Bankruptcy

The definition of bankruptcy can be defined under one of 2 descriptions:

a) a company becomes 'bankrupt' when it cannot pay its debts due to lack of money in the bank.

b) a company becomes 'bankrupt' when its liabilities (or what it owes) exceed its assets (such as property, inventory or what it is owed).

In the UK or in Europe, the first scenario would usually tip a company into liquidation unless it had some sort of rescue plan.

Under the second scenario, often called 'balance sheet insolvency', the company can avoid liquidation by negotiating with its creditors.

Just to make things even more confusing , UK firms will not go bankrupt at all - the term is generally reserved for personal bankruptcies.

Companies running out of money instead enter a Company Voluntary Arrangement (CVA), go into administration or receivership, or are wound up.

Personal bankruptcy is the process of freeing yourself from overwhelming debts so you can make a fresh start. Anyone can go file for personal bankruptcy, including individual members of a partnership. With bankruptcy you will have to sell all your high value assets so money can be shared out fairly amongst your creditors. However, you should try and seek debt help prior to all this happening.

The Courts are responsible for making a bankruptcy order against an individual.

The assets of the bankrupt individual then fall under the control of a Trustee. This will be either the Official Receiver (a civil servant and officer of the Court), or a licensed Insolvency Practitioner. Whoever is appointed is then responsible for uncovering as much as possible about the debtor's assets and liabilities and then getting as much as possible for the creditors from the assets available.

Once a bankruptcy order has been filed your creditors can no longer hassle you for payment. Payment becomes the sole responsibility of the Trustee.