Voluntary bankruptcy is a legal proceeding initiated by a debtor who files a petition for bankruptcy in the appropriate U.S. district court under the U.S. Bankruptcy Code. This form of bankruptcy allows an insolvent individual or business to seek relief from its debts. It stands in contrast to involuntary bankruptcy, where creditors file the petition to have the debtor declared insolvent.
Legal Framework
Voluntary bankruptcy proceedings are governed by Title 11 of the United States Code, commonly referred to as the Bankruptcy Code. The two most pivotal chapters pertaining to business and individual bankruptcy filings include:
- Chapter 7: Often called “liquidation bankruptcy,” this chapter involves the sale of a debtor’s non-exempt assets by a trustee. The proceeds are used to pay off creditors.
- Chapter 13: Known as “reorganization bankruptcy,” it allows individuals with regular income to develop a plan to repay all or part of their debts.
Filing Process
- Petition Filing: The debtor initiates the process by filing a petition in the relevant U.S. bankruptcy court. This petition includes a detailed description of assets, liabilities, income, and expenditures.
- Automatic Stay: Upon filing, an automatic stay is granted that halts most collection actions against the debtor or the debtor’s property.
- Trustee Appointment: A trustee is appointed to oversee the bankruptcy case.
- Meeting of Creditors: Known as the 341 meeting, creditors have the opportunity to question the debtor about the financial situation and the proposed bankruptcy plan.
- Discharge of Debts: Depending on the chapter filed, the debtor may receive a discharge of unsecured debts or a court-approved repayment plan.
Historical Context
The framework for modern bankruptcy in the United States was largely established with the Bankruptcy Reform Act of 1978. This Act replaced the prior Bankruptcy Act of 1898, aiming to create a more balanced approach to handling debts and providing relief to debtors while protecting creditors’ rights.
Comparison with Involuntary Bankruptcy
- Voluntary Bankruptcy: Initiated by the debtor, who acknowledges insolvency and seeks legal protection and relief.
- Involuntary Bankruptcy: Initiated by creditors who petition the court to declare a debtor insolvent, usually due to unpaid debts and the belief that liquidation or reorganization is necessary.
Related Terms
- Insolvency: The state of being unable to pay debts owed.
- Chapter 11: A reorganization bankruptcy typically used by businesses, allowing them to keep operating while reorganizing their debts.
- Discharge: The release of a debtor from personal liability for certain types of debts.
- Automatic Stay: An injunction that halts actions by creditors to collect debts from the debtor who has declared bankruptcy.
FAQs
What is the role of a trustee in voluntary bankruptcy?
How does voluntary bankruptcy affect a debtor’s credit score?
What protections does a debtor receive upon filing for voluntary bankruptcy?
When should an individual or business consider filing for voluntary bankruptcy?
References
- Bankruptcy Code - Title 11 of the United States Code
- United States Courts: Federal Rules of Bankruptcy Procedure
- Bankruptcy Reform Act of 1978
Summary
Voluntary bankruptcy provides a legal avenue for individuals and businesses to obtain relief from insurmountable debt. By filing a petition for bankruptcy, a debtor can achieve a fresh start, albeit with significant repercussions to their creditworthiness. The structured process, administered by a trustee and guided by the federal Bankruptcy Code, ensures both the debtor’s and creditors’ interests are balanced. Understanding the nuances and legal implications of voluntary bankruptcy is crucial for making informed financial decisions.
