Involuntary bankruptcy is a legal procedure through which creditors can force an individual or a business into bankruptcy proceedings, despite the debtor’s unwillingness to file. The exact criteria for forcing someone into involuntary bankruptcy can vary by country, and in the United States, by the type of bankruptcy chapter under which the case is filed (most commonly Chapter 7 or Chapter 11). However, there are some common elements that are generally required for creditors to initiate an involuntary bankruptcy.
In the United States, for example, the general criteria for creditors to force an individual or a business into involuntary bankruptcy under Chapter 7 or Chapter 11 are outlined in the Bankruptcy Code (specifically, 11 U.S.C. § 303). As of my knowledge cutoff in September 2021, some of the main requirements include:
- Number of Creditors:
- If the debtor has 12 or more creditors, at least three of these creditors must join the involuntary petition.
- If the debtor has fewer than 12 creditors, one creditor may file the petition.
- Amount of Debt:
- The creditors filing the petition must have claims that are not contingent (i.e., they are not dependent on a future event) and not subject to a bona fide dispute.
- These claims must also total a specific minimum amount, which is subject to change. As of 2021, this amount was at least $16,750 in unsecured debt.
- General Insolvency or Failure to Pay:
- The debtor is generally not paying its debts as they become due unless those debts are subject to a bona fide dispute.
- Ineligibility of Certain Debtors:
- Some entities, such as banks, insurance companies, and non-profit organizations, are not subject to involuntary bankruptcy.
- Good Faith Filing Requirement:
- The petitioning creditors must file the involuntary petition in good faith. A filing made to harass a debtor or to achieve a purpose other than an orderly liquidation or reorganization of the debtor’s estate may be considered a bad faith filing.
If the criteria for involuntary bankruptcy are met, and the debtor does not respond or contest the petition within a certain timeframe, the court may enter an order for relief and the bankruptcy proceedings will commence. If the debtor contests the petition, the court will determine whether the petition was filed under appropriate circumstances.
If the court finds that the involuntary petition was filed in bad faith, the petitioning creditors could be subject to penalties, including costs, attorney’s fees, and potentially damages for any losses caused by the improper filing.
It’s important to note that involuntary bankruptcy is a complex legal process and the specifics can vary between jurisdictions. Laws may have changed after my last update in September 2021, so it is essential to consult with a knowledgeable bankruptcy attorney or professional in your jurisdiction who can provide the most current and relevant advice based on your specific situation.
Video Transcript
Can Someone Really Force You Into Bankruptcy?
Let’s talk about what is called involuntary bankruptcy. Although rarely used, did you realize that someone you owe money to can force you into bankruptcy? It is called an involuntary bankruptcy. Basically, if you don’t pay your debts to a creditor, they have the option of forcing you into bankruptcy.
The main requirement here is that you are not paying your debts. Now there are some other requirements and there are some exclusions. For example, you can’t force a bank into bankruptcy. You can’t force a nonprofit into bankruptcy. There are some other exceptions that are there. But this is certainly a risk if you have substantial debts and you are not paying those debts, especially if you are not making a good faith effort to pay those debts. If a creditor wants, the creditor can spend money to force you into bankruptcy. “Creditor” is just a simple term for the person you owe money to. So, how that works is the creditor files in the bankruptcy court and asks the bankruptcy court to initiate an involuntary bankruptcy against you or your business.
Considerations and Limitations
Conversely, let’s imagine somebody owes you or your business money. You have the option of asking the bankruptcy court to commence an involuntary bankruptcy against the person who owes you money, the debtor. Now there are some reasons you may not want to do this. First off, it is expensive. There are legal fees involved. Second, it takes time. Third, the bankruptcy court will take a look at all the other creditors the person owes money to. And usually, it is divided up with a percentage to each creditor. How the bankruptcy court does that depends on the circumstances, but the bottom line is you might not get as much if you force that company or that person who owes you money into bankruptcy. You may be better off getting a settlement where they pay you a certain amount of money as a lump sum, or you can work out some other arrangement. But if they are just ignoring you, you can either sue them, or you can look at an involuntary bankruptcy, which essentially still requires you to prove in the bankruptcy court that they owe you money.
Seeking Legal Assistance
So typically, you are going to work with a sophisticated bankruptcy attorney to do this. This is not your classic bankruptcy attorney who helps people file for bankruptcy. Typically, it is an attorney who represents creditors in bankruptcies. These attorneys aren’t cheap. They typically have higher rates than most attorneys. They are often in larger law firms. So, if you are looking to force a person to pay you money, I recommend either working with an attorney who represents creditors in collections or looking for a creditors’ bankruptcy attorney. And most of the small bankruptcy firms represent lawyers who help people file for bankruptcy. What you are looking for is a law firm that will represent the creditor against an individual who owes the money.
Conclusion
Alright, if you would like to get notified about the next live session, you are welcome to subscribe to the Aaron Hall attorney YouTube channel. You are welcome to subscribe to our little reminder email system at AaronHall.com/free. You can also sign up and follow us on other social media sites. I am Aaron Hall, an attorney for business owners and entrepreneurial companies. It was a pleasure talking with you today and answering your questions from an educational perspective.
As I always say, before you rely on any of this, consult with an attorney. It is my hope that you use these questions to identify topics and questions to bring up with your attorney. Until the next live session, I hope you are doing well. Take care.