Creditor Strategy in an Involuntary Bankruptcy Case

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An involuntary bankruptcy petition may be filed by the creditors when the debtor fails to meet his claim obligations, and creditors believe that a bankruptcy is the only viable way to recover the debts. However, involuntary petitions may not be accepted by the court in every case. The debtor is also given the opportunity to contest the petition. Therefore, the creditors must proceed with petition after devising a proper strategy to recover the debts successfully.

Covering Claim Thresholds

As a first step, the creditors must ensure that they are meeting all the claim thresholds under the bankruptcy laws for a valid involuntary petition. The minimum amount of debt owed to each creditor and the minimum number of creditors required to file a petition in good faith are key requirements that must be met. A single creditor is allowed to file an involuntary petition, but it may be a less successful strategy because courts generally view it as a two-party dispute between the creditor and the debtor, and prefer it to be settled at a forum outside the bankruptcy court. Secondly, a single creditor must not aggressively solicit other creditors to join the petition as it may lead to the petition’s dismissal. Three or more creditors must file the petition together out of their own discretion.

Assessing the Position of Debtor’s Assets

If the creditors believe that the market value of the debtor’s non-exempt assets may diminish rapidly with the passage of time, it may be a good strategy to force the debtor into bankruptcy, provided all other conditions are satisfied. Intellectual property assets, real estate and inventories are such assets that may quickly reduce in value in specific situations. Secondly, the current value of the non-exempt assets should be substantial enough to cover the creditors’ claims to a reasonable extent.

Deciding between Chapter 7 and 11

Creditors have the choice between Chapter 7 and Chapter 11 involuntary petition in some cases. If they believe that the value of non-exempt assets may not be sufficient to justify their liquidation, they may opt for Chapter 11. It can force the debtor to reorganize his debt repayment plan under strict conditions imposed by the bankruptcy court. However, if the creditors are of the opinion that the debtor is incapable of debt reorganization or has no intention to rework his business plans diligently, they may choose to file their petition in Chapter 7.

Preparing to Counter Debtor’s Objection

Creditors must be fully prepared for when the debtor files an objection to the creditors’ petition. The burden of proof lies on the creditors to show good faith. They must be able to demonstrate a consistent pattern of non-payment of debts on part of the debtor. The creditors may be asked to provide evidence to support any such claim that the debtor is embezzling the funds or transferring them to third parties in violation of the law. If the creditors’ strategy in case of involuntary bankruptcy is weak, their petition may be dismissed and they may be asked to pay compensatory and even punitive damages to the debtor.

Seeking Legal Aid

The creditors should preferably devise their involuntary bankruptcy strategy in consultation with an experienced bankruptcy lawyer. Involuntary bankruptcy can be a complex legal exercise, and a lawyer specializing in this field may be the best person to advise the creditors about the right strategy of debt recovery from an errant debtor.

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