Typically, businesses and individuals initiate their own bankruptcy filings. These are considered voluntary bankruptcies, even though they may not have any other choice.
Then there is involuntary bankruptcy. That’s when creditors petition the bankruptcy court to require a party (usually a business) to file for Chapter 7 or 11 bankruptcy. They typically do this when they believe their debtor is able to pay their debts but is either refusing to do so or is simply highly negligent.
How does petitioning for involuntary bankruptcy work?
After creditors petition the court, the court determines whether to accept or reject the petition. If they accept it, the debtor is given a specified period to respond.
A debtor can object to the petition. If they do, the debtor and creditors will need to hash things out in court. A debtor may also choose to convert the bankruptcy to a voluntary one.
Limits to involuntary bankruptcy petitions
Generally, a petition is filed by at least three separate creditors. It can be filed by fewer. However, the aggregate amount owed must currently 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,” according to the law.
Further, there can’t be any dispute between a debtor and creditor about the amount of money owed or the debt itself. Each creditor must submit evidence that the debt isn’t being repaid.
Whether a business is facing an involuntary bankruptcy or is considering petitioning for the involuntary bankruptcy of a debtor, it’s crucial to understand the law that governs this process. Getting experienced legal guidance is the best first step.