bankruptcy
A legal process where a person or business that cannot repay their debts seeks relief from some or all of their obligations.
Example
“After years of losses, the company filed for bankruptcy and was restructured under court supervision.”
Memory Tip
BANK-ruptcy — the bank is rupt (broken). Your financial bank is broken.
Why It Matters
Bankruptcy is not financial death. It is a legal tool designed to give people and businesses a fresh start. Understanding it removes the stigma and helps you evaluate it as a legitimate option when debt becomes unmanageable. For many people bankruptcy is the fastest path back to financial stability.
Common Misconception
People often believe bankruptcy wipes out all debt. It does not. Student loans most tax debts alimony and child support generally survive bankruptcy. What bankruptcy does eliminate is most unsecured consumer debt like credit cards and medical bills which is often where people are most overwhelmed.
In Practice
Chapter 7 bankruptcy liquidates non-exempt assets to pay creditors and discharges remaining eligible debts typically completed in 3-6 months. Chapter 13 creates a 3-5 year repayment plan allowing you to keep assets like your home. Both appear on your credit report for 7-10 years.
Etymology
From Italian 'banca rotta' meaning 'broken bench' — moneylenders' benches were broken when they failed.
Common Misspellings
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Related Terms
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See Also
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