Involuntary Bankruptcy

A bankruptcy case may be filed against a debtor under chapter 7 or 11 of the Bankruptcy Code.  The debtor may challenge the filing and the petitioning creditor(s) may have to post a bond to cover the debtor’s potential damages. If the debtor’s challenge succeeds, that petitioning creditor(s) may be liable for consequential or even punitive damages. If the debtor loses or does not make that challenge, an order of relief will be entered and the case will proceed as if it had been initiated by the debtor.

To be an involuntary debtor, a debtor must be otherwise eligible to be a debtor under chapter 7 or 11 (i.e., is not a bank, credit union, or insurance company, among other things) and may not be a farmer or non-profit corporation. The petitioning creditor(s), if challenged, will have to prove that at the time of the petition, the debtor was generally not paying its debts as they came due or that within 120 days previously, a custodian (receiver, assignee, liquidator, etc.) had been appointed or took possession of substantially all of the debtor’s property.

If the debtor has fewer than 12 creditors, then one creditor who has a non-contingent and not validly disputed claim above the statutory minimum may initiate the case.  If the debtor has 12 or more creditors, then three such creditors must join in the petition.  See 11 U.S.C. § 303 and Jonathan Friedland, Elizabeth Vandesteeg and Christopher Cahill, eds. Commercial Bankruptcy Litigation (2d Ed. Thomson Reuters, 2015) §§ 4:17-39.

Read more on this topic in Getting Over the Scariness of Filing an Involuntary Bankruptcy Petition.

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