What is Involuntary Bankruptcy?

Contrary to popular belief, a bankruptcy is not always a choice initiated by the debtor. In some cases, a business or person in debt can be legally compelled to file bankruptcy based on a request made by creditors. Creditors may argue that the best approach to collecting unpaid debts is through the court-guided bankruptcy process. With valid justification, a petition for bankruptcy can be filed on behalf of the creditors. If approved by the court, the result will be an involuntary bankruptcy. In short, an involuntary bankruptcy is one initiated by the creditor instead of the debtor.

In general, this form of bankruptcy is relatively rare – very few businesses or individuals actually get forced into an involuntary bankruptcy. Still, as an informed debtor, it is important to know how to deal with the threat of involuntary bankruptcy and how to take action if it becomes a reality.

When can a creditor petition for involuntary bankruptcy?

There are very specific conditions that are needed in order for a creditor to successfully petition for involuntary bankruptcy.  To begin with, there is a requirement for the number of creditors needed to start the process. If the debtor has less than 12 creditors, an involuntary bankruptcy petition can be filed by a single creditor. If the creditor has more than 12 creditors, at least three creditors must be willing to file the involuntary bankruptcy petition together.

There are also several debt requirements. Involuntary bankruptcy requires that the debtor owe and has missed payments on more than $14,425 before creditors can file a petition. Additionally, the debt needs to be unsecured. That means the debtor has no collateral on the debt that it could simply repossess.  A creditor holding a mortgage on a house, for example, would be ineligible since the house can be repossessed.

Finally, only certain types of debtors can be forced into an involuntary bankruptcy. Several types of debtors are excluded, namely farmers, bankers, insurance companies, and credit unions. Individual debtors can also be forced into bankruptcy, but as a general rule, creditors usually will only press for involuntary bankruptcy for businesses.

Can I stop the involuntary bankruptcy?

Once a creditor has petitioned for involuntary bankruptcy, the case proceeds to court where it will be evaluated. At this point, the debtor will be contacted and their response will be sought. For 20 days, the debtor can respond to the court with their objections. If objections are presented to the court in time, a hearing will be held between the debtor and creditor. To defend themselves against the involuntary bankruptcy, debtors may try to prove that they will be able to pay the debts, that the creditor did not meet the requirements, or that the creditor is otherwise acting in bad faith.

If I am forced to file, which chapter of bankruptcy will it be?

Three chapters of bankruptcy can be filed in cases of involuntary bankruptcy: Chapter 7, Chapter 11 and Chapter 13. The type of bankruptcy for your case depends on the facts of your case and your eligibility for each chapter.

Getting an attorney to help

If you know you are facing an involuntary bankruptcy, the best course of action is to contact a bankruptcy lawyer immediately for help. Depending on the facts of your case, a lawyer may be able to stop the involuntary bankruptcy from being enforced. If not, the lawyer will be able to help you make decisions on how to negotiate with creditors or start the bankruptcy process.