What is Involuntary Bankruptcy?

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A creditor may sometimes find himself in a situation where the debtor owes him a significant sum of money but is unable or unwilling to pay it back. In a few situations, the creditor may receive credible information that the debtor is diverting funds to other parties or even embezzling the funds. In such exceptional circumstances, a creditor or a group of creditors may decide to petition the court to force the debtor into an involuntary bankruptcy.

Advantages for Creditors

The creditors may exercise the option of involuntary bankruptcy in rare circumstances when they believe they have no other way to recover funds from a debtor. When they file such a petition before the court, it allows the avoidance of time period restrictions on three key elements from the creditors’ perspective. Firstly, any inside transfers made by the debtor in the last two years preceding the filing of the creditors’ petition are protected. Secondly, any fraudulent transfers that the debtor may have made within a year prior to filing are protected. Thirdly, any non-insider preferential transfers made by the debtor in the last 90 days preceding the filing of the petition are protected. Involuntary bankruptcy leads to the appointment of a trustee who is empowered to make a detailed examination of the debtor’s actions and hold the debtor accountable. Furthermore, involuntary bankruptcy allows the creditors to claim actual, necessary expenses incurred through the period of ordered relief. This includes attorney fees, accountant fees, and the cost of preparing and filing the petition.

Pre-Conditions to Enforcing Involuntary Bankruptcy

In order to file an involuntary bankruptcy petition, the debtor must have at least three out of 12 creditors who are owed a certain minimum amount together. This amount may vary from one jurisdiction to another. If the debtor has less than 12 creditors, just one creditor is necessary, who must be owed a certain minimum amount, which is usually $10,000. These 12 creditors cannot be the debtor’s employees, insiders or anyone receiving preferences from the debtor. The number of creditors and minimum amounts may also vary depending on whether the debtor is an individual or a company. The debts owed to the creditors cannot be dependent, which means they must not be claims for a lawsuit that has yet to mature. Finally, the disputes cannot be bona fide claims. This means they cannot be debts that are given in good faith to fulfil. Until the case has been discharged or dismissed, the pending petition may also be joined by additional creditors.

Debtor’s Right to Object

When the creditors have filed a petition for involuntary bankruptcy, the debtor is given the opportunity to file objections to the petition. He must file these objections within 20 days of the filing of the petition. In such an event, the court will conduct a hearing and provide equal opportunity to the creditors and the debtors to present their case. In case the court decides in favor of the debtor, the creditors may have to pay all the debtor’s expenses associated with the case. Therefore, creditors must exercise caution and use the option of petitioning for involuntary bankruptcy only under exceptional and unavoidable circumstances.

Seeking Legal Aid

If you are involved in a case of involuntary bankruptcy either as a debtor or a creditor, it may be prudent to seek legal aid to consolidate your case before the court. Involuntary bankruptcy can be a complex litigation which should be handled by an experienced bankruptcy attorney to achieve the best outcome.