What is bankruptcy?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
Bankruptcy is a formal legal process for dealing with a person's debts when they cannot pay them. An appointed trustee manages the bankruptcy and deals with the person's assets and financial affairs under the rules of that process. It applies to people, including sole traders and partners; companies have separate insolvency and winding-up processes.
The word is often used loosely for any business that has closed owing money, but its meaning is narrower: a formal process for a person. For a business run as a company, insolvency means being unable to pay debts as they fall due, while liquidation means the formal winding up of the company.
Bankruptcy itself is a legal matter, not a bookkeeping one. Where the books matter is in showing the real position. Complete, current lists of what the business owes and what its customers owe it show how large the debts are and when each one falls due, rather than leaving the owner to guess.
In Australia
business.gov.au's glossary describes bankruptcy as a process in which an appointed trustee manages a person's assets and financial affairs. It discusses liquidation separately as the winding up of a company.
Its guide to managing debt notes that the arrangements for sole traders and partnerships differ from those for companies. It suggests getting help from a professional before doing anything, since there may be ways to repay the debt that do not involve bankruptcy or closing the business. The same guide begins with assessing your debts and the money owed to you, and mentions setting up a record keeping system to keep track of the position.
Its guidance on spotting financial trouble names a solicitor and an insolvency practitioner among the professionals to approach when there are concerns about whether a business can keep going.
Common mistakes
- Using bankruptcy to describe a company that cannot pay its debts, when the terms for companies are insolvency and liquidation.
- Letting the books fall behind as debts build up, so nobody can see how much is owed or when it is due.
Related terms
Related service
Catch-up bookkeeping
Missing months entered and every account reconciled.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Manage being in debt
business.gov.au, Australian Government. Current at 16 October 2026, released 20 February 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Warning signs your business is in financial trouble
business.gov.au, Australian Government. Current at 16 October 2026, released 20 May 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.