Bankruptcy is a legal procedure for liquidating the assets of insolvent debtors. Its actual goal is the even distribution of the assets among the respective creditors.
Thus bankruptcy is the name for a debtor's inability to meet his obligations. In Germany this term is often replaced by the term insolvency.

Legal Basis of Bankruptcy

The area of law that deals with bankruptcy proceedings is insolvency law. It belongs to civil law and is set out in the applicable Insolvency Code (Insolvenzordnung in Germany). It came into force in 1999. At the same time, the term bankruptcy (Konkurs), which had been used until then, was replaced by that of insolvency.
Bankruptcy, that is, inability to pay, covers both the threat of that condition and over-indebtedness. These are handled a little differently for companies and private individuals. With both of these insolvency models, the first priority is to reduce the burden of existing debts so that the ability to pay the existing creditors is maintained. Only when this proves no longer possible do the paths of debt resolution part ways. For private individuals in particular, discharge of residual debt comes next. This presupposes a so-called good-conduct period on the part of the indebted person. For companies it is always about dissolving the existing business. This happens while all remaining assets are liquidated.

Bankruptcy and Insolvency Proceedings

The insolvency proceedings themselves can be applied for by the debtor and also by a creditor. The local court (Amtsgericht in Germany) of the respective municipality is responsible for this. Once a petition for insolvency has been filed, the court then examines whether it will be granted or refused. Companies concerned must also meet defined requirements for the insolvency proceedings.
The first step in insolvency proceedings is an attempt to settle the existing debts and at the same time to reach an agreement with the creditors who have claims. An insolvency administrator is appointed for this purpose. The parties cannot choose him themselves, however; he is appointed by the competent insolvency court. A detailed insolvency plan is drawn up for handling the insolvency. There are various ways to avert impending insolvency. These include, for example, talks with the creditors. If they waive a certain portion of their claims, bankruptcy can often be averted, and the creditors at least receive a certain part of the sum they would basically be owed from the transactions.
Goods and assets that are not strictly needed can also help ease the situation through the profit from selling them. In a consumer insolvency, a debt counselor usually helps. But if nothing helps, dissolution of the company follows, with discharge of residual debt or regular insolvency proceedings, together with the respective conditions of a personal insolvency. This also ends the bankruptcy proceedings, and the appointed bankruptcy trustee is paid for the work carried out.