Bankruptcy is a legal remedy for people who have incurred insurmountable debt. Insurmountable debt by definition occurs when someone is unable to afford to repay all of the interest on their debt every compounding period. This debt will never be repaid as it continually compounds. Traditionally Bankruptcy this is associated with usury, or unfairly high interest rates. It was the practice of “Loan Sharks” or “Money Lenders” whose deliberate goal was to get people into this situation. Once in this situation that person would perpetually have to pay the “Loan Shark” or “Money Lender” thereby ensuring their ongoing income.

In a modern context it may occur due to an individual’s income reducing, expenses increase or the over accumulation of debt. Many people accrue debts on credit cards, consolidate the debt into personal loans, and then continue to accrue debt on their credit cards. Generally their spending will exceed their income by 3-5% per annum. This creates a situation where, unless they address their spending they will inevitably end up Bankruptcy.

Bankruptcy as a legal concept was first established in England in the 1500’s. While there is a cost for those providing the debt, the benefit for the bankrupt is that free of debt they are able to actively participate in the economy. This also addresses the concept that one should benefit from ones labor. Insurmountable debt essentially creates a situation where an individual is a “wage slave”. There is no benefit to the individual from their labor.

In order to prevent people from shirking their financial responsibilities through bankruptcy certain conditions are imposed of bankrupts. Passports are generally surrendered, sizable assets are sold and a portion of their income is given to creditors for 3 years. Generally bankrupts are excluded from incurring new debts for a period of time.