Bankruptcy is of two general kinds, voluntary and involuntary. The benefits of bankruptcy are open, not only to natural persons, with a few exceptions, but also to business corporations except those engaged in railroad operation, insurance, or banking. These three lines of business are of such general importance that it was thought not to be in the public interest to permit their operations to be brought suddenly to a close and their assets scattered. The process of winding up banking and insurance companies is provided for under the National and State Banking and Insurance Acts. The definition of "insolvency" as given in the National Bankruptcy Act is, from a legal standpoint, peculiar, although it conforms to the definition of "economic insolvency" that has been given above. A person is insolvent, within the meaning of the bankruptcy law, "when the aggregate of his property, exclusive of any property that he has conveyed, transferred, concealed or removed, or permitted to be removed with intent to hinder, delay or defraud his creditors, is not, at a fair valuation, sufficient in amount to pay his debts." An individual or a corporation being in a condition of insolvency, must then commit an "act of bankruptcy" if the person or the corporation is to be thrown into involuntary bankruptcy.

The most common act of bankruptcy is the making of a general assignment for the benefit of creditors. As a general rule, a voluntary assignment for the benefit of creditors is less expensive than bankruptcy proceedings. It requires honor, mutual confidence, and good faith, while on the other hand bankruptcy procedure is especially valuable in case there is any suspicion of misrepresentation or dishonesty. Bankruptcy is a harsh and, for most corporations, a fatal remedy for insolvency. It is, in fact, hardly worth while to attempt to rehabilitate a corporation that has gone through bankruptcy. It is usually far easier and better to form a new corporation which will purchase the assets and proceed to carry on the business.