The Difference Between Voluntary & Involuntary Bankruptcy

By Vanessa Padgalskas

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.

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.

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What Does It Mean if a Bankruptcy Is Lifted?

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Bankruptcy Fraud Penalties

Generally, fraud is dishonesty in some form, which is done with the intent that others rely on it so that you gain an advantage for yourself or cause a disadvantage to someone else. Since bankruptcy is intended to provide relief to the honest debtor and treat creditors as fairly as possible under the circumstances, bankruptcy fraud by any party involved in the process is taken very seriously. There are several penalties that can be applied.

Can Creditors Attempt to Get Money After a Discharge?

When you file a petition for bankruptcy, you are asking a federal court for protection from creditors and time to work out your financial difficulties. In a Chapter 7 case, the court authorizes a trustee to seize your assets and sell them in order to repay creditors. In a Chapter 13, the trustee sets up a repayment plan, taking into consideration your assets as well as your income. Unless the case is dismissed, both kinds of bankruptcy conclude with a cancellation of debts you owe to some — but not all — of your creditors.

Can You Go to Jail if You Get Denied a Bankruptcy Discharge?

A bankruptcy court's discharge releases you from the debts included in it. Federal and state laws don't allow you to include some debts, such as federal taxes, on your discharge. While bankruptcy usually doesn't involve jail time, you may face a criminal sentence if your discharge is denied for an illegal action you took in relation to your case.

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