The bankruptcy price is where a position's remaining margin is exactly zero. At that price the trader has lost the full posted collateral, and any close beyond it would put the account into negative territory. The exchange knows this price when the position opens and uses it internally in the liquidation sequence.
01Liquidation happens first
Liquidation triggers at the maintenance margin level, which sits before the bankruptcy price. That buffer zone is deliberate: it gives the engine a chance to close the position while collateral still exists. If the close fills between the liquidation price and the bankruptcy price, the leftover margin, minus the liquidation fee, returns to the trader.
02When the market gaps through
Sometimes price jumps past the bankruptcy price faster than the engine can close, usually during cascades or liquidity vacuums. The close then executes worse than zero margin, and the loss has to go somewhere. The insurance fund absorbs it when it can. If the fund cannot, the exchange invokes auto-deleveraging and passes the loss to profitable counterparties. Both mechanisms exist because bankruptcy prices get breached in real markets, not in theory.