Legal Definitions - bankrupt

The term "bankrupt" describes a state where an individual or organization is unable to pay their debts because their financial obligations significantly exceed their assets or income. It can also refer to the person or entity in this financial condition. While commonly used in everyday language, in formal legal proceedings under the U.S. Bankruptcy Code, the term "debtor" is typically used instead of "bankrupt" to refer to the individual or entity seeking relief from their debts.

Here are some examples illustrating the concept of being bankrupt:

• Example 1: An Individual's Financial Collapse
  Maria, a self-employed consultant, experienced a sudden and prolonged illness that prevented her from working for nearly a year. Despite having some savings and health insurance, the combination of lost income, high medical bills, and ongoing living expenses quickly depleted her financial reserves. She now owes tens of thousands of dollars on credit cards, a personal loan, and outstanding medical bills, far exceeding what she could realistically pay back even if she returned to work full-time. Her assets, like her car and a small retirement account, are insufficient to cover these debts.

  This illustrates Maria being "bankrupt" because her total debts are so much greater than her ability to pay them, making her financially insolvent.

• Example 2: A Struggling Small Business
  "The Artisan Bakery," a local business, faced severe challenges due to a new competitor opening nearby and a significant increase in the cost of ingredients. For several months, the bakery's revenue consistently failed to cover its operational expenses, including rent, employee salaries, and supplier invoices. After exhausting its line of credit and emergency funds, the owner realized the business had accumulated substantial debt to its suppliers and landlord that it could not possibly repay. The value of the bakery's equipment and inventory was far less than its outstanding liabilities.

  Here, "The Artisan Bakery" is in a "bankrupt" state because its financial obligations are insurmountable given its assets and income, demonstrating its inability to meet its payment responsibilities.