Bankruptcy is a legal process that attempts to find a fair compromise between a debtor (a person or company that has borrowed money) and his creditors (lenders) when the debtor cannot repay his loans. It has been said that the primary goal of bankruptcy law is to give a debtor a fresh start at life, and “a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt”. To that end, bankruptcy courts have the power to discharge certain debts, meaning that the debtor is released from his obligation to pay the debt, and the creditor can never attempt to collect it again, regardless of how much money the debtor makes in the future.

This is why attorneys at other professionals often refer to the process as “bankruptcy protection”. However, giving debtors a fresh start is not the only goal of the bankruptcy process. Bankruptcy Courts will also attempt to repay the creditors as fairly as possible under the circumstances. This process typically involves an evaluation of all of the debtor’s assets, and a determination of how to either: a) divide those assets fairly among the debtor’s various creditors, or b) take control of the assets to ensure that they are developed put to use in a way that maximizes their value in order to pay the creditors back over time.

All bankruptcy proceedings in the U.S. are governed by the Federal Bankruptcy Code, and are supervised by special bankruptcy courts, which are located in 90 districts across the country. The type of proceeding, and the various rights and remedies involved, depend on what chapter of the Bankruptcy Code the debtor filed under. Although there are several bankruptcy chapters, almost all bankruptcy cases come in one of two forms. Cases filed under Chapter 7 of the Bankruptcy Code are referred to as “liquidations”, and are the most common form of bankruptcy. As the term implies, liquidation involves a bankruptcy trustee, who with the Court’s authority, seizes the debtors non-exempt property, and sells it to pay off the debt(s). Cases filed under other relevant Chapters involve a court-supervised “rehabilitation” of the debtor’s assets, in order to eventually create future earnings that can be used to repay the creditor. Filing for bankruptcy automatically “stays” outside collection actions against the debtor. This means that in most cases, once a bankruptcy petition is filed, creditors cannot attempt to collect their debts outside of the proceeding itself. Similarly, the debtor is not allowed to transfer any property that has been declared part of the estate under those proceedings. In the event that a debtor does attempt to transfer any such property, a bankruptcy trustee has the power to go back and undo the transfer for the benefit of the creditors.

Although theoretically all of a debtor's property is evaluated to structure a payment plan, federal and state law have exempted certain property from repossession. Houselhold items and other personal effects such as clothes and food can not be liquidated by creditors. This rule is designed to keep debtors self-sufficient and off of public aid. On the other hand, there are also certain debts that the bankruptcy code forbids from being discharged for public policy reasons. Child support and alimony, certain tax obligations, and student loan debts are all examples.

Bankruptcy has many pros and cons that must be considered by debtors before utilizing it. In the best case scenarios the debtor will be put on a reasonable repayment plan, perhaps having some or all of the debt discharged completely. Leins and wage garnishments are automatically suspended, and creditors who would otherwise have a right to a lein will not be able to obtain one, and many existing leins may be eliminated. Depending on the situation, the debtor may be able to keep his home and most of his property, creating a condition referred to as a "debtor in possession". In some business bankruptcies the business is allowed to keep control of its assets and continue to operate normally, free to make a profit without ever having to pay the discharged debts.

However, bankruptcy is not always the best option. Debtors who attempt to file must be familiar with the bankruptcy code, and file appropriately or risk dismissal. It is also extremely damaging to the debtor's credit rating. Federal law permits credit agencies to report bankruptcies for up to ten years, and all of them do. In addition, once an individual files for Chapter 7 protection, they cannot do so again for another six years. This means that if the debtor runs into trouble again within that time frame, they will be forced to repay the debt, no matter how unreasonable the terms are.