Bankruptcy is a legally declared inability or impairment of ability of an individual or organizations to pay their creditors. Creditors may file a bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed. In the majority of cases, however, bankruptcy is initiated by the debtor (a "voluntary bankruptcy" that is filed by the bankrupt individual or organization via an attorney).

The primary purpose of bankruptcy is: (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. Bankruptcy allows debtors to be discharged from the legal obligation to pay most debts by submitting their non-exempt assets, if any, to the jurisdiction of the bankruptcy court for eventual distribution among their creditors. There are two common forms of bankruptcy: a reorganization bankruptcy and a liquidation bankruptcy which can be handled by an attorney.

A reorganization bankruptcy is a bankruptcy in which the debtor may reorganize their assets and debts to allow the debtor to carry on with the core of its endeavor while partially satisfying creditor claims. In a liquidation bankruptcy, the assets are sold off to satisfy creditor claims. Reorganization bankruptcy may include plans for individuals and for businesses.

Businesses may enter a reorganization bankruptcy in order to survive insolvency due to creditor claims exceeding the ability of the business to satisfy them. The basic process involves a business reducing each creditor's claims to allow partial payment in order for the business to carry on with its daily commercial activity.

Individuals may enter a reorganization bankruptcy in order to retain assets and pay off reduced creditor claims out of the individual's income. A married couple may be treated as an individual under some circumstances in some jurisdictions.

During the pendency of a bankruptcy proceeding the debtor is protected from most non-bankruptcy legal action by creditors through a legally imposed stay. Creditors cannot pursue lawsuits, garnish wages, or attempt to compel payment.