Everything the Average American Consumer needs to know about Involuntary Bankruptcy

While no one ever wants to file bankruptcy, the vast majority of bankruptcy cases filed in the United States are voluntary bankruptcy cases. Voluntary bankruptcy cases are initiated when the debtor submits their voluntary petition to the bankruptcy court. It is possible, however, for creditors to initiate an involuntary bankruptcy case against someone. 

Who can file an involuntary bankruptcy petition? 

Normally, an individual or a company who is in debt to creditors will file their own bankruptcy petition. However, with an involuntary bankruptcy petition, it is the creditors filing bankruptcy against the alleged debtor.  

The number of creditors who need to band together to file the petition depends on the overall total number of creditors.

If the debtor has more than 12 creditors, 3 petitioning creditors are needed to file the involuntary petition. If there are less than 12 creditors, only one single creditor is needed to initiate the bankruptcy proceedings. After the involuntary bankruptcy is filed, other creditors can join the case.

The debtor also needs to owe at least $16,750 to the petitioning creditors. This is the minimum total debt owed – it can be divided any way among the group. This number was last updated in 2019. It will be updated again in 2022.

Claims by petitioning creditors

Bankruptcy law has strict rules about when creditors can file an involuntary petition. The federal court doesn’t want just anybody who disagrees with somebody about whether they’re owed money from bringing a case. This would totally overwhelm the court system.

Instead, only certain debts can be listed in this type of case. These debts can’t be contingent debts. In other words, they can’t depend on something that may or may not happen in the future. Instead, the debts must currently exist. 

Additionally, they can’t be the subject of a bona fide dispute about who is responsible, or how much the debt is. This means that the creditors can show the debtor is liable for the debt, and the amount of the debt is fixed. Creditors also have to show the court that the debtor isn’t paying the debt.

Who can be a debtor in an involuntary bankruptcy? 

Although both individuals and corporations can be subject to an involuntary bankruptcy petition, this type of case is usually brought against businesses. The creditors have to bring a type of bankruptcy case the debtor is eligible to file under. For example, they can’t bring a Chapter 7 case against someone who fails the means test.

Creditors can only file this type of bankruptcy case under Chapters 7 and 11. Involuntary petitions can’t be filed under the rules for Chapter 13 Bankruptcy. However, individuals may be able to convert an involuntary Chapter 7 case to a Chapter 13 case if they think that is the best option for them.

Who can’t be a debtor in an involuntary bankruptcy proceeding

Even though most people and companies who meet the debt threshold can have an involuntary bankruptcy case brought against them, there’s a couple limits on who can be subject to an involuntary case.

First, creditors can’t begin a joint bankruptcy case against married couples. Involuntary petitions can only be brought against individual people or companies.

Second, if you’re a family farmer or a fisherman, you are also exempt from being the subject of an involuntary bankruptcy filing. These cases also can’t be filed against certain companies, including banks, credit unions, and insurance companies.

What types of bankruptcy can be initiated by an involuntary bankruptcy petition? 

Petitioning creditors can only bring a Chapter 7 Bankruptcy or a Chapter 11 Bankruptcy involuntary case. They can’t bring an involuntary Chapter 13 Bankruptcy case, or force somebody into a 3- or 5-year Chapter 13 repayment plan in involuntary bankruptcy procedures. However, individuals who have an involuntary bankruptcy petition brought against them might be able to convert their case to Chapter 13 so they don’t have to sell certain belongings.

What happens after an involuntary bankruptcy petition is filed

After the petitioning creditors file the bankruptcy petition in the appropriate United States Bankruptcy Court, the alleged debtor receives a notice. The debtor has three options of how they can respond.

First, the purported debtor can file an answer to the bankruptcy within 21 days of receiving notice. This bankruptcy filing contests the initial petition. The answer explains to the court why the creditors are wrong, and why this person shouldn’t be in bankruptcy. It can also demonstrate that the creditors didn’t file the petition in good faith.

Second, the debtor can accept the case, and it will move on like a normal Chapter 7 or Chapter 11 bankruptcy case. The debtor will have the normal debt relief protections available under the Bankruptcy Code. An automatic stay will begin, meaning that creditors need to stop all debt-collection activities. A bankruptcy trustee will be appointed and administer the case.

Finally, individual debtors can try to convert the case to a Chapter 13 Bankruptcy, if they don’t want to sell their property (liquidate their assets).

It’s important to remember that the petitioning creditors don’t have unlimited power to force an involuntary bankruptcy petition on the court. The bankruptcy court has to decide whether the petition can move forward.

Involuntary petitions must be brought in good faith. The creditors have to show there isn’t a bona fide dispute over the debt. In other words, they have to show that both they and the debtor agree that the debt exists, the debtor is responsible for paying the debt, and that there’s an agreement on the amount of the debt.

If the court decides that the creditors acted in bad faith, however, it can dismiss the case. It can also award attorneys’ fees and, in some cases, even punitive damages. Making it a lot more expensive for creditors to file frivolous cases helps prevent this sort of filing in the first place.

Conclusion

Although it can be frustrating to be forced into an involuntary bankruptcy case, it might be worthwhile to take advantage of the debt relief offered by the case. If you need help moving forward after the filing of an involuntary bankruptcy petition, it’s a good idea to speak with a bankruptcy attorney to see if they can help you sort out your case. 

If you’re worried about adverse actions creditors may take against you, you can also see if you are eligible for help from Upsolve, which provides free Chapter 7 help for qualified low-income individuals.