I've been bitten by this one plenty.
-When you go bankrupt, you are first forced to hand over all of your cash.
-If the debt is not yet satisfied, you are then required to either cash in houses/hotels AND/OR mortgage unimproved properties until your debt is met. You may not mortgage a property until any/all of the houses/hotels on it have been sold back to the bank.
-If your debt is to the bank, and you have nothing left of value, you are done. Hand everything over to the bank and step aside. The bank will then auction off all of your properties to the highest bidder(s).*
-If your debt is to another player, you are done. Hand everything over to the other player and step aside.*
To raise cash, any player may sell any property (mortgaged or unmortgaged) or Get Out Of Jail Free card to any other player at any time for whatever amount of money that (s)he can get.
@blotsfan - When a property goes up for auction because you decline to purchase it, you can still bid. From the official rules: "Any player, including the one who declined the option to buy it at the printed price, may bid. Bidding may start at any price." This also means that the player being the Banker can be a total dick and start the bidding at $25,000 if (s)he wants, of course.
--Patrick
*People receiving mortgaged property (whether from sale or auction) must pay 10% interest of the total value (as listed on the back of each card) of all mortgaged property on receipt. They then have the option of immediately paying the mortgage value to unmortgage that property. A player may wait until later to unmortgage a property, but (s)he will have to pay the 10% interest again at that time.