Bankruptcy is a legally declared inability of an individual or organisation to pay their creditors. A declared state of bankruptcy can be requested or initiated by the bankrupt individual or organisation, or it can be requested by creditors in an effort to recoupe a proportion of what they are owed.
The primary purposes of the law of bankruptcy are: (1) to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and (2) to repay creditors in an orderly manner to the extent that the debtor has property available for payment.
Bankruptcy allows the debtor to resolve his debts through the division of his assets among his creditors. Additionally the declaration of bankruptcy allows debtors to be discharged of most of the financial obligations, after their assets are distributed, even if their debts have not been paid in full. They are often then restricted in their ability to own any assets for a period of time.
Bankruptcy in the USA
Bankruptcy is federal statutory law (Title 11 of the United States Code) based on the Constitutional requirement for "uniform laws on the subject of Bankruptcy throughout the United States." (Article I, Section 8). Bankruptcy proceedings are undertaken in the United States Bankruptcy Courts, part of the District Courtss.
There are two basic types of proceedings that can either be entered into voluntarily by the debtor or be started by any creditor by filing a petition. Liquidation under a Chapter 7 filing is the most common form of bankruptcy. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Bankruptcy under Chapter 11, Chapter 12, or Chapter 13 is more complex and involves allowing the debtor to use future earnings to pay off creditors.
Some property is exempt from being sold to pay debts in a bankruptcy. The law varies, but in many states, exempt property includes equity in a home or car, tools of trade, and some personal effects. Liens on property, such as a mortgage on a home, are generally not "discharged", or cancelled, in a bankruptcy.
For a possible origin of the term bankruptcy, see Ponte Vecchio.
See also: Debt consolidation