Bankruptcy Questions: Understanding Involuntary Bankruptcy

Involuntary bankruptcy occurs when a debtor's creditors petition Bankruptcy Court to force the debtor into bankruptcy. Debtors can hire bankruptcy lawyers to appeal involuntary bankruptcies.

On the surface, involuntary bankruptcies seem counterproductive. Why would creditors, who benefit from solvent debtors, force a debtor into involuntary bankruptcy?

Creditors who file a petition for involuntary bankruptcy have two reasons. If Bankruptcy Court authorizes an involuntary bankruptcy, the debtor's assets are frozen. Thus, the debtor cannot expend his remaining assets and then file for voluntary bankruptcy. In other words, involuntary bankruptcies offer creditors a chance to recover at least a portion of their losses when the debtor's frozen assets are liquidated.

Secondly, involuntary bankruptcy forces a debtor to meet with all creditors. Prior to the Bankruptcy Court’s ruling, the debtor may have chosen to deal only with the most aggressive creditors. In a Bankruptcy Court setting, he must deal with all creditors.

Creditors cannot simply instruct their bankruptcy lawyers to petition for an involuntary bankruptcy. The debtor must fulfill certain criteria. Creditors may petition for involuntary bankruptcy if the debtor regularly misses payments, misses large payments or simply does not pay debts.

Petitions for involuntary bankruptcy can also occur if the debtor's assets became the responsibility of a custodian or trustee within 120 days of the petition filing.

Bankruptcy Court considers debt load when creditors petition for involuntary bankruptcy. If a debtor owes 12 or more creditors, he must owe three of those creditors $10,775 or more before involuntary bankruptcy is considered.

When the debtor has less than 12 creditors, he must owe at least one creditor $10,775 or more before bankruptcy lawyers can petition for involuntary bankruptcy.

Involuntary bankruptcy can be brought against most debtors, but there are some exceptions. Bankruptcy Court law does not allow the filing of involuntary bankruptcies against:

When Bankruptcy Court issues an involuntary bankruptcy, the court clerk issues a summons to the debtor. The debtor has 20 days to contest the court's decision. If no action is taken during this time, the bankruptcy proceeds.

Involuntary bankruptcies can be pursued under either Chapter 7 or Chapter 11 of the Bankruptcy Code. Under Chapter 7, the debtor's assets are liquidated and divided among creditors whose claims are recognized by the Bankruptcy Court.

If the debtor is a business, an involuntary bankruptcy under Chapter 7 closes the business in order to liquidate assets.

Involuntary bankruptcy can also be filed as a Chapter 11 bankruptcy, the form of bankruptcy normally used for businesses. Under Chapter 11, the Bankruptcy Court creates a financial reorganization plan for the debtor, allowing the debtor to remain in business and pay creditors with the business’ cash flow.

A debtor summoned to Bankruptcy Court to answer an involuntary bankruptcy petition is well-advised to seek out bankruptcy lawyers. Bankruptcy lawyers are better qualified to deal with the intricacies of bankruptcy law.

Debts used to justify involuntary bankruptcy cannot be subject to an ongoing dispute. If there is any question of whether a debtor is liable for credit, bankruptcy lawyers may be able to get the petition overturned.

Creditors who file misleading or fraudulent involuntary bankruptcies face repercussions from Bankruptcy Court. The court can order creditors to pay legal costs, bankruptcy lawyers' fees and additional damages.

Resources

Avery, W. (n.d.). Facing Involuntary Bankruptcy. Retrieved December 19, 2007, from the Lawyers.com Web site: bankruptcy.lawyers.com/Facing-Involuntary-Bankruptcy.html.

Lawdog (n.d.). Involuntary Bankruptcy. Retrieved December 19, 2007, from the Lawdog Web site: www.lawdog.com/bkrcy/lib2a1.htm#Involuntary.