One of the ways bankruptcy law protects creditors is by permitting involuntary bankruptcies. An involuntary bankruptcy is one that is filed by creditors and not by the person or entity that owes the money. Involuntary bankruptcies are not common, and when they are filed, they are usually filed against businesses.
When Creditors Might File an Involuntary Bankruptcy
Most involuntary bankruptcies are filed against businesses. If a debtor is not paying debts as they come due but has assets out of which creditors might get paid, an involuntary bankruptcy might allow creditors to get paid where they otherwise would not. Creditors may push a business into bankruptcy if they know that the business has the ability to pay but is failing or refusing to do so.
Involuntary bankruptcies against individuals are permitted, but they are extremely rare -- most individuals with debt have few assets, so an involuntary bankruptcy against a consumer for consumer debts is typically unhelpful. In most cases, if an individual were pushed into bankruptcy, the creditors would be in a worse position than they were in before, because if the debtor has no assets, the creditors have no ability to receive payment, and the bankruptcy prevents them from attempting to collect. Individuals who are very wealthy or who have substantial assets and substantial debts are the most likely target of an involuntary bankruptcy.
How Involuntary Bankruptcy Works
An involuntary bankruptcy is commenced when one or more creditors files a petition with the bankruptcy court. Once the petition is filed, the debtor has 20 days to respond to the petition. If the debtor does not respond, the court will allow the bankruptcy and the debtor will have no choice but to participate. If the debtor does respond, a hearing will be set, and if the judge decides based on the evidence that the petition was filed in good faith and that the debtor is not paying the debts, the judge will order that the bankruptcy go forward. If the judge finds in the debtor's favor, however, he or she will dismiss the case and might require the creditors that filed the case to pay the debtor's costs and fees.
Limits on Filing Involuntary Bankruptcies
There are other restrictions that make filing involuntary bankruptcies difficult in individual cases.
Number of Creditors and Amount of Claims
Most involuntary bankruptcies are a collaboration between several creditors. In fact, if the debtor has more than 12 unsecured creditors, at least three of these creditors must join the petition, and the three must have, altogether, at least $14,425 in unsecured debt outstanding from the debtor.
A solitary creditor can only file an involuntary petition if that creditor is owed at least $14,425 and if the debtor has fewer than 12 unsecured creditors total. The creditors' claims for debt cannot be disputed, and they cannot be contingent -- that is, the amount of the debt must be known and not conditioned on some future event, such as a lawsuit judgment.
A creditor can file an involuntary bankruptcy under Chapter 7 or Chapter 11; however, involuntary Chapter 13 and Chapter 12 cases are not permitted. Additionally, involuntary bankruptcies cannot be filed against banks, insurance companies, not-for-profit organizations, credit unions, farmers, or family farmers.