In this video, I explain the involuntary petition for chapter 7 and chapter bankruptcy as covered on the CPA exam.
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Involuntary bankruptcy is a legal process initiated by creditors rather than the debtor. It occurs when creditors petition the court to declare a debtor bankrupt, forcing them into bankruptcy proceedings. This process can happen under Chapter 7 or Chapter 11 of the United States Bankruptcy Code, each with distinct characteristics:

Involuntary Chapter 7 Bankruptcy:

Nature: Chapter 7 is known as liquidation bankruptcy. In this process, a debtor's nonexempt assets are sold off to pay creditors.
Initiation: Creditors file a petition with the bankruptcy court. The debtor can contest the petition.
Eligibility: It's typically used for businesses that do not have a viable future or for individuals with limited income and high unsecured debts.
Outcome: If the court approves the petition, a trustee is appointed to oversee the liquidation of the debtor's assets and distribute the proceeds to creditors.
Involuntary Chapter 11 Bankruptcy:

Nature: Chapter 11 is known as reorganization bankruptcy. It allows businesses to continue operating while restructuring their debts.
Initiation: Like Chapter 7, creditors file a petition. The debtor can challenge this.
Eligibility: It's mainly used by businesses as it provides a way to reorganize debts while keeping the business alive.
Outcome: If the petition is approved, the debtor, usually a business, must propose a reorganization plan that details how it will handle its debts. The plan must be approved by the creditors and the court.
In both cases, the involuntary nature of the bankruptcy means that the debtor did not voluntarily choose to file for bankruptcy; instead, the creditors forced the issue due to unpaid debts. This process is generally seen as a last resort for creditors and is relatively rare compared to voluntary bankruptcy filings. The court examines the petition closely to ensure that the creditors have a valid claim and that the bankruptcy is indeed warranted.

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