What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community.


Bankruptcy is the legal process of eliminating or limiting one's debts by demonstrating inability to pay.

Expanded Definition

Bankruptcy may seem simple in theory, but in practice, it relies upon complex laws designed to make welching inconvenient. Consumer bankruptcy also impairs one's credit rating.

Corporations can also file for bankruptcy. Most often they use Chapter 11 of the bankruptcy code.

It is more accurate to say that a person or entity files for bankruptcy protection than to say that they file for bankruptcy. The courts offer protection from creditors while the parties try to work out how debtors can survive financially. The process also works to get some reimbursement to creditors, if possible. Some creditors rank higher when it comes to who gets paid back, and some don't get anything when the person or business who owes them money files for bankruptcy. Certainly everybody isn't going to get all they are owed, or else bankruptcy protection wouldn't have been needed in the first place.

A court-appointed trustee can take control of a company's purse strings while it reorganizes into what is again a financially viable entity.

Saying a business has "gone bankrupt" can also be misleading depending on what Chapter of the Bankruptcy Code is used, as the phrase connotes a complete financial collapse, which may not be the case. Northwest Airlines, Winn-Dixie Stores, and Kmart are just three companies that filed for bankruptcy protection and later "emerged" from it. For some companies, however, such as Enron and WorldCom, bankruptcy does indeed mean financial implosion. Collapse generally doesn't involve scandal or corruption.

But, of course, filing for any sort of bankruptcy is not good, especially for a company's shareholders, who are likely to see their stakes reduced to as much as zero.

Related Fool Articles

Related Terms

Recent Mentions on Fool.com