Involuntary Bankruptcy

Bankruptcy doesn’t just help those in debt—it protects creditors, too. One of the powers given to creditors is the ability to force an unwilling debtor into involuntary bankruptcy.

Involuntary bankruptcies don’t occur frequently, and creditors usually bring them against a business organization rather than an individual. Creditors follow a procedure that includes filing a bankruptcy action on behalf of the person or company that owes the money. In this article, you’ll learn more about the involuntary bankruptcy process.

(Start with the basics by reading Small Business Bankruptcy.)

Creditors Target Assets for Involuntary Bankruptcy

Creditors want to get paid—and forcing the bankruptcy of a person or business without any assets can be a bad move. So it shouldn’t come as a surprise that the focus of involuntary bankruptcy will likely be either on:

• a business with assets or, in more unusual cases,
• a wealthy individual.

When an individual or business doesn’t own much, a creditor is better off trying to grab all of whatever money and property might be available outside of the rules of bankruptcy. Once a debtor is in bankruptcy, the automatic stay—an order prohibiting collection activities—stops creditors from attempting to collect the debt on their own, leaving the creditor to share whatever gets recovered by the bankruptcy trustee appointed to the case.

How Involuntary Bankruptcy Works

An involuntary bankruptcy starts when one or more creditors file a petition with the bankruptcy court. A creditor can file an involuntary bankruptcy case under Chapter 7 or Chapter 11. Cases under Chapter 13 and Chapter 12 cases aren’t permitted.

The bankruptcy petition must indicate which of two circumstances justifies the involuntary bankruptcy:

• the debtor isn’t paying debts as they come due, or
• within the last 120 days, a custodian, receiver, or agent took control of the debtor’s property to enforce a lien.

Once filed, the debtor can respond to the petition. If the debtor fails to do so, the court will allow the matter to move forward, and the debtor will have to participate in the bankruptcy.

If the debtor responds, the court will set a hearing and decide whether the bankruptcy should go forward. A judge who finds in favor of the debtor will dismiss the case. The judge might also require a filing creditor to pay the debtor's costs and fees.

(You can find the official forms for involuntary petitions (individual and non-individual) on the U.S. Court’s bankruptcy form page.)

Involuntary Bankruptcy Limitations

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 $15,775 in unsecured debt outstanding from the debtor (as of April 2016).

A solitary creditor can only file an involuntary petition if that creditor is owed at least $15,775 (as of April 2016) 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.

Involuntary bankruptcies can’t be filed against banks, insurance companies, not-for-profit organizations, credit unions, farmers, or family farmers.