Bankruptcy is generally viewed as a personal self-help measure in which the party filing the bankruptcy petition asks the court to protect it, him, or her from claims of creditors.
In a Chapter 7 proceeding, the petitioner asks the court to forestall collection activity and discharge certain debts; in a Chapter 13 proceeding, the petitioner asks the court to forestall collection activity and supervise a process in which the debtor attempts to pay off debts according to a court-approved schedule.
What, then, is an “involuntary bankruptcy?”
The basics of an involuntary bankruptcy petition
The U.S. Bankruptcy Code permits three or more petitioning creditors (if the debtor has fewer than 12 creditors, the number of petitioning creditors is reduced to 3) to file a petition in bankruptcy court to declare the debtor to be bankrupt. An involuntary bankruptcy petition is generally used to resist the claim by a debtor that it does not have the assets to pay the claim of one of the creditors.
Claims cannot be uncertain or contingent
The bankruptcy code states that a petitioning creditor’s claim against the debtor cannot be contingent as to liability or subject to a bona fide dispute as to liability or amount. The Bankruptcy Code does not define “bona fide” dispute in this context. The majority of courts that have considered this question have chosen an objective approach. Generally, a claim that is embodied in a final judgment and that is neither stayed nor appealed may be considered not subject to argument as to whether it is the subject of a bona fide dispute.
Minimum dollar requirement
The Bankruptcy Code explicitly states that the aggregate claims of the petitioning creditors must total $15,775. Counterclaims, set offs, and bona fide disputes may serve to increase or decrease this number.
Order for relief
Once the petition is found to satisfy the statutory requirements, the court will enter an order for relief if it finds that the debtor is generally not paying it’s debts as such debts become due unless such debts are the subject of a “bona fide dispute as to liability or amount.”
Creditors beware
A creditor who files a petition for involuntary bankruptcy relief may wind up suffering stiff penalties, including the payment of the debtor’s attorneys’ fees and any other damages suffered by the debtor.
