What financial condition is defined as the inability to pay one's debts and applying to the courts for relief?

The financial condition defined as the inability to pay one's debts and applying to the courts for relief is bankruptcy. When an individual or business declares bankruptcy, it acknowledges an inability to meet outstanding financial obligations and seeks a legal process to eliminate or reorganize debts. This legal framework provides protection from creditors while attempting to manage financial responsibilities.

Bankruptcy can involve either liquidation, where a debtor's assets are sold to pay off debts, or reorganization, where the debtor proposes a repayment plan to creditors. This process helps ensure fairness and allows borrowers a second chance to regain financial stability.

In contrast, default refers to failing to meet the terms of a loan agreement, such as missing payments, without the structured legal protections provided by bankruptcy. Foreclosure is a specific legal process where a lender takes possession of property after a borrower defaults on the mortgage, aiming to recover the owed balance. Debt relief can involve various strategies to alleviate financial burdens but does not necessarily involve the formal legal proceedings inherent in bankruptcy.