Decompensation is the functional deterioration of a previously working structure or system. Decompensation may occur due to fatigue, stress, illness, or old age. When a system is "compensated", it is able to function despite stressors or defects. Decompensation describes an inability to compensate for these deficiencies. It is a general term commonly used in medicine to describe a variety of situations.
In psychiatry, decompensation is the deterioration of mental health in a patient with previously maintained psychiatric illness, leading to a diminished ability to think and carry on daily activities. This includes loss of memory, both long term and short.