Bankruptcy is a legal process that allows individuals, businesses, or even governments to seek relief from their overwhelming financial debts when they are unable to meet their financial obligations. It is often considered a last resort for those facing severe financial distress. When an entity declares bankruptcy, it essentially admits its inability to pay its debts. There are various forms of bankruptcy, but the most common types are Chapter 7 and Chapter 13 bankruptcy for individuals and Chapter 11 for businesses.

Chapter 7 bankruptcy involves the liquidation of assets to pay off as much debt as possible, and any remaining unpaid debts are usually discharged, meaning the debtor is no longer legally obligated to repay them. Chapter 13 bankruptcy, on the other hand, allows individuals with a regular income to create a structured repayment plan to settle their debts over a specified period, typically three to five years. Chapter 11 bankruptcy primarily applies to businesses, enabling them to restructure their operations and debts while continuing to operate.

Bankruptcy provides a legal framework to protect both debtors and creditors. Debtors can find relief from insurmountable financial burdens, giving them a chance at a fresh start, while creditors have a chance to recoup some of their losses. Bankruptcy laws and procedures vary from country to country, and they play a crucial role in maintaining the stability of financial systems by allowing individuals and entities to manage financial crises in a structured and regulated manner.