Duhaime's Law Dictionary


Bankruptcy Definition:

The formal condition of an insolvent person being declared bankrupt under law.

Related Terms: Insolvent, Bankrupt, Absolute Priority Rule, Bankruptcy Trustee, Foreclosure

The formal condition of an insolvent person being declared bankrupt under law.

The legal effect is to divert most of the bankrupt’s assets and debts to the administration of a third person, sometimes called a "trustee in bankruptcy", from which outstanding debts are paid pro rata.

Consider this definition proposed by the Guide to American Law:

"Bankruptcy: the procedure authorized by federal law by which a debtor - an individual or corporation that has not paid or is financially unable to pay its debts - is relieved of total liability for them by making court approved arrangements for their partial repayment."

Bankruptcy forces the debtor into a statutory period during which his or her commercial and financial affairs are administered under the strict supervision of the trustee.

Bankruptcy usually involves the removal of several special legal rights such as the right to sit on a board of directors or, for some professions that form part of the justice system, to practice, such as lawyers or judges. Commercial organizations usually add other non-legal burdens upon bankrupts such as the refusal of credit.

The duration of "bankruptcy" status varies from state to state but it does have the benefit of erasing most debts even if they were not satisfied by the sale of the debtor’s assets.

The word is a derivative of the French "banque route".

In medieval France, traders operated off a table or counter called "banc" or "banque". When a trader absconded, he left by the road ("route"). Hence, when tradesmen suddenly interrupted his trade and hit the road, it was called "banque route".

In Everett v Stone (Federal Cases #4,577, 1844, Maine, USA), Justice Story wrote that a bankrupt was a:

"... broken up or ruined trader; ... a person whose table or counter of business is broken up, bancus ruptus."

The earliest form of a bankrupt was to describe a person who, to avoid this creditors, absconded.

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