Bankruptcy Basics: Involuntary Bankruptcy

Man on rockThe phrase “forced into bankruptcy” is often used when an individual or business files for bankruptcy.  But the fact is, there are only two instances in which a bankruptcy is not considered voluntary.

1.  Forced, but voluntary.  When a business or person voluntarily files for a Chapter 7 or Chapter 11 bankruptcy, that is a voluntary action, though it may have been “forced” by necessity in response to the pressure or legal actions of creditors.  A voluntary filing of bankruptcy immediately makes a debtor subject to the Bankruptcy Code and the proceedings that follow, under the supervision of the court and generally, the U.S. Trustee.

2.  Involuntary filingIn certain instances, creditors can execute a bankruptcy filing that literally forces a debtor into bankruptcy.

The requirements for an involuntary bankruptcy filing are generally contained within Section 303 of the Federal Bankruptcy Code:

  • When a company has 12 or more creditors, three or more of these creditors in good standing (i.e. with legitimate claims and no liability attached to the claims) must file the petition.  For a company with fewer creditors, only one creditor is necessary to file.  If additional creditors are identified, they may later join the petition, sanctioned by the court.
  • The company concerned must also generally not be paying its debts.  Exceptions to this include existing disputes or the presence of an appointed custodian in charge of assets.
  • The creditors filing the involuntary bankruptcy must designate either Chapter 7 or Chapter 11 for the type of bankruptcy they seek to force.

Once the filing has taken place, an automatic stay immediately goes into effect.  From that point forward, however, there are significant differences in an involuntary bankruptcy:

  • The debtor/company may continue doing business without restrictions, as though the bankruptcy filing has not taken place.
  • The court does not automatically impose restrictions or appoint a trustee
  • The debtor may contest the involuntary petition by filing a response or a motion for dismissal within 21 days after service of the summons/filing.
  • The debtor can consent to the filing after the fact.  If the creditors have designated Chapter 7, the company may respond by filing its own Chapter 11 plan and therefore reclaim control as a debtor in possession.
  • The debtor may litigate as to whether the involuntary bankruptcy requirements have been met.
  • Should the bankruptcy court ultimately rule in favor of the petitioning creditors, the debtor is officially placed into bankruptcy and becomes subject to the laws and proceedings under the Bankruptcy Code.

Working with an experienced, knowledgeable Arizona creditor’s attorney can help tremendously when evaluating a bankruptcy filing.  If you would like more information about involuntary bankruptcy, creditors’ rights, or if you need assistance from an attorney, contact Windtberg & Zdancewicz to schedule an initial consultation.

The attorneys at Windtberg & Zdancewicz, PLC, provide clients with experienced legal representation in all collection matters.  We are experienced in creditor’s rights including garnishments, charging orders, attachment, property execution, trustee’s sales, foreclosures, judgments, judgment collection, domestication of foreign judgments, and creditor’s issues in bankruptcy cases.  If you need assistance with your collection matters, please contact us at (480) 584-5660.

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