bankruptcy

Sometimes, a debtor will still be in the process of performing a contract when he or she files for bankruptcy.  If the contract is still at a stage where both the debtor and the contracting party have not finished their performance, the liquidator often has the choice between continuing the contract or canceling it completely.  If performance on the contract would result in further assets for the debtor to distribute to creditors, it is in court’s interest to allow the debtor to continue performance of the contract.

One of the requirements for a corporation to enter bankruptcy in Japan is that it be “balance sheet insolvent.”  Balance sheet insolvent means that even if the corporation has assets on hand, it cannot make full payment to all of its creditors even by selling all of its remaining assets.  In essence, the company’s debt outweighs its assets.

The bankruptcy estate is the total collection of assets that creditors must split upon the bankruptcy of a debtor person or corporation.  It is often less than the total amount of the bankrupt person’s debts but splitting it fairly among all creditors is an integral part of the bankruptcy system.

When a debtor files for bankruptcy the court needs a way to organize all of the debtor’s belongings so that they can easily be divided up among the creditors.  Courts will do this by categorizing all of the debtor’s assets in what is called a “bankruptcy estate.”