Act of Bankruptcy

Definition

The term act of bankruptcy refers to an action taken by a debtor that becomes the foundation for a creditor to file a petition in court to declare the debtor bankrupt.  While there are many acts of bankruptcy that can become the basis for this filing; in some jurisdictions, it can be as simple as failure to pay an obligation on the date it is due.

Explanation

When a debtor takes certain actions, a creditor may file a petition in court to declare the debtor bankrupt.  Creditors do this to protect their claims against the debtor's assets, since a bankruptcy proceeding may result in their sale.  The funds received from the liquidation of the debtors assets can then be used to repay the money owed creditors.

In some jurisdictions, simply failing to repay a debt obligation on time constitutes an act of bankruptcy.  Additional actions taken by a debtor that may be found to be the basis for an act of bankruptcy include:

  • Attempting to hide assets from creditors.
  • Providing payment to some creditors, but failing to repay another.
  • Assigning, selling, gifting, or otherwise transferring assets to another party to protect them from creditors.
  • Providing notice to creditors that they intend to suspend, or have suspended, repayment of debt owed and due.
  • Any action that may be reasonably interpreted as attempting to defraud creditors.

Related Terms

current liabilities, long-term debt, promissory notenotes receivable, recognition of notes receivable, long-term notes payable, mortgage notes