What is an Involuntary Bankruptcy?

Almost all bankruptcies that are filed are voluntary bankruptcies.  That is, the debtor decides to file for bankruptcy on behalf of him or herself.  In addition to a voluntary bankruptcy, the law also allows for creditors to file an involuntary bankruptcy.  An involuntary bankruptcy is one filed by someone other than the debtor.

Involuntary bankruptcies are relatively uncommon.  The purpose of the current bankruptcy laws is to benefit the debtor and give debtors a “fresh start.”  Why then, would creditors want to force a debtor into bankruptcy when the purpose of bankruptcy is to give the debtor a fresh start?

Reasons for Filing Involuntary Bankruptcy

One reason for filing an involuntary bankruptcy against a debtor is that the creditors are worried that the debtor is spending the resources that could be used to pay the creditors. An involuntary bankruptcy can preserve the debtor’s assets before his situation gets worse.  For example, a business might owe its three creditors $100,000 each.  The creditors find out that the business has only $200,000 in assets and is also steadily losing money every month.  The creditors might decide that the only way to preserve the remainder of the assets and get paid some of what they are owed is the file an involuntary bankruptcy against the business.  In addition to these reasons, an involuntary bankruptcy will also force a person or business to face all its issues with creditors at one time- it prevents a single creditor being preferred over the others when it comes to payment.

When Involuntary Bankruptcy Can Be Filed

While an involuntary bankruptcy can be filed, it can only be filed under certain chapters.  Section 303(a) of the Bankruptcy Code states:  “An involuntary case may be commenced only under chapter 7 or 11 of this title . . .”  This means that an involuntary case cannot be commenced under a Chapter 13 and force the debtor into a payment plan.  Additionally, three creditors are needed to start a case when a debtor has 12 or more creditors, and only one creditor is needed to start a case when there are less than 12 creditors involved.  Employees (if the debtor is a business) and insiders do not count in this number.  Another caveat is that an involuntary bankruptcy can only be filed against a person or business (except a farmer, bank, non-profit, insurance company, or a credit union) that qualifies to be a debtor under the chapter under which such case is commenced.

The attorneys in our offices are very knowledgeable about all types of bankruptcy.  If you are interested in determining if bankruptcy is right for you, please contact one of our offices and set up a free consultation to discuss your options.