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Inability to pay debts. In bankruptcy of a publicly owned entity, the ownership of the firm's assets is transferred from the stockholders to the bondholders.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.


A legal declaration that one is unable to pay one's debts and thus needs to have debts forgiven or reorganized. That is, bankruptcy is a legal proceeding in which a person or corporation has become insolvent, and therefore cannot pay his/her/its obligations. Most of the time, the person or corporation files this declaration with a bankruptcy court, though in some cases the creditors may do so themselves. In bankruptcy proceedings, one's assets and debts are evaluated and debts are repaid according to the debtor's ability to pay, what the creditors will accept, and what the court and the law decide.

In the United States, bankruptcy falls under federal jurisdiction. There are three main types of American bankruptcy. In Chapter 7, the person or company's assets are liquidated and creditors are repaid out of the proceeds from the liquidation. All remaining debts are then discharged. If a company files for Chapter 7 protection, it ceases operation. In Chapter 11 bankruptcy, a company files a reorganization plan with the court whereby it continues operation and creditors are repaid for part of what they are owed; all other debts are discharged. In Chapter 13, the person or company remains in debt, but payments are lowered, repayment periods are extended, and the company remains in business. See also: Absolute priority rule, Chapter 9, Chapter 12, Chapter 15.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved


The financial status of a firm that has been legally judged either to have debts that exceed assets or to be unable to pay its bills. Formal bankruptcy may result in reorganization and continued operation of the firm or it may require liquidation and distribution of the proceeds. In either case, most security owners, especially shareholders, are likely to suffer losses. Stock transaction tables indicate that a company is in bankruptcy proceedings by appending vi or q immediately before the name of the stock. See also Chapter 7, Chapter 11, reorganization.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.


Bankruptcy means being insolvent, or unable to pay your debts. In that case, you can file a bankruptcy petition to seek a legal resolution.

Chapter 7 bankruptcy, which allows you to discharge your unsecured debts but may result in your losing your home, car, or other secured debt, is available only to those whose earn less than the median for their state or qualify because of special circumstances.

With Chapter 11 bankruptcy, also called reorganization bankruptcy, you work with the court and your creditors to repay debt over three to five years.

However, some debts are not reduced by a declaration of bankruptcy, including past due federal income taxes, alimony, and higher education loans. Similarly, when you hear that a company is reorganizing or is "in Chapter 11," it means it has filed for bankruptcy.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.


Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson


Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005


A common expression used to mean insolvency, being a condition in which one's liabilities exceed one's assets, or in which current cash flow is not sufficient to meet current debts. As a result of the condition, the debtor may take advantage of protections afforded by the Bankruptcy Code. Immediately upon filing, the law imposes an automatic stay which prohibits all collection activities.Over time,the stay may be lifted so that collection may resume,but the law does allow a breathing spell to allow the debtor and attorney to analyze their options.The Code underwent dramatic changes in November of 2005,with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).Bankruptcy is now a much less consumer-friendly place than it used to be,and it places greater demands on bankruptcy lawyers.Some pertinent aspects of bankruptcy law are noted here.

• Chapter 7 bankruptcy. A case brought under Chapter 7 of the Code, with a goal of liquidat- ing all assets, paying all liabilities as far as the money will go, and then obtaining a dis- charge and a fresh start. Some debts cannot be discharged at all, such as judgments for money damages for fraud, payroll withholding taxes, intentional damage, domestic obliga- tions, and other items. In addition, because of past credit card abuses with debtors maxing out their credit cards and then filing for bankruptcy, there is now increased scrutiny of purchases prior to bankruptcy. Suspect purchases will be denied discharge. Debtors requesting Chapter 7 relief must complete government-approved credit counseling before filing, and may be forced to enter Chapter 13, rather than Chapter 7, if a “means test” determines they have the ability to repay some debts over time.

• Chapter 11. Commonly called reorganization, this is designed for businesses or for individuals who exceed the financial limitations for Chapter 13 eligibility. Businesses will continue operations and propose a plan to meet their obligations, or a plan to sell the business as a going concern rather than liquidate assets. The plans usually contemplate the sale of some assets, forgiveness of some debt, and a generous repayment schedule over time. Things rarely work out well for the debtor, and the vast majority of Chapter 11 cases either result in the largest lender owning the company at the end, or the company changing its
plan to one of liquidation. Just because the goal is liquidation does not mean the debtor must convert to Chapter 7; they are said to be in a “liquidating 11.”

• Chapter 13. Commonly called wage earners bankruptcy, but this is misleading, because anyone with regular income from some source may take advantage of the chapter. There are financial limitations for eligibility that, if exceeded, will result in the debtor taking advantage of Chapter 11 instead of Chapter 13. The debtor must complete government-approved credit counseling before being allowed to file. Once in Chapter 13, the debtor proposes a plan for repayment of debts, with payments stretching over 3 to 5 years. At the end of the time, if all agreements under the plan have been met, and if the person completes all required financial education, the debtor receives a discharge.

• Bankruptcy and real estate:

1. Filing stops all foreclosure activities until and unless the lender is able to lift the automatic stay and obtain court approval to proceed. In some states where a debtor may redeem property after a foreclosure sale, the bankruptcy will enable the debtor to do so by making payments, rather than by paying the full cash price ordinarily required for a redemption.

2. Transfers of real estate within the recent past may be reversed if they are for less than full value and deemed to be a fraud against creditors, even if there was no fraudulent intent.

3. Listing agreements to sell property may be terminated, or cancelable, depending on the chapter.

4. Tenants may reject burdensome lease obligations and secure early termination of their leases.

5. Commercial lenders, who typically require that collateral be held in a single-asset entity, may be able to successfully argue against a plan of reorganization and force a foreclosure.

6. Other lenders opposed to a Chapter 11 plan of reorganization may be forced to accept it in a procedure called the cram-down.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.


For tax purposes, a formal petition filed in a Bankruptcy Court under Chapter 7, 11, 12, or 13 of Title 11 of the U.S. Code.
Copyright © 2008 H&R Block. All Rights Reserved. Reproduced with permission from H&R Block Glossary
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