The Initial Process of Involuntary Bankruptcy

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Creditors can file an involuntary bankruptcy petition in the bankruptcy court against the debtor to try and enforce bankruptcy proceedings to recover their debts. The burden lies on the creditors to meet the filing requirements, and the debtor has the right to contest the petition. Therefore, the option of involuntary bankruptcy is usually considered only in extreme or unavoidable circumstances when the creditors have determined it is their only chance to get their money back from the debtor.

Creditors’ Risk Assessment

Prior to the filing of an involuntary petition against the debtors, the creditors must evaluate their risks with such an action. If only a single creditor is filing the petition, he should understand that in a majority of cases, the courts may consider it as a two-party dispute that should be settled on a forum outside the bankruptcy court. Even when a group of creditors is planning to file the petition, they should consult their lawyers for an objective risk assessment and ensure that it is the best course of action in strict conformance with the bankruptcy laws. They should consider the possibility of the debtor filing an objection on the grounds of bad faith. The burden of proof lies on the creditors, and if the court dismisses the creditors’ petition, they may end up paying compensatory and even punitive damages to the debtor.

Petition Filing Process

The involuntary petition filing process begins with the creditors obtaining Form B5, which is the official involuntary petition form, along with a summons with the clerk of the bankruptcy court. The form must be completed properly and signed by the petitioning creditors or their attorneys. The petitioners are required to file this form in a bankruptcy court that has jurisdiction over the debtor.

The filing fee pertaining to the petition must be paid by the creditors. It is also the creditors’ responsibility to ensure that the petition for involuntary bankruptcy is served upon the debtor in a timely manner. A process server may be hired for this task.

Which Chapter to File for Involuntary Bankruptcy

Creditors must consider carefully whether to file their involuntary petition as a Chapter 7 or Chapter 11 bankruptcy. These are the only two options available for involuntary bankruptcy. Chapter 7 involves liquidation of the business, and the proceeds resulting from the liquidation of assets are distributed among creditors based on the lawful priority of creditors. In some cases, the creditors may opt for a Chapter 11 petition when they believe the debtor can reorganize his business as per an acceptable plan and pay back the creditors from the cash flows generated from the business.

Debtor’s Objection to the Petition

A debtor can file an objection to the involuntary petition of creditors within 20 days of the date of filing. In such a situation, the bankruptcy court grants a hearing to both sides to present their cases. If the creditors win the case, the debtor will be forced into bankruptcy by the court. However, if the debtor happens to wins the case, the creditors may have to pay for the legal costs and damages to the debtor, depending on the circumstances of the case. In any case, creditors cannot file an involuntary petition against certain individuals and groups, which include banks, non-profit organizations, farmers, credit unions and insurance companies.

Seeking Legal Advice

Involuntary bankruptcy can be a complicated matter of litigation. Both the debtor and the creditors should consider seeking legal advice and assistance in this process. An experienced bankruptcy lawyer can help to protect their rights under the bankruptcy laws.