Although most people are familiar with voluntary bankruptcy, a debtor can be forced into an involuntary bankruptcy. Under certain circumstances, creditors can initiate a Chapter 7 or Chapter 11 bankruptcy case by filing an involuntary petition against the debtor. Before creditors can initiate an involuntary bankruptcy, a debtor must have 12 or more creditors, three of which hold unsecured claims with an aggregate amount of at least $10,000.00. If there are fewer than 12 creditors, an involuntary bankruptcy can be initiated by one creditor if that creditor has an unsecured claim of at least $10,000.00. The bankruptcy code, however, requires that the $10,000.00 minimum claim cannot be “contingent as to liability or the subject of a bona fide dispute, or an indenture trustee representing such a holder.” 11 USC 303(b). If there is a question regarding the debt, the involuntary petition will fail. If you are a farmers, nonprofit group, insurance company, credit union, bank, rail road, savings & loan, stockbroker or commodity broker, however, you are exempt from a involuntary bankruptcy.

In voluntary petitions are filed by creditors to protect assets where it is believed a debtor is dissipating assets. The involuntary petition allows the bankruptcy trustee to recover “avoidable transfers” which occurred within 90 days prior to the filing and prevent or undue transfers to insiders and fraudulent conveyances. Once an involuntary petition is filed, the bankruptcy court holds a hearing on the requested relief. The court considers numerous factors including the number of creditors, totals debt and whether the debtor has been paying the debts as they come due. As a general rule, just like a voluntary petition, the court is looking for fraudulent and unreasonable activities. If it appears a debtor is trying to hid assets or is conducting business in a way that is detrimentally to one creditor to the benefit of another, odds are the involuntary petition will be approved. Conversely, a debtor has the opportunity to rebut the claims of creditors by demonstrating that debts are being paid as they come due and that there have been no fraudulent activities. If successful, the debtor can request the court enter a judgment against the creditors for attorney fees and costs. 11 USC 303(i)(1). In extreme cases, the bankruptcy court can assess punitive damages. 11 USC 303(i)(2).

Although involuntary bankruptcies are rare compared to voluntary filings, it is important to be aware that the opportunity exists for creditors. If faced with an involuntary bankruptcy, you should consult a knowledgeable bankruptcy attorney.

- Richard V. Stokan, Jr.