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.

What is a Notice of Dismissal of Bankruptcy?

Bankruptcy is a legal process by which debtors may restructure or obtain relief from overwhelming debts and get a fresh start on building a positive economic future. The bankruptcy court process has stringent rules and timelines to insure the debtor and creditors are treated fairly. Failure to abide by these rules may lead to dismissal of the bankruptcy, but in most instances, the debtor will be allowed to refile.

Can You Include Returned Checks in Chapter 7?

When a debtor files for Chapter 7 bankruptcy, he must inform the court of all of his liabilities, including returned checks. Returned checks represent the debtor's unpaid debts. As such, they are dischargeable in bankruptcy, unless the creditor can prove fraud on the debtor's part.


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