From New World Encyclopedia

Notice of closure attached to the door of a computer store the day after its parent company, Granville Technology Group Ltd, declared 'bankruptcy' (strictly, put into administration - see text) in the UK.

Bankruptcy is a legally declared inability, or impairment of ability, of individuals or organizations to pay their creditors. Creditors may file a bankruptcy petition against a debtor in an effort to recoup a portion of what they are owed. In the majority of cases, however, bankruptcy is initiated by the debtor (the bankrupt individual or organization). The declaration of bankruptcy can provide debtors, both individual and companies, necessary financial stability to move forward. The plans available under bankruptcy laws in most nations offer a fair way of organizing debt and planning for the future. The ability to go beyond one's financial mistakes, being at least partially "forgiven" by one's creditors, and to have the opportunity to succeed in other endeavors is a great benefit to many individuals and businesses, and consequently to society as a whole.


The word bankruptcy is formed from the ancient Latin bancus (a bench or table), and ruptus (broken). A "bank" originally referred to a bench, which the first bankers had in the public places on which they tolled their money, wrote their bills of exchange, and so forth. Hence, when a banker failed, he broke his bank, to advertise to the public that the person to whom the bank belonged was no longer in a condition to continue his business. As this practice was very frequent in Italy, it is said the term "bankrupt" is derived from the Italian banco rotto. broken bench.

The word also could derive from the French banque, "table," and route, "trace," by metaphor from the sign left in the ground, of a table once fastened to it and now gone.[1] On this principle they trace the origin of bankrupts from the ancient Roman mensarii or argentarii, who had their tabernae or mensae in certain public places; and who, when they fled or made off with the money that had been entrusted to them, left only the sign or shadow of their former station behind them.


Did you know?
In the Jewish law there was no provision for bankruptcy; instead, all unpaid debts were canceled every seven years

Historically, some cultures had no provision for bankruptcy, using other methods to deal with the issue of unpaid debts. In the Hebrew Scriptures, Deuteronomy 15:1-6 declares that every seven years there shall be a release of debts. Also, The Law prescribed that one "Holy Year" or "Jubilee Year" should take place every half a century, when all debts are eliminated among Jews and all debt slaves are freed, due to the heavenly command.

In ancient Greece, bankruptcy did not exist. If a father owed (since only locally born adult males could be citizens, it was fathers who were legal owners of property) and he could not pay, his entire family of wife, children, and servants were forced into "debt slavery," until the creditor recouped losses via their physical labor.[2] Many city-states in ancient Greece limited debt slavery to a period of five years and debt slaves had protection of life and limb, which regular slaves did not enjoy. However, servants of the debtor could be retained beyond that deadline by the creditor, and were often forced to serve their new lord for a lifetime, usually under significantly harsher conditions.

Bankruptcy is also documented in the Far East. According to al-Maqrizi, the Yassa of Genghis Khan contained a provision that mandated the death penalty for anyone who became bankrupt three times.

In Islamic teaching, according to the Qur'an, an insolvent person was deemed to be allowed time to be able to pay out his debt. This is recorded in the Qur'an's second chapter (Sura Al-Baqara), Verse 280: "And if someone is in hardship, then let there be postponement until a time of ease. But if you give from your right as charity, then it is better for you, if you only knew."

The Statute of Bankrupts of 1542 was the first statute under English law dealing with bankruptcy or insolvency.

In the United States, there were several short-lived federal bankruptcy laws in the nineteenth century. The first was the act of 1800 which was repealed in 1803 and followed by the act of 1841, which was repealed in 1843, and then the act of 1867, which was amended in 1874 and repealed in 1878.

