What does it mean to be bankrupt?

Categories: FAQs

The “B” word. What is it to be bankrupt?
Let’s start with that it means to be bankrupt. To be bankrupt means that your debts outweigh your assets. Picture the scales of justice. On the one side of the scale is all your stuff – ALL of it. Your clothes, cars, money, house, income from work, investments, nick knacks, furniture. Even your intangible things are on this side. Things like copyrights, patents, manuscripts, income streams, and every other type of property you may have. It is a comprehensive list of you and everything you own or have a right to.

On the other side of the scale are all your debts – ALL of them. Credit cards, car payments, mortgages, taxes, medical bills, car repossession balances, spousal and child support, past due utilities, student loans, pay day loans, cash advances, 401(k) loans, and every other debt you owe. If the debt side of the scale weighs down the asset side, this is a sign pointing toward bankrupt.
There is also a timing aspect to being bankrupt. Many situations tip the scale, but then after a payday, a promotion, reemployment, or some other event, the asset side returns. This is the up and down of millions of people’s daily lives. To be bankrupt usually requires a permanency to the situation, not just a temporary downfall. For instance, if you take out a mortgage, your debts are increased, but paying a mortgage rather than rent is not alone a sign of being bankrupt.
But if you can’t pay the mortgage, you have no way to pay the mortgage, your expenses are increasing, the phone rings over and over for collection calls, and this has been going on for months as is often times the case, you may already be bankrupt.
A definition I’ve come to favor when explaining what being bankrupt is something like this:

To be bankrupt is to pass the moment in time that, realistically, no matter what you do, you’ll never pay or catch up on your debts without some help. It’s the moment that the debts are greater than your assets and there is no way to go back.

One universal truth about being bankrupt is that that moment occurs whether you recognize it happening or not.