In general, it refers to the state of a person (natural or legal) being unable to pay the debts it owes others. In legal terms, bankruptcy is a legal/ judicial process whereby a debtor is declared “formally in default“- i.e., unable to repay its debts. This entails a series of actions for clearance of debt. Bankruptcy, as a process, helps debtors get relieved from debts on a court order to the effect that they are unable to pay. On the other hand, it helps creditors get paid from assets and property belonging to the debtor.

After a bankruptcy is formally declared, a debtor is no longer legally required to pay any debts that are dropped/ discharged under a rule by a bankruptcy court, and creditors have to stop all legal action and follow-ups on the debt. The assets of a bankrupt person (particularly non-essential assets) and excess income will be used, on a court’s order, to payoff the creditors.