Bankruptcy, as a legal term, implies that a person who is not in a position to pay his or her outstanding debts could be absolved of that responsibility and given an opportunity to start afresh. Federal law allows an individual the right to go ahead and file a case of bankruptcy. These cases are taken up in a federal court. When bankruptcy is filed, it instantly prevents the creditors from searching for ways to collect their overdue amounts from their debtors till the time those debts are classified as per law.