What is bankruptcy

An individual or company declares bankruptcy in the event that they are unable to pay back debt that is owed to creditors. The state of bankruptcy is usually enforced by the local court or, in some cases, by the entity that owes the money – the debtor.

Bankruptcy explained

Bankruptcy refers to the legal state of insolvency of an individual or company by which they are unable to pay back the debt that they have accumulated. The term bankruptcy and insolvency are both terms that are often confused with one another therefore it is important to differentiate between the two. In most jurisdictions bankruptcy is limited to individuals and does not cover companies in its scope, whereas terms like liquidation and administration refer to the insolvency of companies and not individuals. However, in the United States, bankruptcy refers to insolvency of either individuals or companies.

There are two main types of bankruptcies, both are detailed below;

  • Voluntary: the actual individual or organization makes a petition to the court in order to declare they are bankrupt. The petitioners are aware of the state of their finances therefore they make the decision as to whether the debt can or cannot be repaid.
  • Involuntary: this is when one or more creditors file a petition against an individual or company (debtors) to the court in order for the debtors to be judged and declared insolvent.

Once an individual or company declares bankruptcy, a liquidator is then appointed to assess the bankruptcy claim and to make a bankruptcy settlement. This can be done by claiming and redistributing the company’s assets in order to reduce the debt and essentially pay back all creditors.