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Bankruptcy is a legal process through which people or other entities who cannot repay debts to
creditor A creditor or lender is a party 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' party in 19th century Denmark A party is a gathering of people who have been invited by a host A host is ...

creditor
s may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a
court order A court order is an official proclamation by a judge (or panel of judges) that defines the legal relationships between the parties to a Hearing (law), hearing, a lawsuit, trial, an appeal or other court proceedings. Such ruling requires or author ...
, often initiated by the
debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series ...
. Bankrupt is not the only legal status that an insolvent person may have, and the term ''bankruptcy'' is therefore not a synonym for
insolvency In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been call ...
.


Etymology

The word ''bankruptcy'' is derived from Italian ''banca rotta'', literally meaning "broken bench" but more idiomatically "broken bank", since bankers traditionally dealt from wooden benches. A
folk etymology Folk etymology (also known as popular etymology, analogical reformation, reanalysis, morphological reanalysis or etymological reinterpretation) is a change in a word or phrase resulting from the replacement of an unfamiliar form by a more familia ...
alleges that Italian bankers' benches were smashed if they defaulted on payment, but this is often dismissed as a legend.


History

In
Ancient Greece Ancient Greece ( el, Ἑλλάς, Hellás) was a civilization belonging to a period of History of Greece, Greek history from the Greek Dark Ages of the 12th–9th centuries BC to the end of Classical Antiquity, antiquity ( AD 600). This era wa ...
, bankruptcy did not exist. If a man owed and he could not pay, he and his wife, children or servants were forced into "
debt slavery Peonage, also known as debt slavery or bonded labour, is the pledge of a person's services as security for the repayment for a debt or other obligation, where the terms of the repayment are not clearly or reasonably stated, and the person who is h ...
", until the creditor recouped losses through their physical labour. Many city-states in ancient Greece limited debt slavery to a period of five years; 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. An exception to this rule was
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, which by the
laws Law is a system A system is a group of interacting Interaction is a kind of action that occurs as two or more objects have an effect upon one another. The idea of a two-way effect is essential in the concept of interaction, as oppose ...
of
Solon Solon ( grc-gre, Σόλων Solon ( grc-gre, wikt:Σόλων, Σόλων ''Sólōn'' ;  BC) was an Archaic Greece#Athens, Athenian statesman, lawmaker and poet. He is remembered particularly for his efforts to legislate against political, e ...

Solon
forbade enslavement for debt; as a consequence, most Athenian slaves were foreigners (Greek or otherwise). The
Statute of Bankrupts The Statute of Bankrupts or An Acte againste suche persones as doo make Bankrupte, 34 & 35 Henry VIII, c. 4, was an Act passed by the Parliament of England The Parliament of England was the legislature A legislature is a deliberative a ...
of 1542 was the first statute under
English law English law is the common law List of national legal systems, legal system of England and Wales, comprising mainly English criminal law, criminal law and Civil law (common law), civil law, each branch having its own Courts of England and Wales, ...
dealing with bankruptcy or
insolvency In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been call ...
. Bankruptcy is also documented in
East Asia East Asia is the eastern region of Asia Asia () is Earth's largest and most populous continent, located primarily in the Eastern Hemisphere, Eastern and Northern Hemisphere, Northern Hemisphere of the Earth, Hemispheres. It shares the ...

East Asia
. According to
al-Maqrizi Al-Maqrīzī or Makrīzī (Arabic Arabic (, ' or , ' or ) is a Semitic language The Semitic languages are a branch of the Afroasiatic language family originating in the Middle East The Middle East is a list of transcontinen ...
, the
Yassa Yassa (alternatively: ''Yasa'', ''Yasaq'', ''Jazag'', ''Zasag'', mn, Их засаг, ''Ikh Zasag'') is/was the oral law code of the Mongols declared in public in Bokhara Bukhara (; Uzbek: /; Tajik: Бухоро, ) is the fifth-largest cit ...
of
Genghis Khan Genghis Khan (August 18, 1227), born Temüjin, was the founder and first () of the , which became the in history after his death. He came to power by uniting many of the s of , and, after being proclaimed the universal , or ''Genghis Khan'', he ...

