Voluntary Bankruptcy

Legal proceeding whereby a debtor voluntarily files a petition for relief from creditors in a federal bankruptcy court. The debtor's property is placed in the hands of a court appointed trustee, who distributes assets to pay debts owed to creditors. A business intending to remain in operation can act as its own trustee (called a Debtor in Possession) if no bankruptcy trustee is named. When a petition is filed, an automatic stay prohibits creditors from making further collection efforts until a debt has been discharged, a repayment plan is accepted by creditors, or a petition is dismissed by the bankruptcy court. Individuals and businesses other than railroads, municipalities, banks, and savings institutions can file petitions under any of the three main chapters in the bankruptcy code: a Chapter 7 Liquidation, in which the debtor's assets are sold to pay creditors; a Chapter 11 Reorganization normally filed by a business; or a Chapter 13 Wage Earner Plan filed by persons with regular income who agree to make partial payments toward their obligations. Contrast with Involuntary Bankruptcy. See also Bankruptcy; Creditors' Committee; Reaffirmation; Redemption.