Involuntary bankruptcy is a powerful tool for creditors to collect.
An involuntary bankruptcy is an extraordinary remedy for creditors that forces a bankruptcy proceeding upon a debtor. Involuntary bankruptcy is a remedy that can be used by creditors as a tool to collect a judgment or claim against a debtor, and may be particularly appropriate to collect against a debtor who has hidden, transferred or mismanaged assets.
An involuntary bankruptcy can only be commenced under chapter 7 or chapter 11 of the bankruptcy code.
Also, for creditors to bring an involuntary bankruptcy proceeding and force a debtor into bankruptcy, there needs to be certain debt and other thresholds met.
For example, if the debtor has less than 12 creditors, then it only takes one unsescured creditor with a debt of at least $16,750 to file an involuntary bankruptcy. If the debtor has 12 or more creditors, then it takes three of those creditors with unsecured claims in the aggregate of at least $16,750 to file an involuntary bankruptcy. Also, there needs to be a showing that the debtor is not paying debts as they come due. And, each of the petitioning creditors needs to have a liquidated non contingent claim against the debtor that’s not subject to a bona fide dispute.
Involuntary bankruptcy is only available in limited circumstances.
Certain parties cannot be the subject of an involuntary bankruptcy proceeding.For example, a charitable institution or family farmer cannot be an alleged debtor and an involuntary bankruptcy proceeding.
Once an involuntary bankruptcy is filed by creditors, the alleged debtor is entitled to either dispute the involuntary bankruptcy petition or the debtor can consent to that relief. Also, if the debtor wants to seek such relief, it can require a petitioning creditor through court process to pose some sort of a bond and to indemnify the debtor from the harm that might result from seeking the involuntary bankruptcy.
If the petitioning creditors are successful in the pursuit of the involuntary case, then the alleged debtor becomes a debtor and will proceed with the bankruptcy process.
If, on the other hand, the involuntary petition is successfully controverted by the debtor, then the case will be dismissed.
If the case is dismissed, and it’s deemed not to have been pursued in good faith, then the petitioning creditor or creditors could be liable for the actual damages proximately caused by the filing. And if it’s shown that the creditor sought the relief with intent to harm the debtor, then there may be punitive damages that could be awarded as well.