Bankruptcy is the term that often denotes loss of assets of an individual or business. It may have some truth in the phrase ¡°loss of assets for it is possible that individuals and businesses may lose their assets for paying their liabilities to the creditors.

In much formal definition, the term bankruptcy refers to the inability of an individual or business to settle obligations to creditors. Individuals and businesses that have become insolvent can file from a legal proceeding to aid and protect them from any attempt or possible actions made by the creditor. Bankruptcy is normally associated with a legal case. Individuals declaring bankruptcy is a legal matter wherein individuals and businesses seek the help of bankruptcy court and law to provide them relief from liabilities. Another purpose of bankruptcy is also to help the debtor repay the creditors in an organized manner. Creditors can also benefit from the bankruptcy case.

It is a legal obligation for debtors to pay debts that they owed to the creditors. However, they can be discharged of this obligation when they declare their bankruptcy case to the court. By submitting the non-exempt assets to the court that has jurisdiction over the assets of an individual or businesses for eventual distribution among creditors can relieve debtors from legal obligation.

There are two types of bankruptcy. The bankruptcy filed by a creditor is called involuntary bankruptcy while voluntary bankruptcy is filed by the individual or organization. The proceeding of a bankruptcy case is initiated by a petition filed with the clerk of the Bankruptcy Court.

Individuals and organization can experience bankruptcy when they can become impaired with the ability to pay liabilities to the creditor. This can happen when the value of an individual or an organization's assets is lesser than the total amount of liabilities. Thus, an individual or an organization becomes insolvent. However, there are cases when the individual or organization can file for bankruptcy if the debtor cannot liquidate assets instantly and has no or little liquid assets for immediate payment to creditors. Bankruptcy can be legally declared by debtors especially if one debtor has more than one creditors.

When a person or organization is deemed insolvent, he can file a bankruptcy case to the bankruptcy court. Bankruptcy case can be initiated by the person or organization badly indebted by presenting the debtor's financial information. This can be done with filing a petition to the Bankruptcy Court. The petitioner may be an individual or organization or a group of creditors.

There are various laws in the handling and treatment of bankruptcy case. This can differ in every country. In the United States, there are two common forms of bankruptcy proceedings: liquidation and rehabilitation, which is also known as reorganization. Chapter 7 deals with liquidation while Chapters 9, 11, 12 and 13 are chapters for reorganization. Chapter 11 deals with reorganization of business and individuals. Individuals that are income earners and are sufficient to pay partial payment to their obligations can file for Chapter 13. Individuals filing for Chapter 13 bankruptcy can still retain ownership of their properties. In Chapter 11, debtors are still allowed to maintain control over their assets while restructuring debts. Negotiation would involve in this processing where debtors can work out schedules of repayment acceptable to creditors.

In Chapter 7, debtors will have to liquidate their properties, surrender them to the court for pro rata distribution to the creditors.

Chapter 9 is for municipal reorganization while Chapter 12 is a provision for agricultural bankruptcies.

The Bankruptcy Code in the United States is found in the United States Code Title 11.

In Canada, its federal law sets out the Bankruptcy and Insolvency Act which is applicable to individuals and businesses. The office of the Superintendent of Bankruptcy is responsible for the fair and orderly administration of bankruptcy cases. The administration of bankruptcy estates is tasked to Trustees in bankruptcy.

Bankruptcy is a legal declaration. A fraud in bankruptcy petition is a criminal offense. To avoid bankruptcy, sound financial planning and implementation should be practiced by individuals and business organizations.