The term bankruptcy is the term derived from the Italian word Benca Rotta which also means broken bench. But more idiomatically broken bank us the one term you are looking for. The term is very often analysed to have originated in Renaissance Italy. Apart from the background story, if you need to know what bankruptcy actually means, then it means it is a legal process through which other entities or people who cannot repay their debts to creditors can seek relief from some or all of their debts. In most of the jurisdictions, bankruptcy is imposed by a court order, which the debtor often initiates.
Bankrupt may not be the only legal status that some insolvent person may have. And therefore, that does not make insolvency similar to bankruptcy.
To discuss the term briefly, bankruptcy is the legal process that starts when a person or a business fails to repay the outstanding debts or obligations.
The process of bankruptcy process begins when a debtor files a petition, which is most common and on behalf of the creditors, a less common thing. All of the debtor assets are calculated and measured, and the assets may be used to repay the portion of the outstanding debt.
When the entire bankruptcy proceeding completes successfully, the debtors get relieved of the debt obligations which was incurred prior to filing the bankruptcy.
In real estate or other businesses, bankruptcy is filled with preserved assets, distributing the assets equitably and some orderly liquidation. When a business files for bankruptcy, it might choose to liquidate under chapter 7 or may file the reorganization under chapter 11 of the Bankruptcy Court, but it always has the advantage of changing into chapter 7.
In chapter 7, a trustee is appointed to vouch for the assets and liabilities of the business. The trustee may auction or sell the assets and pursue the claims against the third parties to get the benefits of the creditors. So, in chapter 7, the administers the assets of the bankruptcy estate and prosecutes the fraudulent conveyance and preference actions.
Whereas, in the chapter 11 case, a trustee does not get appointed. Absent a court order, the debtor with management which already exists operates as the debtor-in-possession and assumes the role of the fiduciary to creditors. The debtor has all the powers of the trustee to recover the preferences, fraudulent conveyances, and many other assets that can benefit the creditors.