The first modern Bankruptcy Act in America, sometimes called the "Nelson Act," was initially entered into force in 1898. The "Chandler Act" of 1938 gave unprecedented authority to the Securities and Exchange Commission in the administration of bankruptcy filings. The current Bankruptcy Code, which replaced the Chandler Act, was enacted in 1978 by § 101 of the Bankruptcy Reform Act of 1978. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Pub.L. 109-8, 119 Stat. 23, enacted April 20, 2005), is a legislative act that made several significant changes to the United States Bankruptcy Code. This Act of Congress attempted to, among other things, make it more difficult for some consumers to file bankruptcy under Chapter 7; some of these consumers may instead utilize Chapter 13.


The primary purposes of bankruptcy are:

  1. to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and
  2. to repay creditors in an orderly manner to the extent that the debtor has the means available for payment.

Bankruptcy allows debtors to be discharged from the legal obligation to pay most debts by submitting their non-exempt assets to the jurisdiction of the bankruptcy court for eventual distribution among their creditors. During the bankruptcy proceeding, the debtor is protected from most non-bankruptcy legal action by creditors through a legally imposed "stay." Creditors cannot pursue lawsuits, garnish wages, or attempt to compel payment while the stay is in force.

Courses of action for the bankrupt

Bankruptcy is the legally declared inability, or impairment of ability, of an individual or organization to pay their creditors. In most cases personal bankruptcy is initiated by the bankrupt individual. Bankruptcy is a legal process that discharges most debts, but has the disadvantage of making it more difficult for an individual to borrow in the future. To avoid the negative impacts of personal bankruptcy, individuals in debt have a number of bankruptcy alternatives. These include taking no action, managing their own money, negotiating with creditors, consolidating debt, or entering into a formal proposal with their creditors.

Debt is a result of spending more than one's income in a given period. To reduce debt, the most obvious solution is to reduce monthly spending to allow extra cash flow to service debt. This can be done by creating a personal budget and analyzing expenses to find areas to reduce expenses. Most people, when reviewing a written list of their monthly expenses, can find ways to reduce expenses.

Debt is a problem if the interest payments are greater than the debtor can afford. Debt consolidation typically involves borrowing from one lender (typically a bank), at a low rate of interest, sufficient funds to repay a number of higher interest rate debts (such as credit cards). By consolidating debts, the debtor replaces many payments to many different creditors with one monthly payment to one creditor, thereby simplifying their monthly budget. In addition, the lower interest rate means that more of the debtor's monthly payment is applied against the principal of the loan, resulting in faster debt repayment.

Creditors understand that bankruptcy is an option for debtors with excessive debt, so most creditors are willing to negotiate a settlement so that they receive a portion of their money, instead of risking losing everything in a bankruptcy. Negotiation is a viable alternative if the debtor has sufficient income, or has assets that can be liquidated so that the proceeds can be applied against the debt. Negotiation may also give the debtor some time to rebuild their finances.

If the debtor cannot deal with their debt problems through personal budgeting, negotiation with creditors, or debt consolidation, the final bankruptcy alternative is a formal proposal or deal with the creditors. Bankruptcy prevents a person's creditors from obtaining a judgment against them. With a judgment, a creditor can attempt to garnish wages or seize certain types of property. However, if a debtor has no wages (because they are unemployed or retired) and has no property, they are "judgment proof," meaning a judgment would have no impact on their financial situation. Creditors typically do not initiate legal action against a Debtor with no assets, because it is unlikely they could collect against the judgment. If enough time passes, generally seven years in most jurisdictions, the debt is removed from the debtor's credit history. A Debtor with no assets or income cannot be garnished by a Creditor, and therefore the "Take No Action" approach may be the correct option, particularly if the Debtor does not expect to have a steady income or property, which a creditor could attempt to seize.

Bankruptcy fraud

Bankruptcy fraud is a crime. While difficult to generalize across jurisdictions, common criminal acts under bankruptcy statutes typically involve concealment of assets, conflicts of interest, false claims, and fee fixing or redistribution arrangements. Falsifications on bankruptcy forms often constitutes perjury. Multiple filings are not in and of themselves criminal, but they may violate provisions of bankruptcy law. In the U.S., bankruptcy fraud statutes are particularly focused on the mental state of particular actions.[3]

Bankruptcy fraud should be distinguished from strategic bankruptcy, which is not a criminal act, but may work against the filer.

