An involuntary bankruptcy occurs when unsecured creditors file a petition to place a debtor in bankruptcy. The petition can be filed under either the liquidation provisions of Chapter 7 or the reorganization provisions of Chapter 11. Filing the bankruptcy petition stops all creditor collection efforts, including the enforcement of judgment liens against property in the bankruptcy estate.

Filing an involuntary petition is most important in a Chapter 7 bankruptcy, in which all the debtor's secured and unsecured nonexempt property is placed in the bankruptcy estate for liquidation. The liquidation proceeds are used to satisfy creditor claims. If the judgment lien holder's collection efforts were not stopped, the lien holder could seize the property, removing it from the bankruptcy estate. This would mean fewer assets to liquidate and fewer proceeds to distribute among the other creditors.

(Choice A) Exempt property is not part of the bankruptcy estate. However, liens on exempt property can be discharged (terminated).

(Choice B) Filing the petition does not terminate all security interests in the property in the bankruptcy estate; however, they will eventually be terminated when the assets are sold in the liquidation.

(Choice C) Debtors can still incur new debt while in bankruptcy. This often occurs in Chapter 11 bankruptcies, in which the debtor still operates a business during the bankruptcy and needs to incur debt for ongoing operations.