What Is Technical Bankruptcy?

Technical bankruptcy occurs when someone is unable to pay his debts because of a lack of money, and it is similar to actual bankruptcy. During the time period in which a person is in technical bankruptcy, a creditor who has been defaulted on is allowed to go to court and ask the person or business to declare actual bankruptcy. The differences between actual bankruptcy and technical bankruptcy are slim, with the only real difference being a lack of filing for protection. There are several reasons why a person or business would prefer not to file, such as denial or thinking that he can acquire the funds needed to pay off debts.

Actual bankruptcy and technical bankruptcy start in the same way: with a lack of funds. When someone does not have enough funds, he often will default on debts. A single default usually is not enough, because it can happen for a variety of reasons that do not involve bankruptcy. It is more important that the person does not have the funds available to pay any financial obligations.

After several defaults, a creditor may go to court to sue for repayment. Depending on the unique financial situation of the individual or business, the court may force the entity into bankruptcy. The entity does not have any bankruptcy protection under technical bankruptcy and, thus, may be liable for payments even though there is a lack of general funds. When this case is done, the entity is officially declared bankrupt unless he is able to secure funds to pay off the debt.

When someone is experiencing technical bankruptcy, it is not very different from actual bankruptcy. The only substantial difference between the two is that the entity has not gone to court or filed for any type of bankruptcy protection. This means the entity may still have some purchasing power if there is any room left on credit cards, and that the entity has not had any assets taken away to help with bankruptcy repayments.

During technical bankruptcy the entity is able to file for bankruptcy but does not, and there are several reasons for this. One reason may be denial, because the entity may believe it is possible to secure more funds. Another reason is because the entity does not want remaining assets, such as stocks or property, taken and used for repayment. This also may occur because of severely poor bookkeeping, and the entity may not even be aware of how close he is to bankruptcy.