Involuntary Bankruptcy

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What Is Involuntary Bankruptcy?

Involuntary bankruptcy laws are intended to protect creditors. Creditors file this type of bankruptcy against businesses to recover amounts that they are owed. An involuntary bankruptcy is a type of bankruptcy that is filed by creditors and not by the individual or business that owes the debt.

Involuntary bankruptcies are not common, and when they are filed, they are usually filed against businesses. If a debtor is not paying debts that they owe, but has assets that the creditors can use to pay off the debt, then an involuntary bankruptcy would be filed. This would allow the creditors to get paid when they know that they will not be paid in any other way.

Involuntary bankruptcy against individuals is allowed, but is very uncommon. Most individuals, who have debt, do not have any assets to pay off the debt owed which makes an involuntary bankruptcy very useless for creditors. Individuals who are very wealthy or who have a lot of assets and substantial debts are the most likely the people who are targets of an involuntary bankruptcy. 

When Is an Involuntary Bankruptcy Filed?

When a business owes its creditor money and the creditor feels that they will not recover their money, the creditor may file for an involuntary bankruptcy. The involuntary bankruptcy will dissolve the business and pay the creditor. An involuntary bankruptcy starts when the creditor files a petition with the U.S bankruptcy court. After the petition is filed, the debtor has 20 days to respond to the petition.

If the debtor does not respond to the petition within 20 days, the court will allow the bankruptcy and the debtor will be required to participate.

If the debtor does respond, a bankruptcy hearing will be set, and if the judge decides based on the evidence that the petition was filed in good faith and that the debtor is not paying the debt that is owed to the creditor, the judge will order that the bankruptcy to proceed. If the judge finds in the debtor's favor, the judge will then dismiss the case and would require the creditor that filed the case to pay the debtor's costs and fees for the proceedings.

However, the creditor will only be able to collect money if the business indeed had money initially to pay the creditor back prior to the involuntary bankruptcy. Moreover, this depends on the creditor’s priority rights to the bankruptcy proceeds.

What Are the Consequences of an Involuntary Bankruptcy?

For creditors, they are only allowed to file a certain amount of involuntary bankruptcies against businesses. Generally, the creditors cannot dispute the amount that they initially asked for.
In addition, creditors have a more difficult time forcing a debtor individual into involuntary bankruptcy. There are minimum amounts of debt that needs to be owed and the numbers must be met in order for the creditor to file a petition for an involuntary bankruptcy against the debtor. These numbers vary depending on whether the debtor is an individual or a business.

Do I Need a Lawyer?

A bankruptcy lawyer can help you throughout the process. He can help you defend against the involuntary bankruptcy and even reduce your liability.

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Last Modified: 08-04-2015 12:18 PM PDT

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