While most debtors file for bankruptcy by choice, there are some situations in which creditors will force a debtor to file for bankruptcy involuntarily. This involves creditors filing the petition for bankruptcy on behalf of the debtor. An involuntary bankruptcy involves a business debtor more often than an individual debtor, although sometimes a wealthy individual may be targeted. This is because a creditor will find it worthwhile to go through this process only if the debtor has meaningful assets from which to collect. If a debtor does not have substantial assets, the automatic stay will shield most of their money and property, so a creditor probably will try to collect in other ways.
Setting Up an Involuntary Bankruptcy
A creditor can file a bankruptcy petition with the court only under Chapter 7 or Chapter 11. They cannot trigger the provisions of Chapter 13 or Chapter 12. In the petition, the creditor must explain that they are pursuing an involuntary bankruptcy on the debtor’s behalf because the debtor is failing to pay debts that are due, or because a custodian, receiver, or agent took control of the debtor’s property within the last 120 days to enforce a lien.
If you are a debtor for whom an involuntary bankruptcy petition has been filed, you can oppose the petition and show that the grounds alleged by the creditor are not justified. This will involve the creditor and the debtor presenting their case at a hearing before a judge. The judge will dismiss the petition if they find the debtor’s position persuasive. A debtor may receive compensation for their costs from the creditor that filed the petition if the judge dismisses it. Otherwise, the judge will keep the petition intact and move forward with the case.
If you choose not to oppose the petition, you will be brought into the proceedings as though you had filed for bankruptcy.
Limitations on Involuntary Bankruptcy
A single creditor often will not be allowed to file a petition for an involuntary bankruptcy. They can file a petition only if they are owed a certain threshold amount, which increases periodically, and if there are fewer than 12 unsecured creditors for that debtor. If the debtor has more than 12 unsecured creditors, meanwhile, at least three of them must participate in the bankruptcy petition, and they must meet a threshold amount of unsecured debt as a group, which also increases periodically. (Unsecured debt is debt that is not attached to a certain asset that a creditor can seize if the debtor fails to pay the debt. A creditor with a secured debt usually will not need to file an involuntary bankruptcy petition because they can simply take the asset.)
Moreover, creditors cannot pursue an involuntary bankruptcy petition if a dispute surrounds the debt on which they are trying to collect. They also cannot take this step if the debt is contingent, which means that it is based on an event that has not yet occurred.
Creditors cannot pursue an involuntary bankruptcy under any circumstances against farmers or certain types of organizations, such as non-profits, credit unions, insurers, and banks.