Voluntary Bankruptcy: What it Means, How it Works

By

Updated January 27, 2021

Reviewed by

Fact checked by

What Is Voluntary Bankruptcy?

Voluntary bankruptcy is a type of bankruptcy where an 澳洲幸运5官方开奖结果体彩网:insolvent debtor brings the petition to a court to dꦚeclare bankruptcy because they are unable to pay off their debts. Both individuals and businesses are able to use this approach.

A simple definition of voluntary bankruptcy is simply when a debtor chooses to go to court over bankruptcy versus being forced to do so. A voluntary bankruptcy is intended to create an orderly and equitable settlement of the debtor's obligations.

Key Takeaways

Voluntary bankruptcy is a bankruptcy proceeding that a debtor initiates because they cannot satisfy the debt.
This type of bankruptcy is different than an involuntary bankruptcy, which is a process originating from creditors.
Involuntary and technical are two other forms of bankruptcy.
During involuntary bankruptcy, a creditor can force a debtor into court in order to get paid.
Voluntary bankruptcy is more common than other forms of bankruptcy.

How Voluntary Bankruptcy Works

Voluntary bankruptcy is a bankruptcy proceeding that a debtor, who knows that they cannot satisfy the debt requirements of its 澳洲幸运5官方开奖结果体彩网:creditors, initiates with a court.

Voluntary bankruptcy typically commences when and if a debtor finds no other solution to their dire financial situation. Filing for voluntary bankruptcy differs from filing for 澳洲幸运5官方开奖结果体彩网:involuntary bankruptcy, which oc♔curs when one or more creditors petitions a court to judge the debtor as insolvent (unable to pay).

Voluntary Bankruptc♋y and Other Forms of Bankruptcy

In ad⛄dition to voluntary bankruptcy, other forms of bankruptcy exist, including involuntar൩y bankruptcy, and technical bankruptcy.

Important

Bankruptcy filings vary among states, which can lead to higher or lower filing fees, depending on the location of the f⛎iling.

Creditors request iꦇnvoluntary bankruptcy of debtors when they will not be paid without bankruptcy proceedings and need a legal requirement in order to forceꦓ the debtor to pay. A debtor must have attained a certain level of debt for a creditor to request an involuntary bankruptcy. This level will vary, depending on if the debtor is an individual or corporation.

In a technical bankruptcy, an individual or company has defaulted on their financial obligations, yeಞt this has not been dec𝓡lared in court.

Voluntary Bankruptcy and Corporations

When a corporation goes bankrupt, either voluntarily or involuntarily, there is a specific series of events that occur for all stakeholders to receive due payments. This begins with distributing assets to 澳洲幸运5官方开奖结果体彩网:secured creditors, who have collateral on loan to the business.

If they cannot fetch a market price for the collateral (𒀰which has likely depreciated over time), secured creditors caꦦn recoup some of the balance from the company’s remaining liquid assets.

Secured creditors are followed by 澳洲幸运5官方开奖结果体彩网:unsecured creditors—those who have loaned funds to the company (i.e., bondholders, employees who are owed unpaid wages, and the government, if taxes are owed). Preferred and common shareholders, i𒈔n that order, receive any outstanding assets, if any remain.

Various types of bankruptcy that a corporation can declare include Chapter 7 bankruptcy, which involves liquidation of assets; Chapter 11, which deals with corporate reorganizations; and Chapter 13, which is debt repayment with lowered debt 澳洲幸运5官方开奖结果体彩网:covenants or payment terms.

Of all the types of⛦ bankruptcy, voluntary bankruptcy is the most common.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

United States Courts. "." Accessed Jan. 27, 2021.

澳洲幸运5官方开奖结果体彩网