Financial Dictionary -> Debt -> Bankruptcy

To put it in simple terms Bankruptcy refers to when a person or more often a business can no longer turn a profit and basically has no capital (money) flowing to pay suppliers or run the company. They have no cash left. This usually coincides with lots of debt and unpaid loans, which were used in hope of salvaging the business but just escalated its financial problems.

Bankruptcy can occur for many reasons and from big corporations to small sole traders. It can be because of general poor management, a downturn in the economy, bad expansions, fraud & other legal issues as well as putting all their faith in one product, which eventually becomes unpopular or irrelevant due to technological advancements.

If a business gets itself in this position they will go in to what is known as "liquidation" where their assets are frozen and used to make the business liquid again (in other words get the cash flowing again). Usually a court will instigate this in order to help the business pay off their debts. For example if a restaurant went bankrupt they may sell all of their tables, chairs and cooking appliances to cover the costs owed to their suppliers.

Somebody may declare themselves bankrupt because they see no way out or a supplier may take them to court in order to force them in to bankruptcy because they haven't paid their bills. Unfortunately the creditors may only get a percentage of what is owed to them depending on how much money can be realistically raised during the liquidation process.

After filing for bankruptcy you get a big black mark beside your name, making it considerably hard to obtain any kind of loan or partake in financial deals. Although the records will eventually be wiped it can cause issues for a number of years as lenders and other businesses will be reluctant and wary of working with you.

Although some people see bankruptcy as a way to make money even if they are not actually bankrupt this is considered fraud and a crime. It is also fraudulent to hide assets and withhold certain information during the liquidation process. Registering with false information is also often classed as perjury another serious crime.