What occurs when a company is unable to pay its debts?

When a company is unable to pay its debts, it typically enters into bankruptcy. Bankruptcy is a legal proceeding that occurs when an individual or business cannot meet its financial obligations and seeks relief from those debts through the court system. It provides a way for the company to reorganize its debts, or in some cases, liquidate its assets to settle outstanding obligations with creditors. The process is designed to protect both the debtor and the creditors, allowing for a structured resolution of financial distress.

Liquidation refers specifically to the process where a company's assets are sold off to pay creditors, which can be part of a bankruptcy process but does not encompass the full scope of options available in bankruptcy.

Recession, on the other hand, is an economic condition characterized by a decline in economic activity across the economy which can contribute to financial difficulties for companies but is not directly related to an individual company’s ability to pay debts.

Default is the failure to fulfill a financial obligation such as failing to make scheduled payments but does not encompass the legal processes and implications of bankruptcy, making it more of an indicator of the situation rather than the conclusion of it.

In summary, bankruptcy is the legal term that encompasses the overall situation when a company is unable to manage its debts effectively, either