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What is Voluntary Bankruptcy?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 July 2018
  • Copyright Protected:
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    Conjecture Corporation
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Voluntary bankruptcy is the intentional decision of a debtor to legally declare that he or she is no longer able to pay outstanding debt. With this type of voluntary action, the debtor initiates the bankruptcy action by seeking protection from the court from creditors. Usually there is a period of time in which creditors are notified and the claim is investigated by the court. In time, a decision is made to approve or deny the bankruptcy request.

The decision of a debtor to voluntarily declare bankruptcy is different from the process of involuntary bankruptcy. In this scenario, it is creditors who pursue legal means to have the individual or business entity declared bankrupt in an effort to have assets seized and sold to partially settle outstanding debt. When creditors initiate the bankruptcy process, the debtor usually has to prove why the action should not be approved or demonstrate reasons why particular assets should not be sold to settle a portion of the debt.

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Generally, debtors consider voluntary bankruptcy only in situations where there appears to be no other viable solution. In some cases, the financial issues that led to the decision to file for bankruptcy are due to protracted illness, enormous hospital bills, divorce, or a prolonged period of unemployment. However, a bankrupt state may have its origins in a failure to manage credit and other assets in a responsible manner. In all situations, the ultimate goal is eliminate the debt and allow the individual to make a new start.

Depending on the laws governing involuntary and voluntary bankruptcy actions in a given country, the debtor may be able to retain certain assets. For example, many countries allow a debtor to hold on to assets that are deemed necessary to earn a living. In some areas of the world, it may also be possible to omit the family’s primary residence from the assets that must be sold to partially satisfy creditor claims. In other locations, certain types of loans, such as a mortgage, may be exempt from inclusion in the debt that will be settled by the bankruptcy action.

Because there is a great deal of variance between how bankruptcies are handled in different jurisdictions, it is essential that anyone choosing to file a voluntary bankruptcy seek legal counsel. A qualified bankruptcy attorney can advise the client on what can and cannot be included in the action, what assets are subject to sale in order to partially settle debt, and what type of bankruptcy action would be in the best interest of the client.

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