Voluntary Bankruptcy

Voluntary bankruptcy is a legal proceeding initiated by the debtor who files a petition of bankruptcy in the appropriate U.S. district court under the Bankruptcy Act. This process contrasts with involuntary bankruptcy, where creditors petition the court to declare the debtor insolvent.
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Definition

Voluntary Bankruptcy is a legal proceeding where a debtor—either an individual or business—initiates the process by filing a petition of bankruptcy in a U.S. district court. This action is undertaken when the debtor is unable to pay their debts and seeks relief from the financial obligation under the provisions of the Bankruptcy Act. Voluntary bankruptcy is distinct from involuntary bankruptcy, where creditors essentially force a debtor into bankruptcy by petitioning the court.

Examples

  1. Individual Filing for Chapter 7 Bankruptcy: An individual struggling with overwhelming medical bills and credit card debt might file for Chapter 7 bankruptcy, liquidating assets to pay off creditors.

  2. Corporate Filing for Chapter 11 Bankruptcy: A company facing financial distress and unable to meet its debt obligations might choose to file for Chapter 11 bankruptcy to restructure its debts while continuing operations.

Frequently Asked Questions (FAQs)

Q1: What is the difference between voluntary and involuntary bankruptcy?

  • A1: Voluntary bankruptcy is filed by the debtor, whereas involuntary bankruptcy is initiated by creditors who petition the court to have the debtor declared insolvent.

Q2: What are the types of voluntary bankruptcy?

  • A2: The primary types are Chapter 7, which involves liquidation, and Chapter 11, which involves reorganization for businesses.

Q3: Can self-employed individuals file for voluntary bankruptcy?

  • A3: Yes, self-employed individuals can file for either Chapter 7 or Chapter 13 bankruptcy, depending on their situation.

Q4: What is the Bankruptcy Act?

  • A4: The Bankruptcy Act—formally known as the Bankruptcy Reform Act of 1978—sets out the statutes and provisions under which bankruptcy can be filed and processed in the U.S.

Q5: Is it possible to dismiss a voluntary bankruptcy petition?

  • A5: Yes, under certain circumstances, a debtor may request the court to dismiss the petition; however, the court has the final say.
  • Chapter 11 of the 1978 Bankruptcy Act: This chapter focuses on the reorganization of a debtor’s business affairs, debts, and assets, commonly used by corporations.
  • Insolvency: A financial state where an individual or organization cannot meet its debt obligations as they come due.

Online References

Suggested Books for Further Studies

  • “Chapter 11: Reorganizing American Businesses” by Elizabeth Warren and Jay Lawrence Westbrook
  • “Bankruptcy and Related Law in a Nutshell” by David G. Epstein
  • “Bankruptcy: A Necessary Safety Valve” by Eugene R. Wedoff
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