Basically, bankruptcy is a legal process where individuals, families and businesses (typically called “debtors”) can seek to gain some relief from the various debts that they owe to creditors. Approximately 1 million individuals, families and businesses file for bankruptcy protection every year.
The main goal of our bankruptcy system is to provide relief to debtors in the form of a “fresh start” or a second chance. Another goal of the bankruptcy system is to provide an orderly payout to creditors. Prior to having an organized bankruptcy system, creditors would be paid out on a first come-first serve basis. When a person or business was in financial duress, the creditors would “race to the courthouse” to try and get paid first and that system created chaos.
So, bankruptcy is a legal process (federal law in the US) that really is designed to have two purposes: a fresh start for debtors and equity (or fairness) among creditors. In most consumer bankruptcy cases (by far the highest percentage of cases filed vs. business cases), it really is the fresh start that’s the focus of the case because there isn’t much of a payout (if any) to creditors.