Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. Creditors may file a bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed. In the majority of cases, however, bankruptcy is initiated by the debtor (a "voluntary bankruptcy" that is filed by the bankrupt individual or organization).

Debt is a result of spending more than one's income in a given period. To reduce debt, the most obvious solution is to reduce monthly spending to allow extra cash flow to service debt. This can be done by creating a personal budget and analyzing expenses to find areas to reduce expenses.Most people, when reviewing a written list of their monthly expenses, can find ways to reduce expenses. Common areas for expense reduction would include reducing food expenses by eating out less often, taking public transportation instead of driving a car, and eliminating enhanced telephone and cable television services.Creditors understand that bankruptcy is an option for debtors with excessive debt, so most creditors are willing to negotiate a settlement so that they receive a portion of their money, instead of risking losing everything in a bankruptcy.

Negotiation is a viable alternative if the debtor has sufficient income, or has assets that can be liquidated so that the proceeds can be applied against the debt.

Negotiation may also buy the debtor some time to rebuild their finances.

The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the liquidation and elimination of insolvent entities but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of their business.Therefore bankruptcy should not be used to avoid foreclosure.

Debt Consolidation is a better mean to deal with foreclosure.A typical proposal would involve a debtor making monthly payments for a maximum of five years, with the funds distributed to their creditors. Even though most proposals call for payments of less than the full amount of the debt owing, in most cases, the creditors will accept the deal, because if they don't, the next alternative may be personal bankruptcy, where the creditors will get even less money. The creditors have 45 days to accept or reject the consumer proposal. Once the proposal is accepted the debtor makes the payments to the Proposal Administrator each month, and the creditors are prevented from taking any further legal or collection action. If the proposal is rejected, the debtor may have no alternative but to declare personal bankruptcy.