Bankruptcy often carries a stigma that keeps people from considering it as an option for debt relief. However, there are times when it’s the right solution for consumers who are struggling with more debt than income as it provides court protection and a chance to rebuild credit. Here are the differences between voluntary and involuntary bankruptcy and common scenarios for each.
If your financial circumstances are extremely challenging, the effort to avoid bankruptcy can be exhausting. Robert Haupt, a bankruptcy attorney with Lathrop Gage LLP, offers an analogy: “It takes almost as much energy to tread water as to swim. Struggling with bills is treading water.” And, if you need to file bankruptcy, you’ll be among millions of Americans who’ve also made that decision.
What is bankruptcy?
Bankruptcy laws give those with more debt than they can repay a way to get a fresh start. Depending upon the type of bankruptcy filed, the consumer can gain court-ordered protection from creditors, discharge unsecured debts entirely, or enter an organized repayment plan. There are several types of bankruptcies, but Chapter 7 and Chapter 13 are the most common forms that an individual or married couple can file. Chapter 11 is an option for those with a large amount of debt and whose bankruptcy case will be complicated.
You can make the choice to file bankruptcy, i.e. voluntarily, and do so yourself or through an attorney. Despite the stigma of bankruptcy, there can also be a sense of relief to taking this step towards resolving your debt. Haupt explains, “As soon as you file bankruptcy, you are protected [by the courts]. So, there’s an emotional benefit to bankruptcy that you don’t necessarily get from the other debt relief.”
You must qualify for Chapter 7 and, if approved, may be forced to liquidate non-exempt assets. If you’re not approved, you may choose to file Chapter 13, which will require that you set up a rigid repayment plan.
As you make this decision, keep in mind that bankruptcy stays on your credit for seven to 10 years, which can delay your short-term financial goals and disqualify you for certain jobs.
If bankruptcy is the right solution for your debt struggles, delaying filing may be causing you unnecessary challenges. Michael Bovee, co-founder of Resolve, shares this client experience: “I worked with a couple who were adamantly opposed to filing Chapter 7 bankruptcy. Their reasoning was sound, and they thought they could gut out the debt settlements they were trying to follow through on. One unexpected expense slowed down their ability to save fast enough to settle with an aggressive creditor before they sued in court to collect. That event allowed me to get through to them about reconsidering Chapter 7. Months after they get their discharge in Chapter 7, and relief from all unsecured creditors, including the one that sued, they called to tell me how much relief they felt, and how happy they were to be focused on their future already, and not still slugging it out with trying to save up money to negotiate with creditors.”
Although rare, there are times when creditors file a petition with the courts to force someone who owes them money into Chapter 7 or Chapter 11 bankruptcy. Depending on your amount of debt and number of accounts, it may require only one creditor to file or a group of at least three.
If an involuntary bankruptcy is filed against you, Haupt recommends you get an attorney as quickly as possible. He explains, “Be prepared to show why an involuntary filing is inappropriate. This is a big deal — if the involuntary case is dismissed against the objection of the petitioning creditors, those creditors can be subject to fees and costs in favor of the debtor, and other possible relief as well.”
You also have the choice to accept the bankruptcy as a solution to your debt problems. It’s recommended to consult with a bankruptcy attorney to determine what’s best for your situation.
How Resolve can help
If you’re dealing with debt and not sure what to do, we’re here to help. Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.