Involuntary Bankruptcy; Chapter 11; Petitioning Creditors

Usually debtors file for voluntary bankruptcy protection.  When creditors initiate the bankruptcy process, it is called an involuntary bankruptcy filing. This means that the bankruptcy filing is initiated by the creditors rather than by the debtor company.  An involuntary bankruptcy petition may be disputed or contested before the U.S. Bankruptcy Court by the debtor company.  The outcome of a bankruptcy filing from an unsecured creditor’s perspective is always uncertain.  This may be even more true when a customer is forced unwillingly into bankruptcy by its creditors. Therefore, an involuntary bankruptcy filing should be considered only as a last resort.

Many creditors consider an involuntary bankruptcy filing to be the ultimate threat in dealing with an uncooperative debtor.  An involuntary bankruptcy filing will enable creditors to gain more control over the actions of the debtor.  An attorney must be consulted to determine if the debtor qualifies for an involuntary bankruptcy.  Creditors must keep in mind that the goal of a Chapter 11 filing is to preserve the debtor’s assets for the benefit of all creditors.

An involuntary bankruptcy petition may be filed against a proprietorship, a partnership, or a corporation.  In cases involving fewer than 12 creditors, a single creditor with a claim (a balance due) in excess of $10,000 can file an involuntary bankruptcy petition. If there are more than 12 creditors, at least three creditors with combined claims of more than $10,000 are needed in order to file an involuntary bankruptcy petition.  From the seller's perspective, the advantages of an involuntary bankruptcy filing include:

• The fact that a bankruptcy filing forces the debtor to treat all of its creditors the same way, rather than offering preferential treatment relating to payments to some creditors while not paying other creditors. 
• An involuntary filing can prevent a dishonest or incompetent debtor from draining all of the debtor company's assets.
• The U.S. Bankruptcy Code provides for opportunities for creditors or the Court to determine whether assets of the company were misappropriated.
• Certain information that the debtor is required to provide to the bankruptcy court must be accurate under penalty of perjury.

It should also be noted that if an involuntary bankruptcy filing has been made in bad faith, the bankruptcy court may invalidate the bankruptcy petition.  At that point, the petitioning creditors who filed the petition may be subject to civil penalties for damages or loss of business. 

Edited by Michael C. Dennis.  Mr. Dennis is a consultant and the author of "Credit and Collection Handbook"