Definition of Involuntary Bankruptcy
Involuntary bankruptcy is a tool used by creditors to deal with unreliable borrowers by forcing them to file for bankruptcy under the law. Involuntary bankruptcy is sought by creditors who do not wish to wait for borrowers to decide to file for bankruptcy themselves. They may face a borrower who is depleting assets or not paying debts as they become due, yet has assets that can be used to satisfy those debts.
How Involuntary Bankruptcy Works
Not all entities can be placed under involuntary bankruptcy. Involuntary bankruptcy is prohibited if the borrower is a bank, insurance company, non-profit organization, credit union, farmer, family farm, municipality, or another governmental unit. Most involuntary cases are against commercial borrowers. Involuntary cases against individuals are rare. Individuals can claim exemptions to protect some of their assets and keep those assets out of creditors’ hands in the event of bankruptcy. Unless the individual is wealthy and has a lot of unprotected assets, involuntary bankruptcy may not be feasible. Involuntary bankruptcy against companies is considered more likely to satisfy creditors because companies cannot exempt property.
How Many Creditors Are Needed?
If the borrower has 12 or fewer creditors, the involuntary petition can be filed by one creditor owed at least $16,750 (as of April 2019). The creditor cannot be an insider or involved or a beneficiary of a transfer avoidable. If the borrower has more than 12 creditors, then three creditors owed a total of $16,750 (as of April 2019) may file the petition. If the borrower is a partnership, there are additional criteria for filing the involuntary action.
Can the Borrower Oppose the Involuntary Petition?
The borrower can oppose the petition. Once the creditors file the petition, the borrower has 20 days to respond. The borrower often attacks the legal standing of the creditors who filed the petition, claiming that the debts are subject to dispute or otherwise not qualifying, and attempts to provide evidence that they are paying their debts, or that the petition was filed in bad faith.
Alternatives to Involuntary Bankruptcy
Borrowers can choose to convert the petition from an involuntary status to a voluntary status, or negotiate with creditors to allow the case to be filed as a reorganization under Chapter 11 if filed by creditors as a Chapter 7 case.
Key Takeaways
Involuntary bankruptcy is a tool that creditors can use to compel a non-paying borrower to take action. This tool facilitates immediate bankruptcy under Chapter 7 or reorganization under Chapter 11. A judge may determine that the filing is invalid and penalize the creditor. Most borrowers file voluntary bankruptcy petitions when faced with insurmountable debts.
Source: https://www.thebalancemoney.com/what-is-involuntary-bankruptcy-4160967
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