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What Happens When A Country Declares Bankruptcy

When A Country Defaults Who Comes Knocking

What Happens When A Country Declares Bankruptcy?
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Protesters in Argentina in 2001 wave national flags as they walk through tear gas and smoke from burning street fires set by demonstrators during the country’s financial crisis.

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Protesters in Argentina in 2001 wave national flags as they walk through tear gas and smoke from burning street fires set by demonstrators during the country’s financial crisis.

We all know what happens when individuals stop paying their bills: angry letters, pestering phone calls and possibly getting property repossessed. In the end, you might declare bankruptcy and start again. That’s how it works for a person up to his eyeballs in debt, but how does it work for an entire country?

Harvard economist Ken Rogoff says that it’s not unusual for countries to go into default. In fact, he says it’s happened hundreds of times.

“A lot of countries have gone bankrupt and they don’t even know it it’s not even in their history books,” Rogoff told weekends on All Things Considered host Robert Smith. “Most countries have gone bankrupt at least a couple of times.”

The reason lenders continue to do business with a country is that, unlike businesses or individuals, a country can’t go out of business and continues to pay at least something to its creditors, Rogoff says.

He says there are many ways a country deals with a sovereign default, but most often its finance minister simply declares it does not have the money to pay back lenders.

The Argentina Financial Crisis

What Are The Effects Of Defaulting

The immediate cost of defaulting is the loss of principle and capital of creditor resulting from either partial debt cancellation or debt restructuring. Among the debt owed to different creditors: domestic private creditor, domestic institutional creditor, foreign private creditor and foreign institutional creditor, the government is most likely to cancel debts owed to foreign private creditor due to the less likely retaliation. Besides, just as any other crisis, soaring inflation, unemployment and political pressure to the defaulting government follow as a result of government defaults.

As most of the domestic debt is held by domestic banks, bank runs occur due to the loss of confidence in the banking system. Bank runs occurs as there is massive withdrawal of money due to public panic and loss of confidence. To prevent this, capital control is imposed as government try to restrict the amount of money that can be withdrawn by each depositor. In June 2015, Greek banks were closed for almost 20 days, bank transfers to foreign banks were controlled and cash withdrawals were limited to only 50 per day to avoid banking crisis. Sovereign debt crisis may also lead to subsequent economic crisis and currency crisis as aggregate demand fall and international market lost faith in its currency.

Your Responsibilities When A Bankruptcy Order Is Made

You must:

  • give the official receiver information on your finances
  • give the official receiver a full list of your assets
  • tell your trustee about any rise in income during your bankruptcy
  • tell anyone who offers to loan you over £500 that youre bankrupt
  • go to court to explain why you owe money if asked to do so

There are also things you cant do while bankrupt. These are called restrictions.

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Your Interview With The Official Receiver

If your bankruptcy is approved, youll have an interview with the official receiver. If youve presented your own bankruptcy petition, this may happen directly after the bankruptcy order is made. Alternatively, your letter from the official receiver may invite you to an interview either in person or by telephone. If offered a telephone interview you can ask to be interviewed in person if you prefer.

If you have been made bankrupt by one of your creditors the official receiver may also contact you by telephone to find out if there is anything that needs to be sorted out urgently.

You must attend the interview and cooperate with the official receiver. If you dont, your bankruptcy could be extended beyond the normal 12 months and you could face an examination in court. The more organised you are, the more straightforward the process will be.

Before the interview, telephone the official receiver to confirm or rearrange the appointment let them know if:

  • you require special facilities
  • there is anything that needs to be sorted out urgently
  • you need more time to gather the paperwork for the meeting

If you have been sent a questionnaire, fill it in, noting anything you dont understand .

Collect together all the paperwork you have been asked to take to the interview or have with you during the telephone call.

Face-to-face interviews may take 2 to 3 hours.

After you arrive:

Telephone interviews take at least 30 minutes.

The examiner will:

What Happens To Your Home

What Happens When A Country Declares Bankruptcy?

If you own your home it can be sold if it is the only way to pay your creditors.

Sole owners

If youre the only owner of the property:

  • the value of the property after any secured debts have been paid transfers to the trustee. This is known as the beneficial interest and is sometimes called equity
  • the legal title transfers to the trustee and a bankruptcy restriction is added to the land registry record. This will stop you from selling your home or making deals connected to it

The restriction will be removed once the trustee has been paid for their interest in the property.

Joint owners

If you own the property with someone else:

  • your share of the property after any secured debts have been paid transfers to your trustee. This is known as the beneficial interest
  • a Form J restriction is added to your Land Registry record and the trustee will be told of any deals affecting the property, including a sale

You can still sell the property, but the trustee will get your share of the money from the sale. The Form J restriction will be removed once the trustee has been paid this money.

