Voluntary Bankruptcy

By 
LUCAS DOWNEY
 
 
Reviewed by 
THOMAS J. CATALANO
 
 
Updated Jan 28, 2021
What Is Voluntary Bankruptcy?
Voluntary bankruptcy is a type of bankruptcy where an insolvent debtor brings
the petition to a court to declare 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 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 involuntary bankruptcy, which occurs when one or more creditors
petitions a court to judge the debtor as insolvent (unable to pay).

Voluntary Bankruptcy and Other Forms of Bankruptcy

In addition to voluntary bankruptcy, other forms of bankruptcy exist, including
involuntary bankruptcy, and technical bankruptcy.

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

Creditors request involuntary bankruptcy of debtors when they will not be paid
without bankruptcy proceedings and need a legal requirement in order to force
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, yet this has not been declared 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 secured creditors, who have collateral on
loan to the business.

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

Secured creditors are followed by 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, in 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 covenants or payment terms.1

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