Most people have never heard of “involuntary bankruptcy” until it happens to them. Unlike the more common voluntary bankruptcy, where a person or business is seeking to discharge or restructure their debts, involuntary bankruptcy is initiated by creditors.
That doesn’t mean that anyone who owes a significant amount of money can face involuntary bankruptcy. Typically, one or more creditors file an involuntary bankruptcy petition with the bankruptcy court if they believe a debtor has the ability to pay an unsecured debt of at least $16,750, but is not doing so. (Note that this minimum amount is subject to change under the law and that was the 2019 figure.) Involuntary bankruptcy can’t be used if there’s any dispute about whether the money is actually owed.
Involuntary bankruptcy can only be used for Chapter 7 (for individuals and some businesses) or Chapter 11 (for other businesses). Once the petition is filed stating the amount of debt that’s owed, the bankruptcy court reviews it and decides whether to proceed with the case or dismiss it.
When do creditors need to join forces on an involuntary bankruptcy?
A creditor who files an involuntary bankruptcy petition typically needs to have some idea of a debtor’s overall financial situation. Besides showing that they’re not paying this specific debt, they need to determine how many other creditors are in the same situation.
For example, if there are fewer than 12 creditors who qualify to petition for an involuntary bankruptcy, one creditor can do so on their own. However, if there are at least 12, then a minimum of three of them must participate in the petition.
What options does the debtor have?
Once a petition is filed, the debtor has three weeks to respond. They may also decide to file for bankruptcy on their own. If they don’t file for voluntary bankruptcy and the court believes the request for involuntary bankruptcy is warranted, it will proceed.
An involuntary bankruptcy petition is often the last option for creditors seeking to be paid. Typically, a lot of issues have led up to it. If you believe you’re in danger of facing an involuntary bankruptcy petition or you already are, it’s crucial to seek experienced legal advice.