Involuntary vs. Voluntary Bankruptcy

Per law, bankruptcy cases can potentially be filed in a voluntary or involuntary basis, although the vast majority of bankruptcy filings are voluntary in nature. Voluntary filings, which involve the debtors petitioning the bankruptcy courts on their own accord, include all chapters of bankruptcy and offer debtors protections under the automatic stay provisions. Involuntary bankruptcy, however, is initiated by a debtor’s creditors, who petition the courts in the interest of enforcing their rights as creditors.

Involuntary Bankruptcy

In theory, creditors can initiate an involuntary bankruptcy for an individual debtor, but in the overwhelming majority of cases, involuntary filings stem from creditors initiating a Chapter 7 or Chapter 11 filing against a business entity. The following outlines the requirements and process of involuntary bankruptcy, including:

• Creditors must file involuntary petition against the debtor, which may possibly be filed as a collective or group. Normally, the involuntary proceedings are done as a method of preventing further creditor losses, stemming questionable conveyances, or other actions by the debtor, which will ultimately hurt the creditor’s claim.

• There are legal requirements to initiate an involuntary bankruptcy. For debtors with twelve (12) or more creditors, the involuntary petition must have the participation of no less than three (3) creditors with claims of at least ten thousand ($10,000) dollars, which are not embroiled in a bona fide dispute. Cases involving fewer than twelve (12) creditors total require participation of only one (1) creditor with a claim valued at more than ten thousand ($10,000) dollars, which is also not embroiled in a dispute.

• Bona fide disputes include any dispute over whether a debtor is actually liable for the debts in question. Common examples of a bona fide dispute include civil judgments, which a debtor has appealed, or business contracts or transactions currently unresolved by litigation.

• Ultimately, the involuntary filing decision is a case-specific decision of the bankruptcy courts, who will hear the case during what is known as the hearing on requested relief. The courts consider all matters relevant to the case, including whether a debtor is meeting creditor obligations as they become due.

For debtors, if the involuntary filing is found to be inaccurate, the debtor has a legal right to recover damages for legal fees and other costs incurred during the process, and if the entire filing was done with malice or in bad faith, the courts may assess punitive damages.

Getting Legal Help with Voluntary vs. Involuntary Bankruptcy

In reality, almost all consumers will recognize the need to take some form of pre-bankruptcy or bankruptcy action well before creditors attempt to initiate an involuntary bankruptcy. Having the insight and advice of legal counsel in light of your personal debt situation will prove infinitely more beneficial than waiting for a creditor to initiate an involuntary proceeding. Consult with a bankruptcy lawyer to learn more about your legal rights and options today.