Many people have never heard the term “involuntary bankruptcy.” While filing for bankruptcy isn’t something that any person or company does unless they believe it’s their best or only option for getting out from under crushing debt, the process is still usually considered “voluntary” because they initiate the filing.
So what is involuntary bankruptcy? It occurs when creditors (usually of a business rather than an individual) petition a bankruptcy court to order their debtor to file Chapter 11 or Chapter 7 bankruptcy.
The court decides whether to accept or reject their petition. If it accepts it, the debtor is notified and given a deadline to respond. They have a right to object to it. In that case, all parties will end up in court. A debtor can also “convert” the petition to a voluntary bankruptcy.
When can creditors seek involuntary bankruptcy?
For creditors to successfully seek an involuntary bankruptcy, they must show that a debtor can pay their debt but is refusing or neglecting to do so. There also can’t be a dispute about the debt between the debtor and creditor.
Typically, multiple creditors get together to file a petition for involuntary bankruptcy. Under the law, the current total amount owed to the creditors signing on to the petition must be “at least $21,050 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims.”
While a petition for involuntary bankruptcy shouldn’t come as a surprise to a business owner, it sometimes can – particularly if there hasn’t been regular communication with the creditors. It’s crucial to get experienced legal guidance before responding or taking any action that could potentially complicate the situation.