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What is involuntary bankruptcy?

On Behalf of | Nov 10, 2021 | Bankruptcy

Most bankruptcy filings are initiated by the business or individuals themselves. Typically, they choose bankruptcy as a way to get out from under their debts or reorganize them to get back on to firmer financial footing.

Sometimes, however, businesses find themselves in the midst of involuntary bankruptcy. It can happen to individuals as well, but not as often. Let’s look at what this is, how and why it can happen to a business and how to deal with it.

When can creditors petition for involuntary bankruptcy?

Involuntary bankruptcy occurs when creditors file a petition to compel a business to file for bankruptcy. Usually, creditors take this step when a business isn’t paying what they owe, but the creditors believe the business is able to pay and is simply not doing it.

The only two types of involuntary bankruptcy that can be filed are Chapter 7 and Chapter 11. Further, involuntary bankruptcy can’t be sought for banks, credit unions, insurance companies, farmers or non-profit organizations.

Among the requirements for a creditor to file an involuntary bankruptcy petition are that their claim isn’t subject to dispute and they can show that the debtor has not been paying their bills when they’re due. Once the petition is filed, a bankruptcy court judge decides whether to accept or dismiss it.

Often, more than one creditor is involved in seeking involuntary bankruptcy. One petition can be filed by up to 11 creditors. If there are 12 or more, at least three of them have to be part of the petition. 

What are your options if you’re the subject of an involuntary bankruptcy petition?

You have 21 days to respond and the right to file an objection. If you don’t respond, the court enters an order for relief, which places the business in bankruptcy. That’s also the outcome if the court rules against you. You have the option to file bankruptcy yourself so that involuntary bankruptcy is no longer needed.

An involuntary bankruptcy petition typically follows months if not longer of not paying bills and significant mounting debts. If you’re facing a petition or believe that things are headed in that direction, it’s important to seek legal and financial guidance.