What is the process of declaring a person unable to pay their debts called?

The process of declaring a person unable to pay their debts is referred to as bankruptcy. This legal status is initiated when an individual or entity cannot meet their financial obligations and seeks relief or protection through the bankruptcy court. In bankruptcy proceedings, debts may be restructured, reduced, or eliminated, allowing the debtor a fresh financial start while also providing a method for creditors to recover some of what they are owed.

Bankruptcy serves to protect the debtor from further collection actions by creditors and offers a systematic way to deal with outstanding debts. It is particularly relevant for individuals and businesses facing severe financial distress. The process follows specific legal requirements and can involve different chapters under U.S. bankruptcy law, such as Chapter 7 or Chapter 13, each with its own procedures and implications.

The other terms relate to financial difficulties but do not specifically denote the legal process of declaring bankruptcy. Foreclosure refers primarily to the legal process by which a lender can reclaim property when a borrower defaults on loan payments. Insolvency denotes a state where a person or entity cannot meet their financial obligations but does not necessarily involve legal processes. Reorganization typically refers to restructuring a failing business’s operations or debts, which can occur in bankruptcy but is not synonymous with the act of declaring bankruptcy itself.