What Is an Involuntary Bankruptcy

Involuntary Bankruptcy is a legal proceeding in which a person or business is requested to go into bankruptcy by creditors, rather than on the person’s or business' own accord. Creditors seeking involuntary bankruptcy must petition the court to initiate the proceedings, and the indebted party can file an objection to force a case.

BREAKING DOWN Involuntary Bankruptcy

Involuntary Bankruptcy is requested by creditors who feel that they will not be paid if bankruptcy proceedings are not entered into and seek a legal requirement to force the debtor to pay. For involuntary bankruptcy to be brought forward, the debtor must have a certain amount of debt that must be met. This amount depends on whether the debtor is an individual or a business.

Involuntary bankruptcy differs from a voluntary bankruptcy that is initiated by a debtor with the filing of a petition. Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid, while offering creditors a chance to obtain some measure of repayment based on the individual's or business's assets available for liquidation. 

Involuntary bankruptcies are primarily filed against businesses, where creditors believe the business can pay but refuses to do so. Involuntary bankruptcies against individuals are less common because most individuals in debt have few recoverable assets.

A petitioning creditor, as defined by Title 11 of the United States Code, also known as the Bankruptcy Code, may commence an involuntary bankruptcy by filing an involuntary petition. The petition sets forth requirements for the creditor to satisfy and can be filed against an individual or business entity and only under Chapters 7 or 11 of the Bankruptcy Code.

A petitioning creditor is qualified to file an involuntary petition if it holds a claim against the debtor that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, according to the Bankruptcy Code, equals at least $15,775 (as of April 2016); and demonstrates that the debtor is generally not paying debts as they become due. If the debtor has less than 12 qualifying creditors, an involuntary petition may be filed by a single qualifying creditor. If a debtor has 12 or more creditors, an involuntary petition must be joined by at least three creditors.

A debtor has 21 days to respond to a filing before bankruptcy proceedings may commence. If they fail to respond or if the bankruptcy court rules in favor of the creditors, an order of relief is entered and the debtor is placed into bankruptcy.

Limitations of Involuntary Bankruptcy

A creditor cannot file an involuntary bankruptcy under Chapter 12 or Chapter 13 of the Bankruptcy Code. Involuntary bankruptcies can also not be filed against banks, insurance companies, not-for-profit organizations, credit unions, farmers, or family farmers.