Technical Bankruptcy Definition

What is technical bankruptcy?

Technical bankruptcy occurs when a borrower is unable to make payment for a debt security but has not yet officially declared bankruptcy before a judicial authority. In the event of a technical bankruptcy, the debtor would likely be entitled to protections, but neither the debtor nor its creditors have taken formal legal action in a bankruptcy court.

A second meaning of technical bankruptcy comes from the field of information technology and describes a company with outdated legacy software.

Key points to remember

  • Technical bankruptcy occurs when a debtor cannot pay his debts but has not yet declared bankruptcy in court.
  • Individuals and companies can face technical bankruptcy.
  • Technical bankruptcy also refers to a company that neglects its software infrastructure to the point that its systems become obsolete.

Understanding technical bankruptcy

Technical bankruptcy often refers to a state in which a debtor – an individual or a company – has defaulted on a debt and would likely qualify for bankruptcy protection, but has not yet formally filed for protection in bankruptcy court. Without declaring bankruptcy, a debtor forfeits the short-term benefits of a court order automatic stay. The stay prevents creditors from pursuing repayment through collection appeals, lawsuits or wage garnishments. A debtor with real estate does not enjoy the protection from foreclosure or eviction that filing for bankruptcy would make possible.

Typically, people in this position will seek such protection, but may not be eligible if they have already filed for bankruptcy. Others who are entitled to protection may choose not to do so in order to avoid negative consequences, such as filing has a significant impact on their credit score. People with little or no assets to be protected may come to the conclusion that filing for bankruptcy does not make sense.

People who choose to seek bankruptcy court protection will most often seek either Chapter 7 Where Chapter 13 . Chapter 11 protection is only available for commercial entities.

If your debt is mostly credit card balances, you may be able to restructure your bonds to avoid formally filing for bankruptcy protection.

Technical failure in information technology

Technical bankruptcy can also describe a situation in which a company neglects its technological infrastructure to the point that its systems become obsolete. Such a company fails to maintain its systems because bugs appear and regulatory changes necessitate updating legacy systems. As a result, the company enters a phase known as technical debt. In this scenario, the term does not refer to financial debt but to the company’s inability to meet external demands on its software systems.

Technical debt is increasing for various reasons. Software architecture, for example, which is a complete overview of a system’s configuration and operation, can be faulty, leading to bugs that accumulate over time. The growth of technical debt tends to accelerate over time, deepening the chasm in which a company finds itself. When the situation becomes unworkable, the company is known to be in a state of technical bankruptcy.

Example of technical bankruptcy

Hugo is employed in a job where his salary is barely above minimum wage. He mainly survives on his credit card debt. He doesn’t own a home or other assets that would make him a good candidate for a loan, and his credit rating is already considered poor.

His credit card debt soon reaches a point where he is unable to repay it any further. When the collection agencies call, they find he is technically bankrupt, which means he has no assets or funds that could help him make payments and he has not filed. balance sheet in court.

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