Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors.

A declared state of bankruptcy can be requested by creditors in an effort to recoup a portion of what they are owed; however, in the overwhelming majority of cases, the bankruptcy is initiated by the bankrupt individual or organization.

Bankruptcy occurs when a business cannot meet its debt obligations and petitions a federal court either for reorganization of its debts or liquidation of its assets (although this action has a negative impact on a credit rating).

It also refers to statutes and judicial proceedings involving persons or businesses that cannot pay their debts and seek the assistance of the court in getting a fresh start. Under the protection of the bankruptcy court, debtors may be released from or "discharged" from their debts perhaps by paying a portion of each debt. Bankruptcy judges preside over these proceedings. The person with the debt is called the debtor and the people or companies to whom the debtor owes money are called creditors.

When you are unable to pay your debts, you submit yourself to the protection of the state. A person or business may voluntarily declare bankruptcy or may be petitioned into bankruptcy by his creditors. Once in bankruptcy, the person surrenders his assets to a trustee in bankruptcy who sells the assets for the benefit of the bankrupt's creditors, first the secured creditors then the unsecured creditors. Once a person is discharged from bankruptcy, none of his former creditors may pursue him for his former debts.

The primary purposes of the laws 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 the means available for payment.

There are two types of bankruptcy: Involuntary Bankruptcy, where creditors or lenders file a petition against the debtor (person in debt), and Voluntary Bankruptcy, where the debtor files a petition claiming inability to meet creditors' requirements.

Caryl B. Grecia is an affiliate of www.bestmanagementarticles.com.  The site features great e-books and softwares in business and management.