Define: Bankrupt

Bankrupt refers to an individual or entity who is unable to repay their debts and has been declared insolvent through a formal legal process known as bankruptcy. When someone is declared bankrupt, their assets may be liquidated to repay creditors, or a repayment plan may be established under the supervision of a bankruptcy court. Being bankrupt can have serious financial consequences, including the loss of assets, restrictions on financial activities, and damage to creditworthiness. However, bankruptcy also provides a legal framework for debt relief and a fresh start for individuals and businesses overwhelmed by debt.

To be bankrupt is to be insolvent, or in bankruptcy.

In law, bankruptcy is the term for a state of insolvency declared by a court, but in common usage, bankrupt status could be either de facto or de jure. A firm can become bankrupt even with considerable profit through improper asset-liability management, or not having the cash flow to pay bills when they come due. Thus, an accountant would say that the number one reason a business would become bankrupt is a lack of cash. An individual can be bankrupt, too. A bankrupt individual can discharge debts in Chapter 7 bankruptcy, or repay the debts (but keep all assets) in a Chapter 13 bankruptcy. Chapter 7 also applies for a bankrupt company that is liquidating. A bankrupt company that is going to restructure its debts and attempt to continue as a going concern would instead use either Chapter 10 or Chapter 11. Under Chapter 10, a bankrupt company reorganizes with a court-appointed manager; under Chapter 11, the existing management is retained during reorganization.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 29th March, 2024.