Finance Dictionary
Bankruptcy
Definition
A legal proceeding involving a person or business that is unable to repay their outstanding debts.
Deep Dive
Bankruptcy is a formal legal process initiated when an individual or business becomes unable to repay their outstanding debts. It provides a legal framework for either liquidating assets to pay creditors (often Chapter 7 for individuals and businesses in the U.S.) or for reorganizing financial affairs to develop a structured repayment plan (often Chapter 11 for businesses and Chapter 13 for individuals in the U.S.). The primary goal is to provide a fresh start for the debtor while ensuring some level of recovery for creditors, often under the supervision of a bankruptcy court.
Examples & Use Cases
- 1A small business facing insurmountable debt and unable to continue operations files for Chapter 7 bankruptcy, leading to the sale of its remaining assets to partially repay its creditors.
- 2A large airline, burdened by high operating costs and falling revenue, files for Chapter 11 bankruptcy, allowing it to continue flying while it reorganizes its finances, renegotiates contracts, and sheds unprofitable routes.
Related Terms
InsolvencyLiquidationDebt RestructuringCreditorDebtorReorganization