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How an involuntary bankruptcy works

On Behalf of | Nov 10, 2022 | bankruptcy |

The U.S. bankruptcy code authorizes involuntary bankruptcy as a solution for Maryland creditors in certain situations. This type of bankruptcy can apply to a personal or business debtor, although it is mainly used for businesses. Minimum claim amounts and other limitations exist.

Involuntary bankruptcy defined

In an involuntary bankruptcy, creditors force an unreliable borrower, typically a business, to file for bankruptcy. This type of bankruptcy is relatively rare and used by creditors who do not want to wait any longer for a debtor to file. Creditors choose this option if the debtor has assets that could pay their debts but instead chooses to squander the assets in other ways while ignoring the debt obligations. Involuntary bankruptcy filings are usually against businesses, not individuals. Some entities cannot be the target of an involuntary bankruptcy, including banks, not-for-profits, or farmers.

The process

Creditors can force a borrower to file either Chapter 7 bankruptcy and liquidate all of their assets or Chapter 11 bankruptcy to reorganize their assets and work out new payment arrangements. Based on the case specifics, a bankruptcy judge determines which chapter the borrower must file. In the bankruptcy petition, the creditor must explain their reason for pursuing involuntary bankruptcy on the debtor’s behalf.

Typical reasons involve a debtor failing to pay overdue debts or because, within the last 120 days, another party, like a receiver, agent, or custodian has taken control of the debtor’s property to enforce a lien. The borrower has 20 days to respond and oppose the petition or convert to voluntary bankruptcy.

The minimum claim

A single creditor can force a debtor into involuntary bankruptcy if they have a non-contingent claim of at least $16,750, but only if the debtor has less than 12 total creditors. For debtors with at least 12 creditors, a minimum of three creditors must petition, and their aggregate, unsecured claims must total at least $16,750. The debt may not be contingent on meeting certain business conditions, such as an un-activated guarantee. It also must not carry any doubt as to its existence or validity.

Creditors have the option of involuntary bankruptcy available to help them pursue unpaid debts from debtors that have the means, but not desire, to pay. The creditor must explain their reason and adhere to the minimum claim amount to file a petition.



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