Involuntary Bankruptcy Rules

• When justice requires it, a judge can force a business into involuntary bankruptcy.Justice image by MVit from Fotolia.com
  
  Involuntary bankruptcy can apply to businesses but never to individual consumers. Individual consumers always have the choice to file bankruptcy, but they can never be forced into bankruptcy. Businesses, on the other hand, can be forced into bankruptcy if a certain amount of their creditors request an involuntary bankruptcy.
  
  

Requirements

• Most businesses have a number of creditors, and it typically takes more than one creditor to force a business into involuntary bankruptcy. Specifically, if the business has 12 or more creditors, at least three of those creditors must sign the petition requesting involuntary bankruptcy. Additionally, the business must owe those creditors a combined amount of at least $10,775. But, if the business happens to have fewer than 12 creditors, one creditor can request an involuntary bankruptcy as long as the business owes that creditor at least $10,775.
  
  

Petition

• When creditors request an involuntary bankruptcy, they are basically submitting an application to the bankruptcy judge. The judge will review the petition, or application, and will decide whether to render an involuntary bankruptcy determination. Judges have broad discretion to either approve or deny a request for involuntary bankruptcy. If the court grants the petition, then the business must appear in court for a bankruptcy trial. Ultimately, the court must determine whether bankruptcy is necessary to protect the creditors from never receiving repayment. For example, the court will likely grant the petition if it appears the business is likely to go out of business soon.
  
  

Chapters

• Involuntary bankruptcy can occur under either Chapter 7 or Chapter 11. If a business is forced into Chapter 7 involuntary bankruptcy, then it will fold, and all of the business assets will be sold by the bankruptcy court. Alternatively, under Chapter 11, the business will reorganize itself and continue operating in an attempt to earn a profit. Creditors will be paid from future business revenues rather than from the sale of business assets.
  
  

Penalties

• Creditors are generally reluctant to file a petition requesting involuntary bankruptcy because they face potential fines and penalties if the bankruptcy judge determines they filed the petition in bad faith. If the court decides the creditors had no basis for filing the petition and it is obvious the business will produce revenues to repay its debts, then the court can order the creditors to pay the business' attorney's fees and costs incurred in defending against the petition for involuntary bankruptcy.