Involuntary Bankruptcy
People usually are under the misconception that all bankruptcies are involuntary but this is not the truth. Involuntary bankruptcy is where an individual or an organization is forced into bankruptcy at the request of the creditors. It is usually seen that the debtor either an individual or a company would file for bankruptcy on their own, but in case of involuntary bankruptcy the creditors of the individual or the company would initiate the process of bankruptcy by filing a petition to the bankruptcy court so that they can get back their funds.
If the creditor has opted for involuntary Chapter 7 bankruptcy then the debtor is required to liquidate the assets to pay off the creditors. But in case the debtor has a regular monthly income that would cover both the living expenses and the monthly payments to the creditors then the debtor is allowed to file under the Chapter 11 involuntary bankruptcy.
The process of involuntary bankruptcy
The process for involuntary bankruptcy starts when the creditor files a petition in the U.S bankruptcy court with the clerk and the debtor is given 20 days to file for objections. In case the debtor files objections then the case would go to the court and in case there are no objections then the bankruptcy proceeds.
If the involuntary bankruptcy case goes to the court then there are possibilities that the court would deny the petition of the creditor. But if the court finds that the debtor should go through bankruptcy then the debtor is required to confront the creditors to whom he owes money. It is usually seen that the creditors try to force the debtors into bankruptcy if the debtors owes a considerable amount to the creditor or the debtor has missed on a number of payments. The involuntary bankruptcy helps the creditor in obtaining the money before the debtor would drain out all his assets. The creditors are smart enough to file the involuntary bankruptcy before the debtor thinks of filing for it.
The chapter 11 or the Chapter 7 involuntary bankruptcy can be filed against anyone or any organization that owes considerable money o its creditors excepting for:
•Farmers
•Credit unions
•Nonprofit groups
•Insurance companies
•Banks
•Savings-and-loan institutions
There are basically tow ways in which a debtor can become a target of involuntary bankruptcy. The first being that the debtor is not paying up apart from the disputer arrears, which would include missing a number of payments or not paying up the determined amount. The other is when a guardian is appointed who takes charge of the property within 120 days before the bankruptcy petition is filed.
For filing an involuntary bankruptcy there should be more than 3 creditors who are owed a minimum amount of $10,775 in total. If there are less than 12 creditors then apart from the employees and anyone else getting preference only one creditor who is owed an amount of $10,775 is required. Involuntary bankruptcy is a risky game for the creditors.
Under the new bankruptcy laws there are a number of requirements to file for involuntary bankruptcy. Some of these include:
•The creditor must prove that the claim that they are making is not subject to legal dispute. The debtor can have a legal defense and on the legal basis can prove the basis of involuntary bankruptcy to be disqualified. Most of the bankruptcy courts have tests to determine whether there is a genuine issue for filing the involuntary bankruptcy. The issue depends on the debtor?s liability as the criteria for genuine dispute.
•The debtor should be proved to as not paying up the non-disputed debts when they are due. It should also be proved that the debtor is not paying up to one or two creditors. This also involves a test devised by the court, which would analyze how long the debts have been due, and since when the debtor is not making payments. Besides this the debtor?s liquidity is also taken into consideration. There are some courts that would define the meaning of generally not paying as the debtor is missing on a significant number of payments, which are in relation to the debtor?s financial situation.
•Besides this another basis of proving the involuntary bankruptcy is the debtor?s transfer of substantially of all the assets to a trustee or a receiver.
One of the main reasons for the rarity of the involuntary bankruptcy is that the most of the creditors fail to file successful petitions. It becomes difficult for the creditor to determine whether the claims are subject to the debtor?s genuine dispute and hence would be unable to support the petition. Besides, there are times that the court finds the involuntary bankruptcy in bad faith and hence the creditor would be losing more money. Because of the risk involved in filing the involuntary bankruptcy there are few cases that are brought to the court.
Hence it is advised that if you wish to stay away from the embarrassment of involuntary bankruptcy in case you are unable to defend your self from the creditor you should consider making your payments on time to the creditors.
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