Most bankruptcy filings are voluntary. That means the individual or business with the debt initiates the bankruptcy themselves, even if it feels like they don’t have a choice.
There is, however, something known as “involuntary bankruptcy.” This occurs when creditors force a debtor into either Chapter 7 or Chapter 11 bankruptcy proceedings because they believe they have the ability to pay their debts but are refusing or neglecting to do so.
Businesses are more likely to face involuntary bankruptcy than individuals are. Some types of businesses, however, are exempt from involuntary bankruptcy. These include insurance companies, financial institutions and farms. Non-profit organizations are also exempt.
When can creditors seek involuntary bankruptcy?
After creditors petition the court, the court determines whether to proceed with the involuntary bankruptcy. If the court agrees to it, the debtor is given a time limit to respond. The debtor may object to the petition. They may also choose to convert the bankruptcy to a voluntary one.
For a creditor to qualify to petition for a debtor’s involuntary bankruptcy, the following (among other things) are required:
- There’s no “bona fide” dispute regarding the amount of the debt or the debt itself.
- The debt must be for a minimum amount (which is subject to change).
- The creditor can provide evidence that the debtor isn’t repaying the amount they owe.
While a single creditor can petition for involuntary bankruptcy, it’s typically easier for multiple creditors to meet the criteria.
Why businesses shouldn’t deal with this on their own
Of course, it’s best if a business doesn’t let things get to a point where creditors petition for involuntary bankruptcy. That’s why it’s wise to seek legal guidance with debts or disputes around debts as early as possible.
Any business that is facing an involuntary bankruptcy petition should get this guidance as soon as possible to determine how best to respond. The right response can make all the difference to the future of the business.