Involuntary bankruptcy can be a useful tool for creditors. Filing an involuntary bankruptcy petition against a debtor can help actualize the value of a debtor’s assets. The following are some basic requirements when considering filing an involuntary bankruptcy petition.
Involuntary petitions may only be filed under chapters 7 and 11 of the Bankruptcy Code. A debtor in an involuntary bankruptcy case must qualify as a “person.” This generally excludes farmers and not-for-profits. Next, a petitioning creditor needs to consider the number and amount requirements for filing an involuntary petition. If the involuntary debtor has twelve (12) or more creditors, then there must be at least three (3) petitioning creditors with an aggregate, unsecured claim of at least $15,325. If the involuntary debtor has less than twelve (12) creditors, then only one (1) petitioning creditor with at least $15,325 in non-contingent claims is required.
When counting creditors, employees, insiders, and transferees of voidable transfers are not counted. The number of creditors is computed on the date the involuntary petition is filed. Any post-petition payment to creditors will not affect the number of creditors requirement.
Additionally, the debt at issue must be liquidated – meaning settled or fixed. Debt that is contingent or subject to dispute does not count towards the amount requirement. Thus, tort claims are generally not a basis for an involuntary petition. Finally, there is a basic requirement that the debtor be insolvent, which is ordinarily proven by showing that the involuntary debtor is failing to pay his or her debts as they become due.
In the upcoming articles, we will explore the basic procedures for involuntary bankruptcy petitions, as well as some major pitfalls petitioning creditors must avoid.
