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voluntary bankruptcy

What Does Voluntary Bankruptcy Mean And How Does It Work?

Filing for bankruptcy is a significant financial decision that can help individuals or businesses manage insurmountable debt. One of the most common types of bankruptcy is voluntary bankruptcy, which occurs when a debtor initiates the process by filing a petition with the bankruptcy court.

Let’s explore what voluntary bankruptcy means, how it works, and the distinctions between voluntary and involuntary bankruptcy petitions.

Key Takeaways

  • Definition and Purpose: Voluntary bankruptcy allows debtors to take control of their financial recovery by initiating the process themselves, providing immediate relief from creditors through an automatic stay.
  • Flexibility in Filing: Debtors can choose from different bankruptcy chapters, such as Chapter 7 or Chapter 13, based on their financial situation and long-term goals.
  • Distinction from Involuntary Bankruptcy: Unlike involuntary bankruptcy, which is initiated by creditors, voluntary bankruptcy gives debtors the advantage of determining the timing and type of bankruptcy filing.

What is Voluntary Bankruptcy?

Voluntary bankruptcy is a legal process initiated by an individual or business that recognizes an inability to repay debts. The debtor voluntarily files a bankruptcy petition to seek relief from creditors under federal bankruptcy laws.

This contrasts with an involuntary bankruptcy petition, where creditors force a debtor into bankruptcy to recover unpaid debts.

The most common types of voluntary bankruptcy are Chapter 7 and Chapter 13 for individuals and Chapter 11 for businesses. Each type has specific requirements, benefits, and consequences, allowing debtors to choose the most appropriate option for their situation.

How Does Voluntary Bankruptcy Work?

The process begins when the debtor files a voluntary bankruptcy petition with the appropriate bankruptcy court. This document provides detailed information about the debtor’s financial situation, including income, expenses, assets, and debts.

For individuals seeking to liquidate assets and discharge most debts, filing a voluntary petition under Chapter 7 is a common choice.

Once the petition is filed, an automatic stay goes into effect. This legal provision halts most collection actions by creditors, such as wage garnishments, foreclosure proceedings, and collection calls. The stay provides immediate relief to the debtor while the bankruptcy process unfolds.

Meeting with creditors

After filing the petition, the court schedules a meeting of creditors, also known as a 341 meeting. During this meeting, the debtor answers questions under oath about their financial affairs and the bankruptcy petition. Creditors may attend and raise concerns or objections.

Depending on the chapter under which the petition is filed, the bankruptcy process may involve liquidating non-exempt assets to repay creditors (Chapter 7) or creating a repayment plan to settle debts over time (Chapter 13).

Fianlly, upon successful completion of the bankruptcy process, eligible debts are discharged, meaning the debtor is no longer legally obligated to repay them. This provides a fresh financial start, though certain debts, such as student loans and child support, may not be dischargeable.

Voluntary Petition Chapter 7: A Closer Look

Filing a voluntary petition under Chapter 7 is often chosen by individuals or businesses with limited income and significant unsecured debts, such as credit card balances or medical bills. Chapter 7 bankruptcy involves the liquidation of non-exempt assets, with the proceeds distributed to creditors. Exempt assets, such as essential household items and a portion of home equity, are typically protected.

To qualify for Chapter 7, debtors must pass a means test, which evaluates their income and expenses to determine eligibility. The process is generally quicker than other bankruptcy options, often concluding within three to six months.

Voluntary vs. Involuntary Bankruptcy Petitions

While voluntary bankruptcy is initiated by the debtor, involuntary bankruptcy occurs when creditors petition the court to force a debtor into bankruptcy. Involuntary bankruptcy is typically used in cases involving businesses that owe significant debts and are suspected of hiding assets or unfairly favoring certain creditors. It’s less common for individuals.

Understanding the differences between these two types of petitions is essential for debtors and creditors alike. A voluntary bankruptcy petition provides the debtor with more control over the timing and type of bankruptcy filed, whereas an involuntary petition is initiated without the debtor’s consent and may lead to complex legal battles.

Ask S&B Legal for more information about how to file for bankruptcy and if it’s the best path for you.

Benefits of Voluntary Bankruptcy

  • Debt Relief: Voluntary bankruptcy allows debtors to discharge or reorganize debts, offering a path to financial recovery.
  • Immediate Protection: The automatic stay halts creditor actions, providing breathing room to address financial challenges.
  • Choice of Chapter: Debtors can select the most suitable bankruptcy chapter based on their circumstances and goals.

Final Thoughts

Voluntary bankruptcy can be a valuable tool for individuals and businesses struggling with unmanageable debt. By filing a voluntary bankruptcy petition, debtors take proactive steps toward resolving financial difficulties and rebuilding their lives.

Whether it involves a voluntary petition under Chapter 7, Chapter 13, or another chapter, understanding the process and seeking professional guidance is crucial for a successful outcome.

If you are considering voluntary bankruptcy, consult with a qualified bankruptcy attorney to explore your options and determine the best course of action for your financial situation. Contact S&B Legal today for a free consultation.

Frequently Asked Questions

Can filing for voluntary bankruptcy affect my credit score permanently?

While filing for voluntary bankruptcy will significantly impact your credit score, the effect is not permanent. A Chapter 7 bankruptcy typically remains on your credit report for up to 10 years, while Chapter 13 stays for 7 years. Over time, consistent financial habits and responsible credit use can help rebuild your credit.

What happens if I forget to list a creditor in my voluntary bankruptcy petition?

If you fail to include a creditor in your bankruptcy petition, the debt to that creditor may not be discharged, meaning you may still be responsible for repayment. It is crucial to provide a comprehensive list of all creditors when filing to avoid complications.

Are there any alternatives to filing for voluntary bankruptcy?

Yes, alternatives include negotiating directly with creditors for payment plans, seeking assistance from a credit counseling agency, or exploring debt consolidation options. These alternatives can help manage debt without resorting to bankruptcy, but their suitability depends on your financial situation.