Genghis Khan
contained a provision that mandated the
death penalty Capital punishment, also known as the death penalty, is the state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper), ' ...

death penalty
for anyone who became bankrupt three times. A failure of a nation to meet bond repayments has been seen on many occasions. In a similar way,
Philip II of Spain Philip II) in Spain , image_flag = Bandera de España.svg , image_coat = Escudo de España (mazonado).svg , national_motto = , national_anthem = , image_map = , map_caption ...

Philip II of Spain
had to declare four state bankruptcies in 1557, 1560, 1575 and 1596. According to Kenneth S. Rogoff, "Although the development of international capital markets was quite limited prior to 1800, we nevertheless catalog the various defaults of
France France (), officially the French Republic (french: link=no, République française), is a List of transcontinental countries, transcontinental country spanning Western Europe and Overseas France, overseas regions and territories in the Ame ...

France
,
Portugal Portugal, officially the Portuguese Republic ( pt, República Portuguesa, links=yes ), is a country A country is a distinct territorial body or political entity A polity is an identifiable political entity—any group of people who ...

Portugal
,
Prussia Prussia, , Old Prussian Distribution of the Baltic tribes, circa 1200 CE (boundaries are approximate). Old Prussian was a Western Baltic language belonging to the Balto-Slavic branch of the Indo-European languages The Indo-Europ ...

Prussia
,
Spain , image_flag = Bandera de España.svg , image_coat = Escudo de España (mazonado).svg , national_motto = , national_anthem = , image_map = , map_caption = , image_map2 ...

Spain
, and the early Italian city-states. At the edge of Europe, Egypt, Russia, and Turkey have histories of chronic default as well."


Modern law and debt restructuring

The principal focus of modern insolvency legislation and business
debt restructuring Debt restructuring is a process that allows a private or public company or a sovereign entity facing cash flow problems and financial distress Financial distress is a term in corporate finance Corporate finance is the area of finance that deal ...
practices no longer rests on the elimination of insolvent entities, but on the remodeling of the financial and organizational structure of debtors experiencing
financial distress Financial distress is a term in corporate finance Corporate finance is the area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the fi ...
so as to permit the rehabilitation and continuation of the business. For private households, some argue that it is insufficient to merely dismiss debts after a certain period . It is important to assess the underlying problems and to minimize the risk of financial distress to re-occur. It has been stressed that debt advice, a supervised rehabilitation period, financial education and social help to find sources of income and to improve the management of household expenditures must be equally provided during this period of rehabilitation (Refiner ''et al.'', 2003; Gerhardt, 2009; Frade, 2010). In most EU Member States, debt discharge is conditioned by a partial payment obligation and by a number of requirements concerning the debtor's behavior. In the United States (US), discharge is conditioned to a lesser extent. The spectrum is broad in the EU, with the UK coming closest to the US system (Reifner et al., 2003; Gerhardt, 2009; Frade, 2010). The Other Member States do not provide the option of a debt discharge. Spain, for example, passed a bankruptcy law (''ley concurs'') in 2003 which provides for debt settlement plans that can result in a reduction of the debt (maximally half of the amount) or an extension of the payment period of maximally five years (Gerhardt, 2009), but it does not foresee debt discharge. In the US, it is very difficult to discharge federal or federally guaranteed student loan debt by filing bankruptcy. Unlike most other debts, those student loans may be discharged only if the person seeking discharge establishes specific grounds for discharge under the ''Brunner'' test, under which the court evaluates three factors: * If required to repay the loan, the borrower cannot maintain a minimal standard of living; * The borrower's financial situation is likely to continue for most or all of the repayment period; and * The borrower has made a good faith effort to repay the student loans. Even if a debtor proves all three elements, a court may permit only a partial discharge of the student loan. Student loan borrowers may benefit from restructuring their payments through a
Chapter 13 Title 11 of the United States Code sets forth the statutes governing the various types of relief for bankruptcy in the United States. Chapter 13 of the Bankruptcy in the United States, United States Bankruptcy Code provides an individual the opport ...
bankruptcy repayment plan, but few qualify for discharge of part or all of their student loan debt.


