Future Business Leaders of America (FBLA) Business Law Practice Exam

What occurs during voluntary bankruptcy?

1. A debtor decides to liquidate all assets without court intervention

2. A debtor files for bankruptcy to eliminate or reduce the burden of debt

3. A business automatically dissolves due to liabilities

4. A creditor forces a debtor into bankruptcy proceedings

The correct answer is: A debtor files for bankruptcy to eliminate or reduce the burden of debt

During voluntary bankruptcy, a debtor actively seeks relief from overwhelming financial obligations by filing for bankruptcy. This process is initiated by the debtor themselves, often with the goal of eliminating or reducing their debt burden through various bankruptcy procedures, such as Chapter 7 or Chapter 13 in the United States. In this context, the debtor appears before a bankruptcy court, which oversees the case and ensures that the legal process is followed. By filing for voluntary bankruptcy, the debtor can obtain a fresh financial start, often through either the liquidation of assets to pay off creditors or a repayment plan to settle debts over time. This self-initiated action grants the debtor protection from creditors, putting an automatic stay on collections, and allows them to negotiate manageable terms for their financial recovery. The other options do not accurately describe voluntary bankruptcy. Liquidating assets without court intervention suggests a more informal process that does not involve the legal protections and structured proceedings inherent in bankruptcy. An automatic dissolution of a business due to liabilities misunderstands the voluntary nature of the debtor's action; dissolution can occur but is not an inherent aspect of voluntary bankruptcy. Lastly, a creditor forcing a debtor into bankruptcy refers to an involuntary bankruptcy, which occurs when creditors file a petition against the debtor—a process distinctly different from voluntary