Involuntary Bankruptcy Petition

Bankruptcy Code section 303 provides that when a creditor holding an undisputed claim believes a business or individual will not pay its debts, the creditor may initiate an involuntary bankruptcy proceeding by filing a petition with the Bankruptcy Court as either a Chapter 7 liquidation or a Chapter 11 reorganization. Involuntary bankruptcies are usually filed where the creditors suspect that a debtor is deliberately choosing not to pay its debts, usually while dissipating assets and/or preferring other creditors. Involuntary bankruptcy filings are complex proceedings that require knowledgeable and expert counsel to ensure a successful outcome. Thomas H. Curran Associates has the expertise and experience required to bring an involuntary bankruptcy filing on behalf of petitioning creditors.

Involuntary bankruptcy requirements. If a debtor has 12 or more creditors, the petition must be filed by at least three creditors, each holding a claim “that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount.” If the debtor has less than 12 qualifying non-insider creditors, a single creditor may file the involuntary bankruptcy petition. If filed by fewer than three creditors, the petitioners must have claims against the debtor that amount to at least $16,750 in the aggregate based on current indexing.

Involuntary Bankruptcy Process. When an involuntary bankruptcy petition is filed, the debtor is not placed into bankruptcy immediately. Rather, under 303(f) a debtor may continue its operations as if a bankruptcy case had not been filed. The involuntary petition is treated in a manner that is similar to a civil lawsuit against the debtor: the involuntary bankruptcy petition must be served on the debtor in conjunction with a summons. After receiving an involuntary bankruptcy petition, the debtor has the option of consenting to bankruptcy filing or fighting the petition. If a business receives an involuntary Chapter 7 petition, the company also has the option of responding by filing for Chapter 11 bankruptcy and taking control over the bankruptcy estate as a debtor-in-possession. Once filed, the involuntary petition cannot be dismissed without notice and an opportunity for a hearing, even if the creditors agree to dismiss the action. The creditors of a debtor will be subject to the automatic stay to prevent other creditor actions. However, the Bankruptcy Court has the authority to appoint an interim trustee in an involuntary case, or place restrictions on the debtor’s activities, but the petitioning creditor must seek them by filing a motion with the court. There are many other provisions applicable to an involuntary bankruptcy filing, which require experienced bankruptcy counsel to successfully navigate.

Filing an involuntary bankruptcy petition against an individual or a business is a complex process in which the petitioning creditor could be found liable for the debtor’s attorneys’ fees and damages if it is unsuccessful. Likewise, a company that is subject to an involuntary petition may face the prospect of being forced into bankruptcy proceedings when they are not warranted. Our experienced bankruptcy attorneys at Thomas H. Curran Associates have the skills necessary to ensure clients successfully navigate involuntary bankruptcy proceedings to achieve the best possible outcome.