Bankruptcy

When debts become far larger than a person's or company's ability to repay, bankruptcy offers a structured way out. A court or official process takes control, decides how available assets will be shared among creditors and, in many cases, releases the debtor from remaining debts.

There are two broad approaches. In liquidation, the debtor's assets are sold and the money is divided among creditors, after which most remaining debts are cancelled. In reorganisation, the debtor keeps operating, especially in the case of a business, while repaying creditors under a new plan over several years.

Bankruptcy has serious effects. It usually stays on a credit record for many years, makes borrowing difficult and expensive, and may restrict certain activities, such as running a company. Some debts, such as certain taxes, fines or student loans in some countries, may not be wiped out.

The rules, names and consequences differ greatly between countries. Bankruptcy is generally considered a last resort after options such as negotiating with creditors or entering a debt repayment plan.