Many of the entries on this site deal with the decision to file bankruptcy. (See here for examples).  However, there are instances where an individual can be forced into bankruptcy when they have not actually filed a petition.   This is called an “involuntary bankruptcy” and is covered by 11 U.S.C. Sec. 303. Such proceedings may be initiated only under Chapter 7 or 11, and only against persons (except farmers) or corporations described under  Section 303(a) (generally, most corporations except nonprofits, banks, insurance companies, credit unions, and savings-and-loan institutions can be subject to involuntary bankruptcy). Creditors cannot force a person or entity into Chapter 13.

Involuntary bankruptcy is not available to creditors in all circumstances.  The debtor must owe a relatively high amount to a relatively small number of creditors.  To initiate these proceedings, a single creditor must hold an unsecured claim of at least $10,000.00 against the debtor, and the debtor must have fewer than twelve unsecured creditors. Otherwise, the creditor will have to join with other creditors to file the lawsuit. In that case, there must be at least three creditors with unsecured claims totaling at least $10,000.00 against the debtor. For this reason, the average individual who gets behind on their credit card does not have to worry about being forced into bankruptcy.  However, individuals who are in business for themselves or have personally guaranteed business debts can sometimes face this problem.

Forcing a debtor into involuntary bankruptcy is usually not a creditor’s first choice.  Creditors may chose this rather aggressive option because it forces a debtor to confront all his creditors at once, instead of forking over money only to those who press the hardest. Additionally, involuntary proceedings keep a debtor from draining all his assets before finally giving up and filing for bankruptcy.  Creditors do not take this measure lightly however; Section 303(i) provides that if a petition for involuntary bankruptcy is denied, the court may award the debtor costs and attorneys fees. Section 303(i) also allows the debtor to recover damages where an involuntary petition has been filed by his or her creditors in bad faith.

If you are facing involuntary bankruptcy, contact an experienced bankruptcy attorney as quickly as possible.

-Drew Broaddus