Bankruptcy around the world

Different countries have different legal procedures for compromising debts. For example, in the United States, a debtor can file a Chapter 13 Wager Earner Plan. The plan will typically last for up to five years, during which time the debtor makes payments from their earnings that are distributed to their creditors. In Canada, a Consumer Proposal can be filed with the assistance of a government-licensed proposal administrator. The creditors vote on the proposal, which is considered accepted if more than half of the creditors, by dollar value, vote to approve it.


Bankruptcy in Canada is set out by law in the Bankruptcy and Insolvency Act and is applicable to both businesses and individuals. The office of the Superintendent of Bankruptcy, a federal agency, is responsible for ensuring that bankruptcies are administered in a fair and orderly manner. Trustees in bankruptcy administer bankruptcy estates. Some of the duties of the trustee in bankruptcy are to review the file for any fraudulent preferences or reviewable transactions, chair meetings of creditors, sell any non-exempt assets, and object to the bankrupt's discharge.

Creditors become involved by attending creditors' meetings. The trustee calls the first meeting of creditors for the following purposes: To consider the affairs of the bankrupt, to affirm the appointment of the trustee or substitute another in place thereof, to appoint inspectors, and to give such directions to the trustee as the creditors may see fit with reference to the administration of the estate.

In Canada, a person can file a consumer proposal as an alternative to bankruptcy. A consumer proposal is a negotiated settlement between a debtor and their creditors. A typical proposal would involve a debtor making monthly payments for a maximum of five years, with the funds distributed to their creditors. Even though most proposals call for payments of less than the full amount of the debt owing, in most cases the creditors will accept the deal, because if they reject it, the next alternative may be personal bankruptcy, where the creditors will receive even less money.

United Kingdom

In the United Kingdom (UK), bankruptcy (in a strict legal sense) relates only to individuals and partnerships. Companies and other corporations enter into differently-named legal insolvency procedures: Liquidation or Administration (insolvency) (administration order and administrative receivership). However, the term "bankruptcy" is often used (incorrectly) in the media and in general conversation when referring to companies. Bankruptcy in Scotland is referred to as Sequestration.

Following the introduction of the Enterprise Act 2002, a UK bankruptcy normally lasts no longer than 12 months and may be less, if the Official Receiver files in Court a certificate that his investigations are complete.

There were 20,461 individual insolvencies in England and Wales in the fourth quarter of 2005, on a seasonally adjusted basis. This was an increase of 15.0 percent on the previous quarter and an increase of 36.8 percent on the same period the year before. This was made up of 13,501 bankruptcies, an increase of 15.9 percent on the previous quarter and an increase of 37.6 percent on the corresponding quarter of the previous year, and 6,960 Individual Voluntary Arrangements (IVA’s), an increase of 23.9 percent on the previous quarter and an increase of 117.1 percent on the corresponding quarter of the previous year.

Continental Europe

During 2004, new all-time high rates of bankruptcy were reached in many European countries. In France, company insolvencies rose by more than 4 percent, in Austria by more than 10 percent, and in Greece by even more than 20 percent. However the official bankruptcy (insolvency) statistics have only a limited explanation. The official statistics only show the number of insolvency cases. There is no indication of the value of the cases. This means that an increase in the number of bankruptcy cases does not necessarily entail an increase in bad debt write-off rates for the economy as a whole. Legal, tax-related, and cultural aspects lead to a further distortion of the explanation, especially when compared on an international basis.

In Austria, more than half of all bankruptcy proceedings in 2004, were not even opened due to insufficient funding to settle some outstanding amounts. In Spain, it is not economically profitable to open insolvency/bankruptcy proceedings against certain types of businesses and therefore, the number of insolvencies is quite low. By way of comparison, in France, more than 40,0000 insolvency proceedings were opened in 2004 (it was under 600 in Spain). At the same time, the average bad debt write-off rate in France was 1.3 percent compared to Spain, with 2.6 percent.

