Legal Definitions - bankruptcy case

A bankruptcy case is the formal legal process that begins when an individual, a married couple, or a business files a petition with a special court to seek relief from their debts under federal bankruptcy laws. This process can be initiated voluntarily by the debtor or, in certain circumstances, involuntarily by their creditors, leading to a structured legal proceeding to manage financial obligations.

• Example 1: Voluntary Filing by an Individual

  Sarah, a freelance graphic designer, faced overwhelming medical bills after an unexpected illness, coupled with significant credit card debt from a period of unemployment. Despite her best efforts, she realized she could no longer make even minimum payments to her creditors.

  How this illustrates the term: Sarah decides to file a voluntary petition with the bankruptcy court. This act of filing officially commences a bankruptcy case, initiating the legal process under federal law to address her financial distress and potentially receive a discharge of her debts.

• Example 2: Voluntary Filing by a Business

  "The Daily Grind," a small, independent coffee shop, experienced a sharp decline in revenue after a major employer in their town relocated, causing a significant drop in foot traffic. The owners found themselves unable to pay their suppliers, rent, and employee wages, accumulating substantial business debt.

  How this illustrates the term: To prevent further financial collapse and attempt to reorganize its operations, the owners of The Daily Grind file a voluntary petition for bankruptcy. This action starts a bankruptcy case, allowing the business to either restructure its debts to continue operating or liquidate its assets in an orderly manner under court supervision.

• Example 3: Involuntary Filing by Creditors

  Precision Parts Inc., a manufacturing company, owed substantial amounts to several key suppliers for raw materials. Despite repeated demands and overdue invoices, Precision Parts Inc. failed to make payments for several months, and its financial situation appeared to be deteriorating rapidly.

  How this illustrates the term: Frustrated by the lack of payment and concerned about recovering their money, three of Precision Parts Inc.'s largest creditors collectively file an involuntary petition against the company. This filing commences a bankruptcy case, compelling Precision Parts Inc. into the legal process to address its financial obligations, even though the company itself did not choose to file.