What Is Involuntary Bankruptcy?

Most bankruptcies are filed and entered into willingly by debtors, or people holding debt that has become unmanageable. This is true in New York and in the country at large. However, in certain circumstances, the Bankruptcy Code allows creditors to file a Petition that forces debtors into bankruptcy.

In order for an involuntary bankruptcy to be imposed on a debtor, a number of conditions and qualifications must be met. These include the following:

• The debtor must be an individual or a for-profit corporation
• The creditors can only attempt to force Chapter 7 or Chapter 11 Bankruptcy (not file for Chapters 9, 12, or 13)
• The debtor must owe at least $15,325
• If there are 12 or more creditors, at least three must join the petition
• If there are fewer than 12 creditors, all creditors who are owed $15,235 or more must join the Petition
• The debts owed by the debtor cannot be contingent on liability (i.e., they cannot depend on a lawsuit that hasn’t resolved yet), and they cannot be subject to dispute as to the actual amount owed.
• If the debtor is a partnership and all of the general partners have received relief under the Bankruptcy Law, then any general partner (or their trustees) as well as any claimant-creditor against the partnership can file the Petition.
• If the creditor is a foreign representative of an estate in a foreign proceeding concerning the debtor, they are entitled to file an involuntary bankruptcy.

If a petition is filed for an involuntary bankruptcy, the debtor (or partnership debtors) may file an Answer in response, after which there will be a trial. Unlike a normal bankruptcy, the debtor may conduct business normally until the outcome of the trial.

If the court finds for the creditors, or if the debtor continues to neglect payment of their debts under certain circumstances, the court will order relief for the creditors, sometimes in the form of involuntary bankruptcy.

The court also has ways of protecting debtors from frivolous or overly predatory involuntary bankruptcies. For instance, they may decide to dismiss any involuntary bankruptcy petition, and can then order the creditor-petitioners to pay the debtor’s court/attorney’s fees. If the petition was filed in bad faith, the creditor-petitioners can even be ordered to pay damages to the debtor, and can be barred from reporting the bankruptcy to any credit bureaus.

It should be noted that involuntary bankruptcies are quite rare, and usually aren’t filed unless the creditor-petitioners know that the petition will be accepted by the court, and that the debtor will be able to pay them once bankruptcy is filed.

If you are facing an involuntary bankruptcy, you will need a knowledgeable, experienced, and skilled bankruptcy defense attorney to advocate on your behalf. In NYC, New York Bankruptcy Attorney Wayne Greenwald is the man for the job. Call Attorney Greenwald for a free consultation today at (212) 739-7599.