New Century Financial, one of the largest sub-prime lenders in the US, has filed for Chapter 11 bankruptcy.
New Century has been hit by problems in the sub-prime market
New Century sought protection from creditors after it was forced by its backers to repurchase billions of dollars worth of bad loans.
The company said it would immediately cut 3,200 jobs, more than half of its workforce, as a result of the move.
Sub-prime lenders, who target customers with poor credit histories, have suffered from a downturn in the market.
Shares in New Century were suspended in March on fears the company may be heading for bankruptcy, following a sharp rise in people defaulting on their loans.
New Century's creditors include investment bank Goldman Sachs and Britain's Barclays bank.
The company said it planned to sell its loan servicing operations to Carrington Capital Management for $139m (£70m), subject to bankruptcy approval.
Leading US economists warned on Monday that the current tide of defaults in the sub-prime mortgage sector would continue to weigh on the US's slowing housing market.
"We suspect the problem in the sub-prime area is just the tip of the iceberg for the mortgage market as a whole," said senior economist David Shulman, in the University of California's quarterly Anderson Report.
"For all practical purposes, the sub-prime market is in the process of shutting down."
The slowing US housing market, coupled with rising US interest rates, has meant fewer sub-prime customers have been able to keep up with mortgage and loan repayments.
In a separate development, Barclays Bank said it was buying US sub-prime lender EquiFirst for $76m - substantially less than the $225m the UK firm first offered for the group.
Barclays, which is in merger talks with Dutch bank ABN Amro, said the lower price reflected growing problems in the US housing and sub-prime markets.
However, a spokesman for Barclays said: "We think EquiFirst is positioned for profitable growth."