Bankruptcy

Bankruptcy is a court-ordered legal process, usually started by the debtor, that allows individuals or other entities unable to pay their creditors to obtain relief from some or all of their debts. Being bankrupt is just one possible legal status for an insolvent person, so the two terms are not interchangeable.

The word itself comes from the Italian *banca rotta*, meaning "broken bank." This is often linked to a supposed Renaissance Italian custom of smashing a banker’s bench if he defaulted, though historians doubt this ritual ever actually occurred.

In ancient Greece, there was no bankruptcy. A debtor who could not pay was forced, along with his family and servants, into debt slavery until the creditor recovered the loss through their labor. Many Greek city-states limited this slavery to five years, and debt slaves had protections for life and limb that regular slaves lacked. However, a creditor could keep the debtor’s servants beyond that period, often for life and under harsher conditions. Athens was an exception: Solon’s laws banned enslavement for debt, so most Athenian slaves were foreigners. The first English law on the subject was the Statute of Bankrupts of 1542. Bankruptcy also appeared in East Asia; according to al-Maqrizi, Genghis Khan’s Yassa mandated the death penalty for anyone bankrupt three times. Nations have also defaulted on debts repeatedly—Philip II of Spain declared four state bankruptcies (1557, 1560, 1575, and 1596). Kenneth S. Rogoff notes that France, Portugal, Prussia, Spain, and early Italian city-states all defaulted before 1800, while Egypt, Russia, and Turkey have long histories of chronic default.

Modern insolvency law and business debt restructuring focus less on eliminating struggling entities and more on reshaping their financial and organizational structures to allow rehabilitation and continuation. For private households, the goal is to assess underlying problems and prevent recurring financial distress. During a supervised rehabilitation period, debt advice, financial education, and social support for income and spending management are equally important. In most EU member states, debt discharge depends on a partial payment obligation and specific debtor behavior. The US has fewer conditions, and the UK is the closest EU member to that system. Other EU states, like Spain, do not offer debt discharge; Spain’s 2003 bankruptcy law allows settlement plans that can reduce debt by up to half or extend payments for up to five years. In the US, discharging federal or federally guaranteed student loans through bankruptcy is very difficult. Such loans can only be discharged if the debtor meets the Brunner test, showing they cannot maintain a minimal standard of living while repaying, that this situation will likely persist through most of the repayment period, and that they have made a good faith effort to repay. Even then, a court may only grant a partial discharge. Borrowers may benefit from restructuring payments under a Chapter 13 plan, but few qualify for any discharge.

Bankruptcy fraud is a white-collar crime, typically involving hiding assets to avoid liquidation. It can include filing false information, multiple filings in different jurisdictions, bribery, and other acts. Common criminal acts include concealing assets or documents, conflicts of interest, fraudulent claims, false statements, and fee-fixing. Falsifying bankruptcy forms often constitutes perjury. Multiple filings are not automatically criminal but may violate bankruptcy law. In the US, these statutes focus on the mental state behind the actions, and bankruptcy fraud is a federal crime. This should be distinguished from strategic bankruptcy, which is not criminal because it creates a genuine bankruptcy state, though it may still work against the filer. All assets must be disclosed in bankruptcy schedules, regardless of whether the debtor believes they have net value, because once a petition is filed, the court assumes jurisdiction.