What Is Voluntary Bankruptcy?
Let me explain voluntary bankruptcy directly: it's the type where you, as an insolvent debtor, take the initiative to petition a court for bankruptcy because you can't pay off your debts. This applies to both individuals and businesses.
Simply put, you're choosing to go to court for bankruptcy instead of being forced into it. The goal here is to achieve an orderly and equitable settlement of what you owe.
Key Takeaways
You initiate voluntary bankruptcy when you can't satisfy your debts, setting it apart from involuntary bankruptcy, which starts with creditors. Other forms include involuntary and technical bankruptcy. In involuntary cases, creditors force you into court to get paid, and you need to meet a certain debt threshold for that to happen, varying by whether you're an individual or a corporation. Technical bankruptcy means you've defaulted on obligations but haven't declared it in court yet. Overall, voluntary bankruptcy is more common than the others.
How Voluntary Bankruptcy Works
When you know you can't meet your creditors' debt requirements, you start voluntary bankruptcy by filing with a court. This usually happens when you've exhausted all other options for your financial troubles.
Contrast this with involuntary bankruptcy, where one or more creditors petition the court to declare you insolvent. Remember, bankruptcy filings can differ by state, affecting fees based on where you file.
Voluntary Bankruptcy and Other Forms of Bankruptcy
Beyond voluntary, you have involuntary bankruptcy, where creditors push for it because they won't get paid otherwise and need legal enforcement. There's also technical bankruptcy, which is just a default on financial obligations without any court declaration.
Creditors opt for involuntary when they see no other way, and the required debt level depends on if the debtor is an individual or a company.
Voluntary Bankruptcy and Corporations
For corporations, whether voluntary or involuntary bankruptcy hits, a specific sequence unfolds to ensure stakeholders get paid. It starts with secured creditors, who hold collateral on loans to the business.
If the collateral doesn't sell at market price—often due to depreciation—secured creditors can take from the remaining liquid assets. Next come unsecured creditors, like bondholders, employees owed wages, or the government for taxes. Then, if anything's left, preferred shareholders get it, followed by common shareholders.
Corporations can file under different types: Chapter 7 for asset liquidation, Chapter 11 for reorganization, or Chapter 13 for repaying debts with adjusted terms. Of all bankruptcy types, voluntary remains the most common.
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