Close this search box.

Table of Contents



Bankruptcy is a legal process in which an individual or company declares the inability to repay their outstanding debts. This process allows for the debtor to be relieved of some or all of their financial obligations while also providing protection from creditors. The bankruptcy court oversees the restructuring or liquidation of assets to satisfy creditor claims, subject to certain exemptions and provisions.


The phonetic pronunciation of the keyword “Bankruptcy” is /ˈbæŋkrəptsi/.

Key Takeaways

  1. Bankruptcy is a legal process that allows individuals or businesses to seek relief from their debts, often enabling them to start fresh financially.
  2. There are different types of bankruptcy, mainly Chapter 7 (liquidation) and Chapter 13 (reorganization), with each type having its own eligibility requirements, procedures, and implications.
  3. While bankruptcy can provide much-needed relief, it also has significant long-term consequences such as damaging credit scores and limiting access to credit.


Bankruptcy is an important business/finance term as it refers to the legal process by which individuals or entities unable to meet their outstanding financial obligations are given a chance to start anew. Through bankruptcy, the debtor’s assets are evaluated and distributed among creditors, allowing debtors to alleviate the burden of insurmountable debt. Simultaneously, creditors have the opportunity to recoup some of their losses. Bankruptcy also serves as a cautionary indicator, revealing potential mismanagement or unfavorable economic conditions within a market. In essence, this concept plays a crucial role in maintaining financial stability, enabling a resolution for unsustainable debt situations while promoting responsibility and risk assessment among borrowers and lenders.


Bankruptcy serves as a vital financial mechanism to aid individuals and businesses facing insurmountable debt. The primary purpose of bankruptcy is to offer relief from financial distress by discharging some, if not all, of the debtor’s obligations and providing a fresh start. It allows entities struggling to meet their financial responsibilities a chance to reorganize, restructure, or potentially liquidate their assets in an organized manner. Additionally, bankruptcy affords protection to debtors by halting debt collection processes such as creditor harassment, foreclosures, and repossessions. Bankruptcy can provide benefits not only to the debtor but also to creditors and the overall economy. For creditors, the bankruptcy process ensures an equitable distribution of the debtor’s available assets, enabling fair recovery of potential losses. In the business context, bankruptcy can also facilitate a company’s turnaround, preserving jobs and maintaining some of its value for investors or shareholders. On a broader scale, bankruptcy contributes to the efficient allocation of resources within the economy by allowing the repurposing or redistribution of assets from nonperforming ventures into more productive uses. Thus, while bankruptcy might carry a negative connotation, it plays a critical role in maintaining the financial integrity and stability of businesses, individuals, and the economy at large.


1. Lehman Brothers (2008): Lehman Brothers, a leading global financial services firm, filed for Chapter 11 bankruptcy protection in September 2008. This bankruptcy, with $639 billion in assets and $619 billion in debt, is considered the largest in U.S. history. The collapse of Lehman Brothers significantly contributed to the global financial crisis. The firm’s risky investments, particularly in the subprime mortgage market, led to its downfall when the housing market collapsed, leaving Lehman Brothers with massive losses. 2. General Motors (2009): General Motors (GM), the iconic American automaker, filed for Chapter 11 bankruptcy protection in June 2009 after struggling with significant financial losses and declining market share. The U.S. government intervened and provided financial support to help the company restructure its operations, cut costs, and emerge from bankruptcy as a more competitive and viable entity. GM’s bankruptcy, which involved $82 billion in assets, is considered one of the largest bankruptcies in the history of the automotive industry. 3. Toys “R” Us (2017): Toys “R” Us, a well-known and beloved toy retailer, filed for Chapter 11 bankruptcy protection in September 2017 with $5 billion in debt. The company initially intended to reorganize and revamp its operations, but several factors, including increased competition from online retailers like Amazon, decreased foot traffic in their stores, and a challenging retail environment, led to the decision to liquidate its assets. All Toys “R” Us and Babies “R” Us stores in the United States were eventually closed as the company went through the bankruptcy process.

Frequently Asked Questions(FAQ)

What is bankruptcy?
Bankruptcy is a legal process that occurs when an individual or a business is unable to repay their outstanding debts. It provides the debtor relief from some or all of their debts, and may involve liquidating assets to pay creditors or creating a debt repayment plan.
What are the different types of bankruptcy?
There are several types of bankruptcy, but the most common are Chapter 7, Chapter 11, and Chapter 13. Chapter 7 involves liquidation and is applicable to both individuals and businesses. Chapter 11 is focused on business reorganization, while Chapter 13 involves debt adjustment for individuals with regular income.
How does bankruptcy affect my credit?
Bankruptcy has a significant negative impact on your credit score and can remain on your credit report for up to 10 years, depending on the type of bankruptcy filed. This may affect your ability to obtain new lines of credit, loans, or even employment opportunities.
What is an automatic stay?
An automatic stay is a legal provision that immediately stops most creditor collections activity once a bankruptcy petition is filed. It provides temporary relief to the debtor, allowing them time to reorganize their finances and create a repayment plan.
Can all debts be discharged through bankruptcy?
No, not all debts can be discharged through bankruptcy. Generally, student loans, child support, alimony, and certain tax debts are not dischargeable.
How long does the bankruptcy process take?
The bankruptcy process duration varies depending on the type of bankruptcy filed. Chapter 7 bankruptcy typically takes 4-6 months to complete, while Chapter 13 bankruptcy lasts 3-5 years, based on the debtor’s repayment plan.
Can a business continue operating during bankruptcy?
In many cases, a business may continue to operate during the bankruptcy process, particularly during Chapter 11 bankruptcy, where the business develops a reorganization plan to repay creditors while continuing operations.
How often can an individual file for bankruptcy?
An individual can file for Chapter 7 bankruptcy once every eight years and can file for Chapter 13 bankruptcy as soon as they complete a previous Chapter 13 case. However, there are waiting periods between different bankruptcy filings (e.g., from Chapter 7 to Chapter 13 or vice versa).
What happens to my assets during bankruptcy?
In a Chapter 7 bankruptcy, non-exempt assets may be liquidated to repay creditors. Exemptions vary by jurisdiction but may include a primary residence, vehicle, and personal property. In a Chapter 11 or Chapter 13 bankruptcy, assets are not liquidated, but repayment plans are devised to pay off a portion or all of the debts.
Can I file for bankruptcy without an attorney?
While individuals can technically file for bankruptcy without an attorney (pro se), it is strongly recommended to seek legal counsel, as the bankruptcy process is complex, and mistakes can have serious consequences.

Related Finance Terms

Sources for More Information

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More