What Is an Involuntary Bankruptcy?

Involuntary bankruptcy is a legal proceeding through which creditors request that a person or business go into bankruptcy, rather than doing so 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.

Creditors may request involuntary bankruptcy if they feel that they will not be paid if bankruptcy proceedings are not entered into, and so they must 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 serious unmet debt. This amount depends on whether the debtor is an individual or a business.

Understanding Involuntary Bankruptcy

Involuntary bankruptcy differs significantly from a voluntary bankruptcy that a debtor initiates by filing a petition with the courts. 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.

Key Takeaways

  • Involuntary bankruptcy is a legal proceeding that creditors may bring against a person or business that may force that person or business into bankruptcy. 
  • The main reason an involuntary bankruptcy might be granted is for a case in which a business has the ability to pay its debts but refuses to do so. 
  • An individual being sent into involuntary bankruptcy is very rare; while it's more common for businesses, it is still a relatively rare form of bankruptcy.

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

Petitioning Creditors

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 they hold 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 $16,750 (as of January 2020); 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, at least three creditors must join an involuntary petition.

Limitations

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.

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.