Fraud

Bankruptcy
fraud In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described by ...

fraud
is a
white-collar crime The term "white-collar crime" refers to financially motivated, nonviolent or non directly violent crime In ordinary language, a crime is an unlawful act punishable by a state or other authority. The term ''crime'' does not, in modern cr ...
. While difficult to generalize across jurisdictions, common criminal acts under bankruptcy statutes typically involve concealment of assets, concealment or destruction of documents, conflicts of interest, fraudulent claims, false statements or declarations, and fee fixing or redistribution arrangements. Falsifications on bankruptcy forms often constitute
perjury Perjury is the intentional act of swearing a false oath Traditionally an oath (from Anglo-Saxon The Anglo-Saxons were a cultural group Culture () is an umbrella term which encompasses the social behavior Social behavior is beha ...
. 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 A mental state, or a mental property, is a state of mind The mind is the set of faculties responsible for mental phenomena A phenomenon (; plural phenomena) is an observable fact or event. The term came into its modern philosophical ...
of particular actions. Bankruptcy fraud is a
federal crime In the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, st ...
in the United States. Bankruptcy fraud should be distinguished from '' strategic bankruptcy'', which is not a
criminal In ordinary language, a crime is an unlawful act punishable by a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper ...

criminal
act since it creates a real (not a fake) bankruptcy state. However, it may still work against the filer. All assets must be disclosed in bankruptcy schedules whether or not the debtor believes the asset has a net value. This is because once a bankruptcy petition is filed, it is for the creditors, not the debtor, to decide whether a particular asset has value. The future ramifications of omitting assets from schedules can be quite serious for the offending debtor. In the United States, a closed bankruptcy may be reopened by motion of a creditor or the U.S. trustee if a debtor attempts to later assert ownership of such an "unscheduled asset" after being discharged of all debt in the bankruptcy. The trustee may then seize the asset and liquidate it for the benefit of the (formerly discharged) creditors. Whether or not a concealment of such an asset should also be considered for prosecution as fraud or
perjury Perjury is the intentional act of swearing a false oath Traditionally an oath (from Anglo-Saxon The Anglo-Saxons were a cultural group Culture () is an umbrella term which encompasses the social behavior Social behavior is beha ...
would then be at the discretion of the judge or U.S. Trustee.


By country

In some countries, such as the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

United Kingdom
, bankruptcy is limited to individuals; other forms of insolvency proceedings (such as
liquidation Liquidation is the process in accounting by which a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of ...
and
administration Administration may refer to: Management of organizations * Management, the act of directing people towards accomplishing a goal ** Administration (government), management in or of government *** Administrative division ** Academic administratio ...
) are applied to companies. In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
, ''bankruptcy'' is applied more broadly to formal insolvency proceedings. In some countries, such as in Finland bankruptcy is limited only to companies and individuals who are insolvent are condemned to de facto indentured servitude or minimum social benefits until their debts are paid in full, with accrued interest except when the court decides to show rare clemency by accepting a
debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series ...
s application for
debt restructuring Debt restructuring is a process that allows a private or public company or a sovereign entity facing cash flow problems and financial distress Financial distress is a term in corporate finance Corporate finance is the area of finance that deal ...
, in which case an individual may have the amount of remaining debt reduced or be released from the debt. In France, the cognate French word ''banqueroute'' is used solely for cases of fraudulent bankruptcy, whereas the term ''faillite'' (cognate of "failure") is used for bankruptcy in accordance with the law.


Argentina

In Argentina the national Act "24.522 de Concursos y Quiebras" regulates the Bankruptcy and the Reorganization of the individuals and companies, public entities are not included.


