Legal procedure for liquidating a business (or property owned by an individual) which cannot fully pay its debts out of its current assets. Bankruptcy can be brought upon itself by an insolvent debtor (called 'voluntary bankruptcy') or it can be forced on court orders issued on creditors' petition (called 'involuntary bankruptcy'). Two major objectives of a bankruptcy are (1) fair settlement of the legal claims of the creditors through an equitable distribution of debtor's assets, and (2) to provide the debtor an opportunity for fresh start. Bankruptcy amounts to a business-failure, but voluntary winding up does not. See also insolvency.

How Does Bankruptcy Work?

Surveys say that most people's greatest fears are financial. What if you can't afford to pay your debts? That's where bankruptcy comes in. Nobody wants to do it, but you can go before a judge and have your past debts forgiven.

How Does Bankruptcy Work?

Before filing for bankruptcy, you should be sure that you've tried everything else. Material assets need to be sold off, or the court will mandate it. A good attorney can help you keep your house and car. Then paperwork needs to be filed. When filing for bankruptcy, you need to show the court that you can't in good faith pay back your debts. You'll also need to show that you don't have anything that you can sell in order to pay creditors.

After filing for bankruptcy you'll be given a court date. When you attend, you'll go before a judge and declare that you cannot pay off your debts. You'll sign paperwork that says the same. Finally, you'll be forgiven of your debts. Bankruptcy stays on your credit report for about 7 years, so make sure that you have no other options before proceeding. Some debts, like financial aid for college, can't be forgiven through bankruptcy, but most of them can be.

Use bankruptcy in a sentence

  • Despite facing dire financial straits since losing his job six months earlier, Carl still thought of bankruptcy as a distant last resort.

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  • A common misconception states that student loan debt cannot be discharged in bankruptcy, however a recent study concluded that forty percent of debtors that petitioned the court were grated at minimum a partial discharge.

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  • If you get yourself in to so much debt that you don't think there is any way out your last resort may be to declare bankruptcy.

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