The Difference Between Voluntary & Involuntary Bankruptcy

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 bankruptcies are most commonly filed by individuals or businesses under Chapter 7, Chapter 13 or Chapter 11 of the Bankruptcy Code. Filing bankruptcy is a way to discharge your unsecured debts, the money you owe that is not secured by collateral, and certain types of bankruptcy help you reorganize your debts. Creditors are prohibited from collecting on debts that are discharged in bankruptcy. Businesses do not receive a discharge in Chapter 7.

Read More: Stages of Bankruptcy

Most involuntary bankruptcies are filed against businesses. To file an involuntary case against a debtor with 12 or more creditors, at least three of those creditors with aggregate unsecured claims in excess of $16,750 as of 2019. If the debtor has fewer than 12 creditors, only one is needed to file an involuntary case, but that one creditor must be owed at least $16,750. These amounts increase every few years.

Involuntary bankruptcy can only be filed under Chapter 7 or Chapter 11 and only against a person or a commercial, moneyed business and not a farmer or a non-profit. The debtor must also qualify for the chapter under which the case is filed.

If the debtor does not object to the bankruptcy petition, the bankruptcy will proceed. If the debtor objects, the court will hold hearings to determine if the creditor's petition was filed in good faith, and if it finds that it was not, award monetary sanctions to the debtor and against the creditor before closing the case.