The Difference Between Voluntary & Involuntary Bankruptcy

by Vanessa Padgalskas
The U.S. Bankruptcy Court has sole jurisdiction over bankruptcy cases.

The U.S. Bankruptcy Court has sole jurisdiction over bankruptcy cases.

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A bankruptcy may be the only way to get out from under your debt, but it can have severe consequences on your credit score. When you think of bankruptcy, you most likely think of voluntary bankruptcy, which is initiated by an individual or business. But a bankruptcy may also be initiated by a creditor. This is known as an involuntary bankruptcy.

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Voluntary Bankruptcy

Voluntary bankruptcies are most commonly filed by individuals or businesses under Chapter 7 of the Bankruptcy Code. Filing Chapter 7 bankruptcy is a way to discharge your unsecured debts, the money you owe that is not secured by collateral. Creditors are prohibited from collecting on debts that are discharged in bankruptcy.

Involuntary Bankruptcy

Most involuntary bankruptcies are filed against businesses. But one or more creditors can file a petition against an individual and ask the court to declare the debtor bankrupt. Involuntary bankruptcy can only be filed under Chapter 7 or Chapter 11. If the debtor does not object to the bankruptcy petition, the bankruptcy will proceed. If the debtor objects, the court will first hold hearings to determine if the creditor's petition was filed in good faith.