Definition of Bankruptcy

The concept of bankruptcy is part of the terminology of the economy and more specifically of those situations in which some companies are in a situation of economic crisis and cannot face their debts with their creditors.

In what context does it occur

In a context of economic crisis, there are companies that have difficulties to get ahead, particularly a series of debts that they cannot pay (for example, with a supplier or with several or with an entity bank). Faced with this situation, companies in crisis have their provision a legal mechanism to try to overcome this joint. The established legal mechanism is included in the law and in the case of Spain it is bankruptcy law.

The basic idea of ​​the bankruptcy

The entity that cannot assume its financial responsibilities is placed in the hands of a judgetrade, who analyzes the insolvency situation of the entity (what the company has and what it owes) and when the The judge verifies that the entity cannot assume its responsibilities and approves the bankruptcy creditors. This implies that the creditors of the company cannot sue it and that the Treasury cannot apply to the company the

procedures ordinary. Thus, instead of the total closure of the company, the bankruptcy allows it to continue operating, since the commercial judge appoints some bankruptcy administrators to supervise the functioning of the company in a situation of bankruptcy.

On the other hand, bankruptcy as a procedure allows the company to reach an agreement with its creditors. From this moment the creditors try to agree to the partial payment of the debt that the company has with each of them. In this way, the insolvent company has been able to reduce its financial commitments (because it has reduced the debt that has or has postponed it) and in this way the company can continue with its activity without having to close the entity.

A sword of protection

The bankruptcy is a legal figure designed to protect companies and workers who carry out their activity in them so that they can continue to operate. However, this theoretical protection is not fulfilled in the majority of cases in reality, since generally companies in a situation of bankruptcy end up being liquidated. For this reason, experts recommend that before launching the bankruptcy, companies try to negotiate with the creditors and the workers themselves (for example, with a reduction in wages and a postponement of debts).

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Issues in Bankruptcy