Who Is Exempt from an Involuntary Bankruptcy Case?

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People who are struggling to meet their financial obligations often turn to bankruptcy as a solution to get out of debt and obtain a fresh start. Most unsecured debts can be wiped out under a Chapter 7 liquidation case. However, it may be surprising to know that involuntary bankruptcy can be started by the creditors that are owed money. Only one creditor is needed to start an involuntary bankruptcy case if the debtor has less than 12 creditors. Three creditors are needed if the debtor has 12 or more creditors.

Federal Rules Creditors Must Follow

The United States Congress has imposed several requirements to commence an involuntary bankruptcy action. Each creditor must prove that their claim is not in dispute by the debtor. This is to prevent creditors from forcing bankruptcy upon debtors who may have a legitimate defense.

  • Claim Threshold—Creditors are required to meet a claim threshold. Involuntary bankruptcy can be brought against any debtor that owes at least $10,000 in unsecured debts. This means that claims are only valid if they are not secured by collateral. 
  • Good Faith—The bankruptcy court can dismiss a petition if it determines that the creditor's motives are in bad faith. An improper purpose could include harassment or malice by the creditor. The bankruptcy court can choose to award a debtor monetary damages and attorney's fees in a case of bad faith.
  • Non-Payment—Creditors must show that the debtor is not paying his or her debts in order to support an involuntary petition. They must be able to prove that a debtor is missing a significant number of payments on a regular basis.

Creditors run the risk of filing an involuntary bankruptcy petition because debtors can object on several different grounds. Debtors have 20 days in which to file an objection to an involuntary action.

Exemptions from Involuntary Action

The federal bankruptcy laws contain exceptions regarding which groups cannot be forced into involuntary bankruptcy. An involuntary Chapter 7 or Chapter 11 cannot be used against:

  • Banks
  • Credit Unions
  • Insurance Companies
  • Non-Profit Organizations
  • Savings and Loan Institutions

In addition to the above, railroads cannot be involuntary debtors in Chapter 7 cases. Stock and commodity traders cannot be part of a Chapter 11 bankruptcy case.

Get Advice from a Bankruptcy Attorney

Having creditors bring an involuntary bankruptcy petition against someone is a frightening prospect. If the court accepts an involuntary petition, it will be treated the same as a voluntary one. Therefore, it is imperative to get legal advice from an attorney who specializes in bankruptcy law.