The sale of your home

The trustee cant usually sell the property without your agreement for a year from the date of the bankruptcy order if you have a partner or children living with you.

You can stop a sale taking place later if a family member or friend buys the beneficial interest in your home. The buyer should contact the trustee.

Rented property

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When The Bankruptcy Order Is Made

The early stages of a bankruptcy are normally handled by an official receiver. An official receiver works for the Insolvency Service and is attached to the court. They will also be your trustee unless an insolvency practitioner is appointed to take over that role. The trustee will realise any assets .

The official receiver will write to you within 2 weeks of the bankruptcy order being made, explaining what you need to know and what you must do.

Why Do Countries Go Bankrupt

There are a number of economic forces that can implode any nations economy, but a poor monetary policy must reign above many other factors when determining the financial position of any nation.

All seven national economies listed above instill relatively little confidence among investors. However, Jamaicas credit rating was upgraded by Moodys this year, and Argentinas and Belizes credit ratings remained stable. The remaining four countries, on the other hand, were downgraded.

A countrys history of fiscal responsibility, including past defaults, and current compliance with IMF debt repayment plans, are major contributors to Moodys evaluations.

Extremely high debt levels, which while not always a feature of unhealthy economies, can also contribute to a countrys poor credit rating. The debt of four of the seven countries was equal to more than 75% of GDP. In Jamaica and Greece, debt was well over 100% of GDP.

Political conflicts have also weakened some of these economies, which in turn has introduced more uncertainty and increased risk. Ukraines conflict with Russia over its annexation of Crimea, for example, and the resulting U.S. and European sanctions, have contributed to the countrys downgrade in March.

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What Happens If A Limited Company Is Liquidated

When a company is liquidated, a licensed insolvency practitioner takes control of the company, realises its assets, and distributes the funds to creditors. Because the company is a separate legal entity from its directors, you are protected from personal liability unless certain circumstances arise.

If you have provided personal guarantees for business borrowing, this can also lead to you being liable for the outstanding sum, for instance. During the liquidation process the office-holder carries out investigations into the companyâs decline leading up to insolvency, and reports their findings to the Secretary of State.

But limited company bankruptcy does not necessarily mean the business is doomed to failure. Depending on the financial position of the company and its likely future viability, there may be options available to rescue the company and bring it back from the brink of insolvency.

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How To Cancel Attachment Orders Or Direct Debits

What Happens When A Country Declares Bankruptcy?

Once you have entered bankruptcy you need to cancel any direct debits, unless the type of debt isnt included in your bankruptcy, e.g. court fines, Child Support. The Official Assignee cannot cancel the direct debit for you. You will need to contact your bank.

If you have an attachment order over your wages for a debt that is included in your bankruptcy, your creditor should tell your employer to stop making the deductions once they receive the report from the Official Assignee. If this does not happen you need to take a copy of your bankruptcy acceptance letter to the District Court that made the order and ask them to cancel the order.

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Who Sorts It All Out

If a country is no longer able to pay its bills, the International Monetary Fund usually steps in. It may, for example, write off part of the government debt or provide emergency loans. Of course, all this is subject to terms. The country is often obliged to carry out a major restructuring of its public finances. What’s more, a write-off by the IMF doesn’t necessarily mean that all the creditors will agree â if the IMF writes off debt for one country, it obviously means a financial loss for another. After a lot of legal and diplomatic back and forth, however, a ‘solution’ always emerges, as was the case with the Greek bailout, for example.

In 2021, countries are therefore no longer allowed to ‘truly’ go bankrupt. There’s too much at stake for this to happen. Movement of capital, investments, financial and geopolitical interests and more no longer end at national borders. The global economy is so tightly interwoven that a real bankruptcy would trigger a chain reaction. And so a solution is always found.

Barter Economies Will Be Ready

Nothing would help the average person remember that money is merely a medium of exchange with no intrinsic value more than if they suddenly had none and no reliable means of getting it. Such was the fate of much of the American public in 2007 when the nation was rocked by a major recession. What millions of Americans did instead of succumbing to fear was turn to a barter system. According to, by January 2008 Craigslist.coms barter pages had increased one hundred percent in terms of postings and traffic. Now consider how much more extreme the financial pressures brought on by a national bankruptcy, instead of a recession, would be.

This was not something that was only done among average poor people, either. 2007 also saw companies and corporations in the United States increase their use of bartering for goods and services by roughly $16 billion. Under these circumstances, people who have stockpiled basic necessities may well make off like bandits or gain considerable influence in their communities for when the economy recovers from the bankruptcy.

