What is Bankruptcy?

When a business has more debt then his assets combined then it can file for bankruptcy. Bankruptcy is a state which helps the person or the company to settle the accumulated debts and gives protection from the harassments of creditors. Usually the lender files for bankruptcy not the creditor. After filing for bankruptcy a federal court will choose what will happen and there are two scenarios how this will play out.

The first scenario is liquidation which means that the debts are pardoned. The second scenario is reorganization, this means that the loaner has to prepare and present a plan in front of the court containing the ways on how the debt will be what he owns will be repaid. For example a person or a company reaches a state in which can't pay his debts then there's the option for filing for bankruptcy. This state gives a chance to the business to get a fresh start while shielding from the creditors.

Creditors get also a chance of repayment based on the companies assets. While the company gives up it's assets he's debts might be wiped out or partially wiped clean. There's a big difference between being bankrupt and insolvent. A bankrupt person or company can still pay out all his debts and continue on running his business, insolvency means that there's no hope what and liquidation is inevitable.