Australia

In Australia, bankruptcy is a status which applies to individuals and is governed by the federal ''Bankruptcy Act 1966''. Companies do not go bankrupt but rather go into
liquidation Liquidation is the process in accounting by which a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of ...
or
administration Administration may refer to: Management of organizations * Management, the act of directing people towards accomplishing a goal ** Administration (government), management in or of government *** Administrative division ** Academic administratio ...
, which is governed by the federal ''
Corporations Act 2001 The Corporations Act 2001 (Cth) (the Corporations Act, or CA 2001) is an Act of the Commonwealth of Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the A ...
''. If a person commits an act of bankruptcy, then a creditor can apply to the Federal Circuit Court or the
Federal Court Federal court may refer to: United States * Federal judiciary of the United States ** United States district court, a particular federal court Elsewhere * Federal Court of Australia * Federal courts of Brazil * Federal Court (Canada) * Federal Cou ...
for a sequestration order. Acts of bankruptcy are defined in the legislation, and include the failure to comply with a bankruptcy notice. A bankruptcy notice can be issued where, among other cases, a person fails to pay a judgment debt of at least $5,000. A person can also seek to have themselves declared bankrupt for any amount of debt by lodging a debtor's petition with the "Official Receiver", which is the Australian Financial Security Authority (AFSA). All bankrupts must lodge a Statement of Affairs document, also known as a Bankruptcy Form, with AFSA, which includes important information about their assets and liabilities. A bankruptcy cannot be discharged until this document has been lodged. Ordinarily, a bankruptcy lasts three years from the filing of the Statement of Affairs with AFSA. A Bankruptcy Trustee (in most cases, the Official Trustee at AFSA) is appointed to deal with all matters regarding the administration of the bankrupt estate. The Trustee's job includes notifying creditors of the estate and dealing with creditor inquiries; ensuring that the bankrupt complies with their obligations under the Bankruptcy Act; investigating the bankrupt's financial affairs; realising funds to which the estate is entitled under the Bankruptcy Act and distributing dividends to creditors if sufficient funds become available. For the duration of their bankruptcy, all bankrupts have certain restrictions placed upon them. For example, a bankrupt must obtain the permission of their trustee to travel overseas. Failure to do so may result in the bankrupt being stopped at the airport by the Australian Federal Police. Additionally, a bankrupt is required to provide their trustee with details of income and assets. If the bankrupt does not comply with the Trustee's request to provide details of income, the trustee may have grounds to lodge an Objection to Discharge, which has the effect of extending the bankruptcy for a further three or five years depending on the type of Objection. The realisation of funds usually comes from two main sources: the bankrupt's assets and the bankrupt's wages. There are certain assets that are protected, referred to as ''protected assets''. These include household furniture and appliances, tools of the trade and vehicles up to a certain value. All other assets of value can be sold. If a house, including the main residence, or car is above a certain value, a third party can buy the interest from the estate in order for the bankrupt to utilise the asset. If this is not done, the interest vests in the estate and the trustee is able to take possession of the asset and sell it. The bankrupt must pay income contributions if their income is above a certain threshold. If the bankrupt fails to pay, the trustee can ask the Official Receiver to issue a notice to garnishee the bankrupt's wages. If that is not possible, the Trustee may seek to extend the bankruptcy for a further three or five years. Bankruptcies can be annulled, and the bankrupt released from bankruptcy, prior to the expiration of the normal three-year period if all debts are paid out in full. Sometimes a bankrupt may be able to raise enough funds to make an Offer of Composition to creditors, which would have the effect of paying the creditors some of the money they are owed. If the creditors accept the offer, the bankruptcy can be annulled after the funds are received. After the bankruptcy is annulled or the bankrupt has been automatically discharged, the bankrupt's credit report status is shown as "discharged bankrupt" for some years. The maximum number of years this information can be held is subject to the retention limits under the Privacy Act. How long such information is on a credit report may be shorter, depending on the issuing company, but the report must cease to record that information based on the criteria in the Privacy Act.


