaths, catastrophes happen, and based on the probability of such they collect premiums to support operational cash flows and for profit. The basic model for an insurance company is simple. sell as many insurance policies as possible to broaden the coverage population and reduce the risk. In an ideal world the insurance company supplies the amount of insurance coverage demanded in exchange for the insurance risk to the population. The company collects enough revenue to pay claims and make a profit.

So, bankruptcy! The government recognize that to encourage commerce, the burden of uncertainty must be shared by the public. The the various bankruptcy types and laws regulating them is designed to afford everyone to participate in a thriving economy and to also have an exit strategy when events like economic recession, catastrophic illnesses, the loss of jobs, riots, and so on causes overwhelming economic hardships.

Bankruptcy laws will force the wipe away of most debts. Or, it could force creditors to accept a reduced amount subject to terms negotiated between/among the parties by negotiators/attorneys and enforced by the courts. This is usually a welcomed do-over opportunity.

Trevor McKenzie 4/27/2021

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