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Bankruptcy is a legal process that allows individuals or businesses to be absolved of their debt. In the United States, bankruptcy is handled in federal courts, and the process begins when the debtor files a petition with the federal court. Sometimes the debtor will file a petition on behalf of their creditor.

Once a petition has been filed, the federal court evaluates the debtor’s assets. The court may decide to appropriate the debtors assets to repay some or all of their debt. Thus, creditors may be able to recover some or all of their loan.

In theory, the ability of individuals and companies to file for bankruptcy is beneficial to the overall economy because bankruptcy gives people and companies a second chance to gain access to credit. It also provides creditors some restitution, allowing them to retain more money than they would have if the loan had never been repaid at all. When a bankruptcy proceeding is complete, the debtor is relieved of their debt obligations. However, bankruptcy stays on an individual or company credit report for 10 years, which can make borrowing more difficult.