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When Your Bankruptcy Will End

You will be freed from bankruptcy after 12 months. This ends the bankruptcy restrictions and releases you from most of the debts you had when the bankruptcy order was made.

Youll normally be discharged automatically, even if:

  • no payments have been made to your creditors
  • youre still paying an IPA or IPO
  • some assets havent been sold yet

Assets you had during bankruptcy can still be used to pay your debts once your bankruptcy has ended.

Your bankruptcy can be extended for longer than 12 months if you dont co-operate with your trustee. Check your discharge date using the Individual Insolvency Register on our website. If your discharge status is suspended indefinitely you need to contact the official receiver for an update.

What Happens If A State Goes Bankrupt

What Happens When a Country Declares Bankruptcy?

State bankruptcies have recently become an open question as the coronavirus pandemic shreds many states finances. But before that, the issue emerged in 2017 when the U.S. territory of Puerto Rico filed for bankruptcy. And even prior to that analysts were studying the deteriorating condition of state finances. No state has ever declared bankruptcy, though. And, with the exception of Arkansas in 1933, it has been nearly 150 years since any state defaulted on debt. There is no roadmap for what happens when a state goes bankrupt. We review how we got to this point, bankruptcy issues and possible ways forward.

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Being Discharged From Bankruptcy

When a debtor receives a discharge order, they are no longer legally required to pay the debts specified in the order. What’s more, any creditor listed on the discharge order cannot legally undertake any type of collection activity against the debtor once the discharge order is in force.

However, not all debts qualify to be discharged. Some of these include tax claims, anything that was not listed by the debtor, child support or alimony payments, personal injury debts, and debts to the government. In addition, any secured creditor can still enforce a lien against property owned by the debtor, provided that the lien is still valid.

Debtors do not necessarily have the right to a discharge. When a petition for bankruptcy has been filed in court, creditors receive a notice and can object if they choose to do so. If they do, they will need to file a complaint in the court before the deadline. This leads to the filing of an adversary proceeding to recover money owed or enforce a lien.

The discharge from Chapter 7 is usually granted about four months after the debtor files to petition for bankruptcy. For any other type of bankruptcy, the discharge can occur when it becomes practical.

Types Of Bankruptcy Filings

Bankruptcy filings in the United States fall under one of several chapters of the Bankruptcy Code, including Chapter 7, which involves the liquidation of assets Chapter 11, which deals with company or individual reorganizations and Chapter 13, which arranges for debt repayment with lowered debt covenants or specific payment plans. Bankruptcy filing costs vary, depending on the type of bankruptcy, the complexity of the case, and other factors.

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What Happens To Your Motor Vehicle

Your motor vehicle will be sold to pay for your bankruptcy debts, unless you need it:

  • for your work or vocation
  • to meet basic domestic needs where alternative transport is not practical

If the official receiver agrees you need the vehicle, it will be classed as exempt and not included in your bankruptcy. This does not apply if you own your vehicle through an ongoing hire purchase agreement .

If you are allowed to keep the vehicle you remain responsible for road tax, MOT and insurance.

If your vehicle is exempt but valuable it can be replaced with a cheaper alternative. The official receiver will use the money from the sale to either pay for the new vehicle directly or give you the money to buy one. You must provide proof of purchase for your new vehicle within 1 month. The guide price for a replacement is £1,000.

Stop the sale of your vehicle

If your vehicle is not exempt you may be able to keep it if a third party can pay to transfer it to them for you and you provide a:

  • current insurance certificate
  • vehicle registration document
  • a valid MOT

The price paid will be the market value of the vehicle but must at least cover the agents costs for the sale of the vehicle.

If you dont want to keep the vehicle the official receiver will dispose of it.

Vehicles under finance agreements

A finance agreement can be a:

  • hire purchase
  • conditional sale
  • leasing agreement

If the trustee decides they wont be claiming the vehicle they will give notice to you and the finance company.

Suspended Income Tax Payments

What Happens If A Country Goes Bankrupt?

HMRC will apply a nil tax code when youre bankrupt. This tells your employer not to take any further income tax from your wages for the rest of the tax year . The extra money in your pay that results from this can be claimed by the trustee to form part or all of an IPA or IPO. If the IPA or IPO is wholly paid out of this extra income, it will stop when you start paying tax again.

The NT wont tell your employer youre bankrupt as an NT can be applied for a number of reasons.

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What Happens To Your Business

If youre self-employed, your business will be closed. Any business assets will be claimed by the trustee.

Your employees may make a claim for unpaid wages and holiday pay, payment in place of notice, and redundancy. Theyll make this claim to the National Insurance Fund, or the money may be claimed in the bankruptcy process.

You can start trading again, but youll have to follow certain rules.


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