In the right circumstances, creditors can utilize involuntary bankruptcy a tool for collecting on its debts. This post addresses the process a creditor must follow after filing an involuntary petition under chapter 7 or 11 of the Bankruptcy Code. Before a creditor can initiate this procedure, it is important to understand the basic requirements of involuntary bankruptcy. These basic requirements can be found here in the first post of this series.
The commencement of an involuntary case is governed by 11 U.S.C. § 303. Upon filing an involuntary petition, the summons must be issued and served upon the alleged involuntary debtor. The Bankruptcy Rules mandate that service be made within fourteen days after the summons is issued. The debtor—or a party in interest— then has twenty days to either contest the petition or file an answer. Possible defenses include, without limitation, lack of jurisdiction, improper venue, an insufficient number of petitioning creditors, an inadequate aggregate debt amount, and issues relating to fraud, duress, or estoppel.
Section 303(h) is significant for creditors as it provides that “[i]f the petition is not timely converted, the court shall order relief against the debtor . . . .” Likewise Bankruptcy Rule 1013(b) provides that “[i]f no pleading or other defense to the petition is filed within the time period . . . the court . . . shall enter an order for the relief requested in the petition.” If, however, the alleged involuntary debtor contests the petition, the court will hold a hearing on the merits.
Prior to initiating an involuntary action, it’s important that petitioning creditors are aware of pitfalls associated with involuntary bankruptcy. These pitfalls include the possibility that a petitioning creditor may be on the hook for extensive attorney’s fees and costs. We will address these pitfalls as our final topic on this series.
