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What is bankruptcy?

Bankruptcy is a legal proceeding to deal with the debts (liabilities) of an insolvent debtor (individual or business). Insolvent means "unable to meet debts or discharge liabilities; bankrupt." This may seem a little circular, but that’s the way things often are. The purpose of the legal proceeding of bankruptcy is to distribute the bankrupt’s assets equitably among the creditors in an orderly way, and, in most cases, to free the bankrupt from further liability. Bankrupt is simply the name for the insolvent debtor, once he, she, or it has declared bankruptcy.

At one time, people who failed to pay their debts were consigned to debtors’ prison, where they languished as an example to others about the moral hazards associated with debt.

The theory behind bankruptcy is the fresh start, a new beginning where an individual can start anew, unencumbered by financial burdens and business reversals of the past. In practice, however, bankruptcy means a long march across barren terrain where the former debtor must often learn to live in very reduced straights.