Bankruptcy laws allow the debtors who are unable to pay their debts to creditors, to settle his debts through the division of his/her asset among the creditors. It also allows the right of the creditors to be treated with equality. Bankruptcy Laws operates in various ways under various situations. It might allow the debtors to continue with their business and earn revenue to pay off their debts to the creditors. The law also operates to free the debtors after dividing its property among the creditors even if the debt has not been fully met.

Bankruptcy proceedings are supervised by United States Bankruptcy Courts. The proceedings at the court are governed by the bankruptcy rule promulgated by the Supreme Court.

The Bankruptcy proceedings are done in two ways. The more common of these two is filing under chapter 7 which is called liquidation. The case starts with the debtor filing a petition with the bankruptcy court where the debtor lives or his/her business is domiciled. In liquidation a trustee is appointed who collects non exempt property of the debtor and sells it. The proceedings are then distributed among the creditors. Bankruptcy proceedings under chapter 11, 12 and 13 involve the rehabilitation of the debtor or to allow him to use his future earnings to pay off creditors.

The procedures carried under chapter 11, 12 and 13 are complex in nature. Filing under chapter 11 is allowed by individuals but are not commonly seen due to the complexity, it usually involves partnership firms or corporations. Here in Chapter 11 the debtor proposes to reorganize the business and pay off the creditors with the future earning. Chapter 12 under many situations are only available to family farmers or fishermen. Chapter 13 requires debtors to propose a plan for repaying all or a portion of the debts in instalments of your income. But under these entire chapters i.e. chapter 7, 11, 12 and 13 a trustee is appointed to supervise the assets of the debtors. The Bankruptcy Abuse Prevention and Consumer Protection Act added chapter 15 in the year 2005 to deal with cross border insolvency.

In the US the bankruptcy cases can either be voluntary or involuntary. In the voluntary bankruptcy which is the majority of the case the debtors files the petition at the bankruptcy court unlike the involuntary bankruptcy where the creditors file the petition at the court.

Not all the cases of failure to repay debt come under Bankruptcy, cases related to minor amounts may be dismissed. A dismissal at the court does not protect the interest of the debtor by allowing him/her to pay debt under bankruptcy law. A dismissal leaves the debtor at the same place where he/she was before petition.