Involuntary Bankruptcy 101

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Involuntary Bankruptcy 101

Involuntary bankruptcy is a rare form of bankruptcy, but it’s talked about often enough that it’s worth understanding the basics of the policy. Bankruptcy is usually a voluntary process. If you file for bankruptcy, you’re probably filing under Chapter 7 or Chapter 13, and you choose to do it on your own. However, there is a process called involuntary bankruptcy wherein the person, company, or entity who owes the money is forced into bankruptcy by a creditor. Involuntary bankruptcy exists to protect creditors who would otherwise be out large sums of money. However, it is very rare and can only be filed against a debtor in certain circumstances.

When is an Involuntary Bankruptcy Usually Filed?

Most of the time creditors will choose to file an involuntary bankruptcy if they have reason to believe a debtor is able to repay a debt, but is refusing (or simply failing) to do so. It usually occurs when a debt of a substantial amount has been overdue for a long time and collection efforts have been unsuccessful. However, collections processes can last for years, and involuntary bankruptcy is usually a last resort.

Can Individuals Be the Subject of an Involuntary Bankruptcy?

While it’s technically possible and legal for creditors to push individual consumers into an involuntary bankruptcy, it’s extremely rare. An involuntary bankruptcy case still pushes the debtor into bankruptcy. At that point, the automatic stay of a typical bankruptcy still goes into effect. That means the creditor or creditors filing the involuntary bankruptcy motion are simultaneously agreeing not to pursue any collections efforts. Since most consumers with debt high enough to warrant an involuntary bankruptcy usually earn a low income and/or have little to no disposable income, filing an involuntary bankruptcy against them would be pointless. Not only would the creditor be likely to gain nothing out of the process, but the creditor would also be unable to pursue any collections activities during the process. For this reason, individuals are almost never filed against unless they are extremely wealthy and/or own a great deal of property.

How Does the Process Work?

The creditor or creditors pursuing the involuntary bankruptcy file with the court, just like an individual or business filing for voluntary bankruptcy would. At that point, the debtor has 20 days to respond. If the debtor doesn’t respond, they’re automatically forced to go through the process. However, if the debtor does respond they have the right to go to a hearing where the validity of the involuntary bankruptcy case will be decided. If the judge decides that the creditor or creditors filing the involuntary bankruptcy did so in good faith and that the debt in question is not being paid, the bankruptcy will move forward. However, if the judge rules in the debtor’s favor, not only will the bankruptcy be dismissed, but the creditor or creditors filing the bankruptcy will likely be forced to pay, at a minimum, the court and legal fees of the debtor.

What Are the Qualifications?

The circumstances under which a creditor or creditors can file an involuntary bankruptcy claim against an individual or company are as follows:

  • If the debtor owes money to 12 or more creditors, at least three of those creditors must come together and mutually decide to file the involuntary bankruptcy claim.
  • The grand total of the debt owed to the creditors filing the involuntary bankruptcy claim must meet or exceed $14, 425.
  • A single creditor may only pursue an involuntary bankruptcy claim against a debtor if the debtor owes that creditor at least $14, 425, and the debtor has less than 12 creditors.

Exempt Companies and Entities

Bankruptcies cannot be filed against certain types of entities and companies, including insurance companies, nonprofit organizations, family farmers, farmers, banks, and credit unions. Also, if a creditor decides to pursue an involuntary bankruptcy against a debtor they can only do so under Chapter 7 or Chapter 11. Chapter 12 and Chapter 13 bankruptcies are always voluntary.

Involuntary bankruptcies happen infrequently, and for good reason. There are usually much more efficient ways for creditors to obtain any debt owed to them than to pursue an involuntary bankruptcy. However, it’s helpful to know that involuntary bankruptcies exist, and to know your rights regarding them. If you’re the subject of an involuntary bankruptcy, be sure to contact a bankruptcy attorney in your area as soon as possible. Only a reputable bankruptcy lawyer can help you navigate the legal waters and obtain the most favorable and fair outcome for you or your business.

 

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