Technical Bankruptcy: What It is, How It Works

澳洲幸运5开奖号码历史查询:Julia Kagan

Updated April 09, 2023

Reviewed by

Thomas J. Catalano

Fact checked by

Yarilet Perez

Part of the Series

Bankruptcy

Bankruptcy Explained: Types and How It Works

Bankruptcy Basics

Types of Bankruptcy

Personal Bankruptcy

Corporate Bankruptcy

Bankruptcy: Your Legal Rights

Bankruptcy Terms (341/A-B)

Bankrupty Terms (C-I )

Bankrupty Terms (J-Z)

Individual reviewing bills at home in kitchen with a worried look — urbazon / Getty Images

What Is Technical Bankruptcy?

Technical bankruptcy occurs when a borrower is unable to make payment on a debt obligation but has yet to officially declare bankruptcy before a legal authority. The debtor would likely qualify for protection, but neither the debtor nor their creditors have taken up formal legal action in a bankruptcy court.

A second meaning for technical bankruptcy comes from the field of information technology. It describes a firm with obsolete legacy software.❀

Key Takeaways

Technical bankruptcy occurs when a debtor can't pay their debts but has yet to declare bankruptcy before a court.
A debtor might not have sought legal help because they're ineligible to file for bankruptcy.
Both individuals and companies can face technical bankruptcy.
Technical bankruptcy also refers to a company that neglects its software infrastructure to the point where its systems become obsolete.

Understanding Technical Bankruptcy

Technical bankruptcy often refers to a state in which a debtor has defaulted on a debt and would likely qualify for 澳洲幸运5开奖号码历史查询:bankruptcy protection bu𒁃t has yet to formally file for protection in a court. The debtor can be an individual or a company.

A debtor foregoes the short-term benefits of a court-ordered 澳洲幸运5开奖号码历史查询:automatic stay when they don't file for bankruptcy. The stay prevents creditors from pursuing repayment via collection calls, lawsuits, or wage garnishments. A debtor with real estate assets won't receive the foreclosure or eviction protection that filing for bankruptcy and the automatic stay would make possible.

Individuals in this position will generally seek such protection, but they might not be eligible if they've previously filed for bankruptcy. Others who qualify for protection may decide not to file for bankruptcy because they want to avoid negative consequences, such as the 澳洲幸运5开奖号码历史查询:severe impact that bankruptcy will have on their c♉redit score. People with few to no assets to protect might come to the conclusion that filing for bankruptcy doesn't make sense.

Individuals who do seek protection from a bankruptcy court will most commonly seek either Chapter 7 or Chapter 13. 澳洲幸运5开奖号码历史查询:Chapter 11 protection is available only to business entities.

Important

You may be able to restructure your obligatio⭕ns to avoid formally filing for bankruptcy protection if your debt is mostly credit card balances.

Technical Bankruptcy in Information Technology

Technical bankruptcy can also describe a situation in which a company neglects its technology infrastructure to the point that its systems become obsolete. The firm fails to maintain its systems as bugs appear and regulatory changes require updating legacy systems. The company enters a stage known as technical debt as a result. The term refers not to financial debt in this scenario but to the firm’s failure to stay current with external demands on its sof🦩tware systems.

Technical debt can grow for various reasons. Software architecture, which is a comprehensive overview of the setup and functioning of a system, may be faulty. This can lead to bugs that accumulate over a p♑eriod of time. The growth of technical debt tends to accelerate over time, and this can deepen the hole into which a company finds itself falling. The firm is known to be in a state of technical bankruptcy when the situatio💎n becomes unworkable.

An Example of Technical Bankruptcy

You're employed in a job where your salary is barely above minimum wage. You survive mainly on credit card debt. You don't own a house or other assets that could make you a good candidate for a loan. Your credit score is already considered poor.

Your credit card debt reaches a point where you're unable to service it further. Collection agencies come calling when they discover that you're in technical bankruptcy: You don't own any assets or funds that could help you make payments, and you haven't filed with a court for bankruptcy protection.

Frequently Asked Questions (FAQs)

What's the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

The bankruptcy court will gather your assets and sell or "liquidate" them to raise funds to pay your creditors when you file for Chapter 7 bankruptcy. But you have some protection here because the bankruptcy code provides for exemptions that will safeguard some of your property so it can't be sold.

Chapter 13 bankruptcy is a payment plan that allows you to pay toward your debts over a period of time. Your creditors can't pursue you for your debts while you make these payments. Your creditors must receive at least as much money as they would if you had filed for Chapter 7 instead and your property was liquidated.

Both chapters provide for an automatic stay, and your outstanding debts will be discharged or erased after the bankruptcy pro⛦ceeding is finalized.

What are Some Actions that Creditors Can Take If I'm Technically Bankrupt?

Creditors can file lawsuits against you that will provide them with various options to collect the money they're owed. These options can include garnishing your pay and placing liens or levies against your property and assets so they're paid from the proceeds if you should sell them. A lien will allow them to seize your property and sell it so they can collect.

But federal law provides you with some protection here as well. The Debt Collection Rule that went into effect in November 2021 exercises some control over debt collectors' actions and gives you some rights.

What can disqualify me from filing for Chapter 7 bankruptcy protection?

You can be denied the right to file for 澳洲幸运5开奖号码历史查询:Chapter 7 bankruptcy if you had even a single debt discharged within the last six years in a Chapter 13 proceeding or if you received another Chapter 7 discharge within the last eight years.

You can also be disqualified for a Chapter 7 proceeding if you have sufficient income to pay a percentage of your debts through a Chapter 13 payment plan. You could make payments that would be equal to or more than what your creditors would receive through a Chapter 7 liquidation.

The Bottom Line

You're experiencing technical bankruptcy if you can't pay your debts, but haven't sought help and protection from a bankruptcy court. Your creditors haven't yet taken action to collect from you, but it's inevitable that they eventually will if you don't make payments.

Filing for bankruptcy can take the pressure off, providing an automatic stay that prevents your creditors from taking any action against you while your bankruptcy case is in pr𒁏ogress. The bankruptcy court will ultimately discharge or erase at least some portion of your debts, depending on which chapter you file.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

U.S. Bankruptcy Courts, Western District of Washington. "."
United States Courts. "."
United States Courts. "."
United States Courts. “.”
Consumer Financial Protection Bureau (CFPB). ""
Consumer Financial Protection Bureau. "."
United States Courts. "."