The word bankruptcy comes from Italian and means roughly a broken or smashed bench. But why was it called a broken bench? The background is easy to explain. During the Renaissance, Italian money changers ran their business from a bench. If one of them could no longer fulfill the contracts of his exchange business, his bench was smashed. It was a sign that he could no longer carry out his work. There are also other expressions, some of them jokes, that describe this state:

  • Insolvent
  • Bankrupt
  • Illiquid
  • Unable to pay
  • Broke
  • Burnt out
  • Cleaned out
  • Ruined

A distinction is made between the creditor, who lends an agreed amount of money, and the debtor, who accepts it under certain conditions. The borrower has to repay this defined sum. A debtor can be a private individual, a company or even a state. A contract is drawn up between creditor and debtor, which both sides must sign and honor. What does bankruptcy mean for the two parties to the contract? If the borrower can no longer keep the repayment agreement at all, we speak of bankruptcy or insolvency. In the normal case, insolvency or bankruptcy proceedings are then opened in court.

What Risks Do Creditors Face?

Creditor risks are divided into information risk, insolvency risk and loss risk. There is legal creditor protection that aims to keep the risk of loss within limits and to impose various duties and prohibitions on the debtor.
What does the bankruptcy of a private individual mean for creditors?
Personal bankruptcy follows different rules than corporate or sovereign insolvency. The legislator has provided that a private individual must first try to reach an out-of-court settlement with the creditors. If the creditors agree, no court insolvency proceedings are needed. If they do not agree to a settlement, insolvency proceedings follow.
What does bankruptcy mean for a company?
In the case of a company going under, regular court insolvency proceedings take place.
The last variant is sovereign insolvency.
This is the case when a state has to stop most or all of its payments because the financial means are no longer available.

Insolvency as a Criminal Offense

Not paying back one's loan is a breach of the contract terms and is classified as a criminal offense in law. One is, so to speak, committing an insolvency offense, brought about deliberately or through certain circumstances. What does bankruptcy mean for fraudsters? There are always people who enrich themselves privately or harm others through fraudulent acts, by committing the following offenses:

  • Misrepresenting balance sheets
  • Pretending that others have rights to the funds
  • Keeping or falsifying business records to conceal assets
  • Buying goods on credit and selling them far below their market value
  • Wanting to conceal or withhold funds from the insolvency estate
  • Carrying out speculative transactions financed by debt
  • Manipulating accounting records
  • Deliberately bringing about over-indebtedness.

Disregarding the legal requirements can result in fines or prison sentences.