The insolvency numbers of private individuals also do not show the whole picture. Only a fractional amount of the households that can be described as heavily indebted decide to file for insolvency. Two of the main reasons for this are the stigma of declaring themselves insolvent and potential professional disadvantage.

United States

Bankruptcy in the United States is a matter placed under Federal jurisdiction by the United States Constitution (in Article 1, Section 8), which allows Congress to enact "uniform laws on the subject of Bankruptcy throughout the United States." Its implementation, however, is found in statute law. The relevant statutes are incorporated within the Bankruptcy Code, located at Title 11 of the United States Code, and amplified by state law in the many places where Federal law either fails to speak or expressly defers to state law.

While bankruptcy cases are always filed in United States Bankruptcy Court (an adjunct to the U.S. District Courts), bankruptcy cases, particularly with respect to the validity of claims and exemptions, are often highly dependent upon State law. State law, therefore, plays a major role in many bankruptcy cases, and it is often quite unwise to generalize bankruptcy issues across state lines.

There are six types of bankruptcy under the Bankruptcy Code, located at Title 11 of the United States Code:

  • Chapter 7—basic liquidation for individuals and businesses—the most common form of bankruptcy. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Because each state allows for debtors to keep essential property, most Chapter 7 cases are "no asset" cases, meaning that there are not sufficient non-exempt assets to fund a distribution to creditors.
  • Chapter 9—municipal bankruptcy
  • Chapter 11—rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets
  • Chapter 12—rehabilitation for family farmers and fishermen
  • Chapter 13—rehabilitation with a payment plan for individuals with a regular source of income
  • Chapter 15—ancillary and other international cases

The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13.

Life after bankruptcy

The purpose of bankruptcy is to allow debtors to get their finances in order and reestablish themselves in the financial community. Despite the legal benefits of bankruptcy, there exist a number of drawbacks. Those emerging from bankruptcy suffer from extremely low credit scores. This makes obtaining loans for anything from houses to cars exceedingly difficult. Also, those who suffer from low credit scores are charged higher rates when they are able to obtain loans because the lender is assuming a greater risk. Nevertheless, the declaration of bankruptcy enables people to resume control of their lives. Bankruptcy provides a legal, structured method for eliminating debt without the crushing fear of debilitating repossession.

Bankruptcy is also a useful option for some failing businesses. The structure of a limited liability corporation (LLC) allows the assets of a company to be considered separate from its owner, which prevents the seizure of personal assets for a failing business. The two main options for bankrupt businesses are reorganization or liquidation. Reorganization, accomplished by filing a Chapter 11 in the United States, allows a company to divert some assets from debt payments in the hopes of rejuvenating their revenue stream. Liquidation, done through Chapter 7, allows the owners of the business to pay backtaxes or salaries. Sale of a business can also guarantee the jobs of current employees, rather than folding the company completely.[4]


  1. YourDictionary, Bankrupt. Retrieved March 29, 2007.
  2. Richard Hooker, Ancient Greece. Retrieved March 29, 2007.
  3. 140 Cong. Rec. S14, 461 (daily ed. Oct. 6, 1994).
  4. Mortan Law Group, Business Bankruptcy. Retrieved April 1, 2007.

ISBN links support NWE through referral fees

  • Baird, Douglas G. The Elements of Bankruptcy. Foundation Press, 2005. ISBN 1599410621
  • Frey, Martin. Introduction to Bankruptcy. Thomson Delmar, 2006. ISBN 1418040967
  • Sandage, Scott. Born Losers: A History of Failure in America. Harvard University Press, 2005. ISBN 067402107X
  • Stewart, Chuck. Bankrupt Your Student Loans and Other Discharge Strategies. Authorhouse, 2006. ISBN 1425928552

External links

All links retrieved September 17, 2023.


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