Bankruptcy in simple terms means a person or organization is insolvent or is in a state of insolvency. Insolvency means the person or the organization is not in a position to repay the debts it owes to its creditors. This is mostly imposed by a court order which is being initiated by the debtors.
Let us delve a bit deeper and try and understand the origin of the very word “bankruptcy”. It is derived from the Latin word “Bancus “(which means a bench or a table) and “ruptus” (which means broken). Earlier banks referred to a bench, which the initial bankers had in the public place on which they tolled their money and wrote their bills of exchange. When a banker failed he broke his bank to advertise to the public that the individual or the organization to which the bank belonged was not able to continue the business and thus originated the word bankruptcy.
In ancient times in countries like Greece, bankruptcy was treated very differently and if a man owed and could not pay, he and his wife, children or servants were forced into debt slavery, until the creditor recouped the losses with their collaborative physical labor. In ancient Greece debt slavery was limited to a period of five years, but the servants of the debtor could be retained beyond that stipulated time by the creditor.
As a modern legal system
Bankruptcy is a complex legal system which serves to give individuals a “fresh start” from debt. Bankruptcy not only removes the burden of excessive debt, but also helps to keep credit flowing in the economy. In most bankruptcy cases a trustee is appointed who administers the bankruptcy case by reviewing the debtor’s documentation, and attempts to sell any non-exempt property to pay off the creditors. The trustee also has to be vigilant about fraudulent conduct of business or failure to disclose relevant information on the part of the debtor and has a duty to collect as many assets as possible to pay creditors. The focus of modern insolvency legislation and debt restructuring does not aim at elimination of insolvent entities but instead focuses on remodeling of the financial and organizational structure of the debtors experiencing financial distress to aloe rehabilitation and continuation of the business.
Liquidation is by far the most common bankruptcy situation and is appropriate for individuals that cannot opt for payment plan system. However in the modern system the aim is to provide a chance to debtors to repay his debts over a period of 3 to 5 years and involves a complex reorganization of debt.
What is meant by Bankruptcy Fraud?
Bankruptcy Fraud is a white-collar-crime and involves concealment of assets, documents, conflicts of interest, fraudulent claims, false statements or declarations, and redistribution arrangements.