Involuntary bankruptcy is a proceeding through which an individual or business is requested to go into bankruptcy by their creditors even if the individual or business does not want to declare bankruptcy. Creditors who are seeking involuntary bankruptcy have to petition the court to initiate the proceedings and the debtor can file an objection.

When is Involuntary Bankruptcy Used?

Creditors who feel that they will not be paid if bankruptcy proceedings are not entered into can request an involuntary bankruptcy which will legally force the debtor to pay. However, for an involuntary bankruptcy to be requested, the debtor must have a certain amount of debt and the amount depends on whether the debtor is an individual or a business.

Bankruptcy offers an individual or business an opportunity to start fresh by forgiving debts that cannot be paid and it offers creditors an opportunity to obtain some measure of repayment based on the assets of the debtor which is available for liquidation.

Once a debtor is in bankruptcy, the automatic stay, which is an order prohibiting collection activities, prevents creditors from attempting to collect the debt on their own which leaves the creditors to share whatever gets recovered by the bankruptcy trustee appointed to the case.

Involuntary bankruptcies are largely filed against businesses when the creditor believes that the business can pay but refuses to do so. However, because most individuals in debt have few recoverable assets, involuntary bankruptcies against individuals are rare. Also, individuals can claim exemptions to protect at least some of their assets and keep those assets out of the hands of creditors in a bankruptcy case.

What are the Laws Regarding Involuntary Bankruptcy?

Involuntary bankruptcies are governed by Title 11 of the United States Code which is also known as the Bankruptcy Code. A creditor can commence an involuntary bankruptcy by filing an involuntary petition and the petition itself describes the requirements which the creditor has to satisfy.

A creditor cannot file an involuntary bankruptcy under Chapter 12 or Chapter 13 of the Bankruptcy Code and it can only be filed against an individual or business under Chapter 7 and Chapter 11 of the Bankruptcy Code. A debtor has 21 days to respond to a filing before the bankruptcy proceedings start.

However, if they fail to respond or if the bankruptcy court rules in favor of the creditors, then an order of relief is entered and the debtor is placed into bankruptcy. Also, a petition for involuntary bankruptcy filed by a creditor has to meet the following conditions:

  • It holds a claim against the debtor which is not contingent as to liability or the subject of a bona fide dispute as to liability or amount;
  • The debt in question equals at least $15,775 (as of March 2018); and
  • The petition shows that the debtor is generally not paying debts as they become due.

A petition for involuntary bankruptcy can be filed by a single qualifying creditor if the debtor has less than 12 qualifying creditors and if a debtor has 12 or more creditors, at least three creditors have to join the petition for involuntary bankruptcy.

Once the debtor responds to a petition for involuntary petition, the court will set a hearing and decide whether or not the bankruptcy should go forward. A judge who finds in favor of the debtor will dismiss the case and may also require a filing creditor to pay the debtor’s costs and fees.

What are the Options for Debtors When Filing for Bankruptcy?

Debtors can oppose the petition for involuntary bankruptcy. A debtor may often challenge the creditor’s standing to bring the petition, claim that the debts are subject to dispute or are otherwise not eligible and they can also attempt to bring evidence that they are paying their debts or that the petition was not brought in good faith.

The bankruptcy judge will determine whether to allow the involuntary petition to go forward based on the arguments of both sides. Debtors can also choose to convert the petition from an involuntary case to a voluntary one or the debtors can negotiate with the creditors to change the petition from a chapter 7 case to a chapter 11 reorganization case.

What are the Limitations of Involuntary Bankruptcy?

Involuntary bankruptcies are mostly filed against businesses which have assets available for liquidations and it is uncommon for involuntary bankruptcies to be filed against individuals unless they are wealthy and have a lot of property which is not exempt under bankruptcy laws.

Also, involuntary bankruptcies cannot be filed against banks, insurance companies, not-for-profit organizations, credit unions, farmers or family farmers.

Should I Contact a Lawyer If I am Facing an Involuntary Bankruptcy?

Bankruptcy laws can be complex and involuntary bankruptcies can be declared against businesses and certain individuals who are not paying their creditors.

If you are facing an involuntary bankruptcy, it is important to consult with an experienced bankruptcy attorney who can help you understand your rights and reduce your liability if possible.