Involuntary Bankruptcy

While a bankruptcy filing is usually a step taken by a debtor who is facing crushing debt, in some cases creditors can force the debtor’s hand into filing for bankruptcy. This generally involves business debtors rather than individuals, but not always. When wealthy individuals who have significant assets that can be retrieved, creditors may take this drastic step.

How it Works 

For a creditor to force a bankruptcy filing, they can only pursue Chapter 7 or 11. In the petition for involuntary bankruptcy the creditor must lay out the reasons for this action. There are certain key facts that must be presented:

• Significant debt has accrued (at least $16,750 as of 2022) to a single creditor, and the debtor is not paying on them and;
• There are no more than twelve unsecured creditors OR;
• At least three creditors owed a combined amount of at least $16,750 team up to file a petition together and;
• There are more than a dozen unsecured creditors in total OR;
• The debtor’s property has been controlled by a receiver, custodian, or agent within 120 days to enforce a lien.

Fighting Back 

Debtors can oppose this petition.  It will require that both parties state their case before a judge in a hearing, after which the judge can either hold the petition intact or dismiss it altogether, perhaps even ordering the creditor to pay the debtor’s costs associated with the petition. The only other option for a debtor is to accept the petition, in which case things will move forward as though the debtor filed for bankruptcy.

Bad Faith Dismissals 

Another way debtors can get out from under an involuntary bankruptcy is if the case is determined to have been filed with bad faith. That could include circumstances such as:

• A creditor aiming to ruin the reputation of a debtor;
• A creditor attempting to intimidate a debtor so they will settle up;
• A creditor trying to damage the business of a debtor;
• A creditor endeavoring to get a disproportionate advantage over competing creditors.

Bad faith dismissals can turn into a windfall for debtors. One such case resulted in  a judgment of over $6 million in compensatory and punitive damages for the debtor, plus attorney’s fees. Any creditor even considering petitioning for an involuntary bankruptcy would be wise to move forward with caution, as the repercussions for such filings can be brutal when proper steps prior to filing are not taken.

Advocating for You 

The Miami bankruptcy attorneys at the Law Office of Julia Kefalinos have the knowledge and experience necessary to help you with your financial woes. To discuss your situation, schedule a confidential consultation in our Miami office today.

Source:

justice.gov/archive/ust/articles/docs/cll0203.pdf