Bankruptcy is a legal process that happens when a person or business can't pay back the money they owe. Imagine someone who borrowed money to start a restaurant, but the restaurant failed and now they owe $100,000 to banks and suppliers with no way to pay it back. Through bankruptcy, a court helps sort out the situation: sometimes debts get erased, sometimes assets get sold to pay creditors, and sometimes a payment plan gets arranged.

There are different types of bankruptcy. When a business declares bankruptcy, it might close completely and sell everything (called liquidation), or it might reorganize and try to keep operating while paying back debts more slowly. When individuals go bankrupt, they typically keep necessities like clothing and may keep their home, but might lose luxury items or savings.

Going bankrupt isn't the same as just being broke or poor. It's a formal legal declaration that you can't pay your debts, and it has serious consequences: damaged credit, difficulty borrowing money for years, and public records of the bankruptcy. But it also offers a second chance, letting people escape impossible debt and eventually rebuild their financial lives.