Brazil

In
Brazil Brazil ( pt, Brasil; ), officially the Federative Republic of Brazil (Portuguese: ), is the largest country in both South America and Latin America. At 8.5 million square kilometers (3.2 million square miles) and with over 211 mill ...

Brazil
, the Bankruptcy Law (11.101/05) governs court-ordered or out-of-court receivership and bankruptcy and only applies to public companies (publicly traded companies) with the exception of financial institutions, credit cooperatives, consortia, supplementary scheme entities, companies administering health care plans, equity companies and a few other legal entities. It does not apply to state-run companies. Current law covers three legal proceedings. The first one is bankruptcy itself ("Falência"). Bankruptcy is a court-ordered liquidation procedure for an insolvent business. The final goal of bankruptcy is to liquidate company assets and pay its creditors. The second one is Court-ordered Restructuring (''Recuperação Judicial''). The goal is to overcome the business crisis situation of the debtor in order to allow the continuation of the producer, the employment of workers and the interests of creditors, leading, thus, to preserving company, its corporate function and develop economic activity. It's a court procedure required by the debtor which has been in business for more than two years and requires approval by a judge. The Extrajudicial Restructuring (''Recuperação Extrajudicial'') is a private negotiation that involves creditors and debtors and, as with court-ordered restructuring, also must be approved by courts.


Canada

Bankruptcy, also referred to as insolvency in Canada, is governed by the
Bankruptcy and Insolvency Act The ''Bankruptcy and Insolvency Act'' (BIA; french: Loi sur la faillite et l'insolvabilité)(the ''Act'') is one of the statutes that regulates Insolvency law of Canada, the law on Consumer bankruptcy in Canada, bankruptcy and Commercial insolvency ...
and is applicable to businesses and individuals. For example,
Target Canada Target Canada Co. was the Canadian Canadians (french: Canadiens) are people identified with the country of Canada. This connection may be residential, legal, historical or cultural. For most Canadians, many (or all) of these connections ex ...
, the Canadian subsidiary of the
Target Corporation Target Corporation is an American retail Retail is the sale of goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribut ...
, the second-largest
discount retailer A discount store or discounter is a term that has been used over time and across different countries for a number of different retail formats, all of which sell products at prices that are in principle lower than an actual or supposed "full retail ...
in the United States filed for bankruptcy on January 15, 2015, and closed all of its stores by April 12. The office of the
Superintendent of Bankruptcy The Superintendent of Bankruptcy is a Canadian government position charged to ensure that bankruptcies and insolvencies in Canada are conducted in a fair and orderly manner. References

Federal departments and agencies of Canada Insolven ...
, a federal agency, is responsible for overseeing that bankruptcies are administered in a fair and orderly manner by all licensed Trustees in Canada. Trustees in bankruptcy, 1041 individuals licensed to administer insolvencies, bankruptcy and proposal estates and are governed by the Bankruptcy and Insolvency Act of Canada. Bankruptcy is filed when a person or a company becomes insolvent and cannot pay their debts as they become due and if they have at least $1,000 in debt. In 2011, the Superintendent of bankruptcy reported that trustees in Canada filed 127,774 insolvent estates. Consumer estates were the vast majority, with 122 999 estates. The consumer portion of the 2011 volume is divided into 77,993 bankruptcies and 45,006 consumer proposals. This represented a reduction of 8.9% from 2010. Commercial estates filed by Canadian trustees in 2011 4,775 estates, 3,643 bankruptcies and 1,132 Division 1 proposals. This represents a reduction of 8.6% over 2010. ;Duties of trustees: 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 * Object to the bankrupt's discharge * Distribute funds to creditors ;Creditors' meetings: Creditors become involved by attending creditors' meetings. The
trustee Trustee (or the holding of a trusteeship) is a legal term {{Short pages monitor *
U.S. Federal Bankruptcy Courts









National Association of Consumer Bankruptcy Attorneys

Bankruptcy Research Database (WebBRD)

Website of the Insolvency Service in the UK

Bankruptcy Statistics in Hong Kong


{{Authority control Bankruptcy, Personal financial problems Corporate liquidations Debt