How to Initiate Involuntary Bankruptcy

When a business is owed money by an individual or an entity, the business lender may attempt to initiate involuntary bankruptcy proceedings for a debtor who refuses to pay their debts. The available bankruptcy filings for involuntary bankruptcy proceedings are either Chapter 7 or Chapter 11 Bankruptcy under the U.S. Bankruptcy Code. However, it is possible to avoid bankruptcy.

When Should a Business Initiate Involuntary Bankruptcy?

Real or personal property may be the subject of a lien, so long as the property owner has an outstanding debt with the lien holder. Since the process for obtaining is time consuming, liens are generally only filed when the debt owed is substantial. While any debt can be subject to a lien, nominal debts are usually not worth the time and cost associated with the lien process, and businesses are better off simply writing the loss off on their taxes.

How Is Involuntary Bankruptcy Initiated?

In order to instantiate an involuntary bankruptcy proceeding against a debtor, if there are more than 12 creditors for a debtor, there must be three or more creditors with claim totaling over $10,775, who come together to file the petition with the court. If there are fewer than 12 creditors, than only one creditor with a claim over $10,775 is necessary to start the filing. As part of the proceedings, the creditors will have to be able to show that the business is not paying their debts and the burden of proof rests solely with the creditors, not with the debtors.

What Kinds of Debtors are Subject to Involuntary Bankruptcy?

Any debtor may be subject to involuntary bankruptcy proceedings so long as the creditors meet the necessary number and/or the requisite claim amount to initiate a filing. Any entity may be subject to an involuntary bankruptcy proceeding except: banks and savings and loan entities; credit unions and insurance companies; non-profit organizations; farmers; railroads and commodity brokers.

The End Result

The end result of initiating an involuntary bankruptcy proceeding is that the creditor(s) filing the petition stand to gain by forcing the debtor to pay their debts before all assets have been spent. If successful, an involuntary bankruptcy proceeding can allow the creditor to avoid losses that would have like occurred had the bankruptcy not been initiated.

Getting Legal Help

In order to successfully initiate involuntary bankruptcy proceedings, businesses should seek the representation of an attorney who specializes in the field of credit law and bankruptcy. Additionally, the attorney should be licensed to practice in the specific state where the debtor is located and where the bankruptcy action is commencing. Having an experienced attorney assist with initiating involuntary bankruptcy proceedings is essential for the business to succeed in the action.