Being in a financial-stressed situation, where you’re unable to pay your debts, can be a challenging experience. From incessant calls from creditors to sleepless nights, there’s always something depriving you of peace of mind. If other debt relief method fails, declaring bankruptcy might be the only option to ease your financial burden.
There are two major types of bankruptcy petitions: voluntary and involuntary. While both of these will be examined, this post’s primary focus is on voluntary bankruptcy.
What is Voluntary Bankruptcy?
As the name implies, voluntary bankruptcy is a type of bankruptcy instigated by the insolvent debtor. In this case, the debtor (which can either be an individual or a business) submits a petition to the court to declare bankruptcy.
If the worth of your assets and income is substantially lower than your debt, then it may be impractical to repay your debts. Rather than get deeper into the vicious cycle of debt, voluntary bankruptcy can help you start the journey of setting your financial life back in order.
On the other hand, an involuntary bankruptcy petition is instigated by the creditors. It usually occurs when the debtor refuses to declare bankruptcy. If creditors are unable to collect their debt through other means, they might be forced to submit a petition for bankruptcy on behalf of the debtor so that they can recover, at least, part of the money owed.
How Voluntary Bankruptcy Works
When we use the word ‘bankruptcy,’ in most cases, we are referring to ‘voluntary bankruptcy.’ This is because creditors are usually wary to file a bankruptcy on behalf of the debtor. After all, it doesn’t guarantee how much they’ll receive (if they receive any amount, and yet, they will have to pay for the filing fee).
If you know that you cannot meet the debt requirements of your creditors, then you can initiate a voluntary bankruptcy petition with the court. Voluntary bankruptcy typically begins when you cannot find a solution to your dire financial situation.
Types of Voluntary Bankruptcy
Three major types of voluntary bankruptcy can be filed:
- Chapter 7
Under Chapter 7, your unsecured debts may be written off. After filing under Chapter 7, the court appoints a trustee in charge of your estate. The trustee will act on your behalf to settle your creditor. The trustee sells your nonexempt assets and uses the money to pay off your creditors. After this process is complete, your remaining unsecured debts are written off. Chapter 7 bankruptcy will, however, hurt your credit score and remain in your credit report for 10 years, making it difficult to secure new loans in the future.
- Chapter 13
When you file under Chapter 13, a new repayment plan is created for you to pay back your debt within the next three to five years. As a result, none of your assets are sold by the trustee. However, you have to make sure to stick to the repayment plan. Chapter 13 bankruptcy will also hurt your credit score (however, with less impact than Chapter 7) and remain in your credit report for up to 7 years.
- Chapter 11
Chapter 11 bankruptcy is mainly used by companies. It can be thought of as the Chapter 13 equivalent for companies. It involves the reorganization of the company’s debts, business affairs, and assets. This helps the company to stay afloat as it sets its affairs in order.
It is important to note that under involuntary bankruptcy, creditors can only file under Chapter 7. The reason is that the goal is to liquidate some of the debtor’s assets so that they can recover, at least, a fraction of their debt.
Other Forms of Bankruptcy.
Other forms of bankruptcy exit. The two most common include involuntary and technical bankruptcy.
- Involuntary Bankruptcy
As we’ve highlighted earlier on, creditors may request an involuntary bankruptcy of debtors when they have refused to meet up to their obligations. However, certain requirements must be met before a creditor can request an involuntary bankruptcy.
First, creditors are only allowed to request under Chapter 7. Also, as of April 2016, a single creditor can file an involuntary case if the debtor has less than 12 unsecured creditors and the creditors have an unsecured claim of, at least, $15,775. Three or more creditors can file for an involuntary case is the debtor has more than 12 creditors and the creditors have an unsecured claim of $15,775 or more.
Before your creditors can request for involuntary bankruptcy, they first have to issue you a document called a ‘statutory demand’ to inform you of their intention to start a bankruptcy proceeding if you refuse to pay up your debt. After 21 days of issuing the statutory demand, the creditors can start the bankruptcy proceedings.
- Technical Bankruptcy
Technical bankruptcy is just a fancy term to describe a situation where a company or individual has defaulted on their debt obligations before it is being declared in court.
How Voluntary Bankruptcy affects Corporations
After a company declares bankruptcy, a series of events is initiated to start the settlement process. This starts with the liquidation of the company’s assets. There is an order to how stakeholders are settled in this process.
First, secured creditors seize the collateral used by the company to obtain the loan. Thereafter, they sell it to recoup their debts. However, due to depreciation, the value of the collateral is usually less than the amount of debt. If that’s the case, secured creditors will recoup some of the balance from the remaining liquid assets.
Unsecured creditors are then next in line. This includes bondholders, government (if taxes are owed), and unpaid wages for employees. After unsecured creditors are taken care of, preferred stockholders are settled, followed by common stockholders.
Note that the liquidation of the company’s asset only takes place under Chapter 7. Under Chapter 11, a debt repayment plan is created while the company stays afloat. Contact us today for debt relief assistance.