DEFINITION of 'Voluntary Bankruptcy'

Voluntary bankruptcy is a type of bankruptcy where an insolvent debtor brings the petition to a court to declare bankruptcy because he or she (in the case of an individual) or it (in the case of a business entity) is unable to pay off debts. The bankruptcy is intended to create an orderly and equitable settlement of the debtor's obligations.

BREAKING DOWN 'Voluntary Bankruptcy'

Voluntary bankruptcy is a bankruptcy proceeding that a debtor, who knows that they will not be able to satisfy the debt requirements of creditors and initiates. Voluntary bankruptcy typically commences when and if a debtor finds no other solution to their dire financial situation. Voluntary bankruptcy differs from 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. In involuntary bankruptcy, creditors request this 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 remaining 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. In addition, bankruptcy filing vary among states. This can lead to higher or lower filing fees.

RELATED TERMS
  1. 341 Meeting

    A 341 meeting is a meeting of creditors that takes place after ...
  2. Bankruptcy

    Bankruptcy is the legal proceeding involving a person or business ...
  3. Bankruptcy Court

    Bankruptcy court is a specific kind of federal court that deals ...
  4. Bankruptcy Trustee

    Bankruptcy trustee is a person appointed by the United States ...
  5. Bankruptcy Financing

    Bankruptcy financing is financing arranged by a company while ...
  6. Bankruptcy Abuse Prevention And ...

    BAPCPA was passed by Congress and signed into law by President ...
Related Articles
  1. Taxes

    Changing The Face Of Bankruptcy

    A 2005 law attempts to unmask fraudulent debtors and still save those who are struggling. Will it affect you?
  2. Taxes

    When To Declare Bankruptcy

    When is bankruptcy the best or only route– and when is it better to look at alternative solutions? And should you always hire a lawyer?
  3. Financial Advisor

    Corporate bankruptcy: An overview

    When public company files for corporate bankruptcy, the bondholders are first in line to receive their share back. Equity holders on the other hand, are second in line to bondholders when a corporate ...
  4. Personal Finance

    What You Need To Know About Bankruptcy

    Don't choose this last-resort option until you learn how it will affect your future.
  5. Personal Finance

    Life After Bankruptcy

    Find out what you have to look forward to after filing for Chapter 7 or 13.
  6. Investing

    5 Energy Companies Crushed by Low Oil in 2016

    Oil companies globally are at risk of slipping into bankruptcy, and many of these businesses could disappear, leaving the sector worse off than in 2008.
  7. Small Business

    The 5 Biggest Oil Bankruptcies of All Time (CVX, OGXP3.SA)

    Learn about the five largest bankruptcies in the oil industry. With oil prices in a slump and a global oversupply of oil, more bankruptcies loom on the horizon.
  8. Taxes

    7 Decisions That Lead To Bankruptcy In The UK

    In the past three years, personal bankruptcies have been on the rise throughout the U.K. Here's how it happens.
  9. Investing

    Buying a House After Bankruptcy? It Is Possible!

    Buying a house after bankruptcy is not impossible. It just takes time to repair your credit score and demonstrate you're a good risk for a mortgage.
RELATED FAQS
  1. What's the Differences Between Chapter 7 and Chapter 11?

    Chapter 7 bankruptcy is sometimes called liquidation bankruptcy, while Chapter 11 bankruptcy is called rehabilitation bankruptcy. Read Answer >>
  2. How does chapter 11 bankruptcy affect a company's stocks and bonds?

    Learn more about what happens to companies that file for chapter 11 bankruptcy protection - and how it differs from other ... Read Answer >>
Trading Center