What Is Voluntary Bankruptcy?

Voluntary bankruptcy may be the only solution to spiraling debt.

Voluntary bankruptcy is when a debtor finds that his debts are too great to repay and so seeks to legally declare that he is no longer able to pay them. When there seems to be no other solution to his out-of-control debt, the debtor seeks protection from the court system.

Reasons

There are a number of circumstances that lead individuals to declare bankruptcy, including a prolonged illness resulting in large hospital bills, a divorce, an extended period of unemployment and poor financial planning where the debtor has failed to responsibly manage credit and assets.

Process

The process begins with the debtor filing for bankruptcy with the courts. The bankruptcy process does not totally eliminate the debtor from all financial obligations. Generally, the debtor will be given a grace period--a longer period of time to repay all or partial debts. Voluntary bankruptcy works best if it is filed before creditors seek action by suing you through the involuntary bankruptcy process.

Advice

Before seeking voluntary bankruptcy, the debtor should seek the advice of a lawyer. A qualified bankruptcy attorney can advise the debtor about what can and cannot be included in the action. The bankruptcy attorney will advise the debtor about which assets can be sold to partially settle her debts.

Chapters

Your legal counsel will help you to decide which bankruptcy chapter is appropriate to file your debts with the court. Chapters 7 and 13 are the chapters that appeal more to individuals with uncontrollable debt and wish to pursue voluntary bankruptcy. A trustee must be appointed when filing for Chapter 7. The trustee will be responsible for liquidating all assets, and the proceeds will go toward paying off creditors.

When filing Chapter 13, the debtor will have five years to pay off his creditors by means of regular monthly payments. The debtor will retain all property during the repayment period. Payments will be made to the Chapter 13 trustee and can range anywhere from 10 percent to 100 percent of your monthly income, depending on the amount of debt and your income level.

Goal

The goal of voluntary bankruptcy is to allow the debtor to reduce her large amount of debt and start anew with a cleaner financial record. But bankruptcy can come with personal ramifications. By filing bankruptcy, the individual's image could become tarnished. All bankruptcy proceedings and the name of the individual filing for bankruptcy is recorded as public record in the local newspaper.

Filing

Any person in the United States who has a residence or a business or owns a property can file for bankruptcy. "Person" includes an individual, a partnership and/or corporation as long as the entity is not a governmental unit. If you feel that your finances are out of control, seek the advice of a bankruptcy attorney before filing for voluntary bankruptcy with the court.

References

• Wise Geek: What Is Voluntary Bankruptcy?
• LawDog Bankruptcy: Voluntary and Involuntary Bankruptcy
• University of Maryland University College: The Four 'Chapters' of Bankruptcy