bankruptcy

Process by which the property of an individual or organization unable to pay debts is taken away under a court order and divided fairly among the person's creditors, after preferential payments such as taxes and wages. Proceedings may be instituted either by the debtor (voluntary bankruptcy) or by any creditor for a substantial sum (involuntary bankruptcy). Until ‘discharged’, a bankrupt is severely restricted in financial activities.

Federal law distinguishes between complete bankruptcy and protection of assets for purposes of financial reorganization. The latter is commonly referred to as Chapter 11 bankruptcy, since it is provided for under Chapter 11 of the federal bankruptcy law, which allows businesses and individuals to continue to operate while reorganizing to pay debts.