Accounting Dictionary

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Bankruptcy

Definition: Bankruptcy is the legal process of liquidating an insolvent debtor’s assets, distributing the proceeds to creditors, and relieving the debtor of any further liability. The bankruptcy process can be initiated by the debtor or by a petition filed by the debtor’s creditors.  Under the federal bankruptcy code, Chapter 7 addresses the complete liquidation of a debtor’s assets, while Chapter 11 deals with the reorganization of the debtor business.

Bankruptcy is designed to give the debtor a fresh start unencumbered by old debts, as well as to fairly settle creditor claims through an equitable distribution to them of the debtor’s remaining assets.