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Involuntary Bankruptcy Useful in the Right Situations

 Posted on July 27, 2017 in Bankruptcy

Involuntary Bankruptcy Useful in the Right SituationsDebtors who lack the means to repay creditors protect themselves by filing for bankruptcy. They can liquidate assets or create reorganization plans, after which their remaining debts may be discharged. Though creditors may be unable to retrieve their full debts, they are often forced to cooperate with the debtor in the bankruptcy to retrieve what they can. However, creditors have the ability to initiate bankruptcy with uncooperative debtors. Involuntary bankruptcy is a lesser-used debt retrieval method because it only benefits creditors in certain situations.

Filing for Involuntary Bankruptcy

There are several requirements when using involuntary bankruptcy against a debtor:

  • The bankruptcy is filed as either chapter 7 or 11;
  • The debtor can be an individual or business, with exemptions for farmers and nonprofit organizations;
  • The debt must be undisputed and unpaid;
  • Each creditor that files must be owed at least $15,775 in debt; and
  • If the debtor has 12 or more creditors, at least three creditors must participate in the filing.

Court Decisions

Debtors have 20 days to respond after receiving notice of the involuntary bankruptcy filing. If the debtor contests the filing, a court must determine whether:

  • The creditors are entitled to the debt;
  • The debtor is not paying the debts; and
  • The creditors requested the involuntary bankruptcy in good faith.

The bankruptcy will commence if the court rules in favor of the creditors. However, a ruling against the creditors can have financial consequences if the court believes the creditors did not file in good faith. The court may award damages to the debtor, based on legal fees incurred and harm to the debtor's reputation.

When to Use It

Creditors typically utilize involuntary bankruptcy against businesses and wealthier individuals. These types of debtors may have valuable assets that they refuse to sell to pay off their debts. Forcing bankruptcy on a debtor with limited assets can hurt creditors. They will likely retrieve much less money than they are owed and will lose their claims to the rest of the debt. Creditors may choose to use involuntary bankruptcy if:

  • The debtor’s assets are depleting in value;
  • The debtor is favoring certain creditors when paying debts; or
  • The creditors believe the debtor is committing fraud.

Weighing Your Options

Involuntary bankruptcy can be an effective means of retrieving debt from debtors who are being uncooperative. However, creditors put themselves at financial risk if they use it improperly. A Chicago creditor’s rights attorney at Dimand Walinski Law Offices, P.C., can determine whether involuntary bankruptcy will help you. Schedule an appointment by calling 312-704-0771.


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