Voluntary bankruptcy is the filing of a legal case where a person submits a bankruptcy petition when they cannot pay their outstanding debts. If a person or company has exhausted all their options and cannot repay what they owe, they may file for voluntary bankruptcy.
Definition and Examples of Voluntary Bankruptcy
Voluntary bankruptcy occurs when an individual files a petition with the court to declare bankruptcy. This differs from involuntary bankruptcy, where a creditor or group of creditors files a petition with the court to declare bankruptcy against a debtor due to their inability to pay.
An individual or a company can declare voluntary bankruptcy. Let’s take a look at an example.
Suppose Chris was laid off last year. After losing his job, he fell behind on bills, including credit card payments, utility bills, and loans. Even with credit counseling assistance, he doesn’t have the means to repay his debts anytime soon. He is looking for a fresh start, and the sooner he can get a clean slate, the sooner he can work on rebuilding his credit. Without income and without a way to pay off his debts soon, Chris voluntarily declares bankruptcy.
How Voluntary Bankruptcy Works
An individual can declare voluntary bankruptcy in two different ways: Chapter 7 and Chapter 13 of the Bankruptcy Code.
Chapter 7 involves liquidating all or most of your debts by selling off your assets to repay your outstanding debts. If you do not have many assets, Chapter 7 is a relatively quick process, taking a few months from start to finish. In contrast, Chapter 13 does not completely liquidate your debts but restructures them. The reorganization process can take many years to complete.
Chapter 13 is typically used when there are assets such as a house involved. This can help avoid losing your home through liquidation in Chapter 7, which is possible.
Let’s look at Chris as an example. Chris will file for Chapter 7 bankruptcy since he does not have many assets like a house or a car. He needs to provide a complete list of creditors and the amounts owed to them, as well as income (if any), assets, and a detailed list of expenses. Over the next few months, the court will hold meetings with Chris and creditors to determine if he qualifies. If the court finds him eligible, he will be released from his responsibility for the outstanding debts.
Process of Filing a Voluntary Bankruptcy Petition
Before a person can file for bankruptcy, they will need to receive credit counseling within 180 days before filing the petition. This allows the court the opportunity to review your financial situation and determine if you have exhausted all other options before obtaining a fresh start.
Once an individual files for bankruptcy – whether under Chapter 7 or Chapter 13 – they will need to prove to the court that they have no means of paying their outstanding debts. To do this, they must submit:
- Proof of current income
- Proof of current expenses
- Outstanding assets, debts, and obligations
- Recent tax returns
- Credit counseling certificate
- Statement of financial affairs
In addition to the initial filing fee of $245, both Chapter 7 and Chapter 13 incur various fees for continuing to process the bankruptcy filing, along with administrative fees. In total, the cost of filing is $335. Although generally paid as a lump sum when filing, there is a possibility of fee waivers or paying in installments.
Once voluntary bankruptcy is filed, most debt collections will stop due to an automatic stay until the bankruptcy process is completed. At this point, the court will appoint a bankruptcy trustee or designated neutral party to manage the case. In Chapter 7, the debtor may retain some exempt assets, but the trustee liquidates the rest of the assets. In this case, the trustee will sell (or liquidate) the debtor’s property, if any, to pay for the qualifying debts.
In
When Chapter 7 liquidates, Chapter 13 reorganizes, as mentioned earlier. With Chapter 13, individuals who own assets like a house or a car will not lose their possessions. However, the process takes longer to complete and there are restrictions on debts. For example, unsecured debts must be less than $394,725, and secured debts must be less than $1,184,200. These limits are adjusted periodically to reflect changes in the consumer price index.
Chapter 13 bankruptcy is a good option for individuals who already have a regular income and plan to repay all their debts in a new and restructured way. Payments are typically made over three to five years.
Filing for Chapter 13 requires the individual (or in the case of a small business, the sole proprietorship) to propose their own repayment plan. Even if the plan is not approved, debtors must begin making payments to the trustee within one month of filing for voluntary bankruptcy. All creditors must approve the plan in advance. When payments are made, they are either done by the individual themselves or through payroll deductions to ensure that the payments are made on time.
The process is completed when the debtor is discharged from personal liability for most of their debts. This means that creditors cannot pursue individuals who have successfully gone through bankruptcy, although this varies based on each individual’s bankruptcy case.
Please note that there are certain cases that may be dismissed. Due to the complexity of Chapter 13 bankruptcy, debtors should seek legal advice before reaching that stage of the process.
Takeaway
You can file for voluntary bankruptcy to get rid of most – if not all – of your outstanding debts. To qualify for voluntary bankruptcy, you will need to prove that you do not earn enough money to repay old debts and that you have exhausted all other financial resources. Your assets and outstanding debts will determine which chapter you file: Chapter 7 (liquidation) or Chapter 13 (reorganization). Not all bankruptcies are liquidated, and you may still be liable for some debts that are not discharged in bankruptcy, such as student loans.
Source: https://www.thebalancemoney.com/what-is-voluntary-bankruptcy-5189093
Leave a Reply