Bankruptcy Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Bankruptcy, written in plain English, along with examples of how it is used.

What is Bankruptcy?

(n) Bankruptcy is the situation in which the liabilities of a person or business entity exceeds the assets and properties owned by them and such entity has no means to settle the dues to their creditors fully. Courts declares an entity as bankrupt based on the petition moved by such person or entity.

History and Meaning of Bankruptcy

Bankruptcy has been around for centuries and derives from the Italian word "bancarotta," which means broke bench. In ancient Rome, if a moneylender became insolvent, his table (banco) was broken (rotto) to illustrate his inability to repay debts. Bankruptcy in its modern form developed in England in the 16th century with the introduction of debtors' prisons. The concept has since evolved into a legal process in which the assets of a debtor are distributed among creditors to discharge the debtor's debts.

Bankruptcy is a legal status for individuals and businesses facing financial difficulty. It is a situation where an entity cannot pay off its liabilities to creditors. Bankruptcy provides a solution for entities that cannot pay their creditors and are looking for a fresh start to their financial situation. It is a legal process that allows individuals or businesses to reorganize debts, liquidate assets, and emerge with a clean financial slate.

Examples of Bankruptcy

  1. The popular retail store filed for bankruptcy after the COVID-19 pandemic caused a sharp decline in sales.
  2. The famous celebrity went bankrupt after a series of poor investments and overspending.
  3. The small business owner declared bankruptcy after being unable to pay off mounting debts.

Legal Terms Similar to Bankruptcy

  1. Liquidation: In bankruptcy, it means to sell off assets to pay off creditors.
  2. Insolvency: It's a financial state where an entity cannot pay off its debts on time.
  3. Debt restructuring: It's the process of modifying the terms of outstanding debt to make it easier to pay off.