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  1. Bankruptcy Glossary
  2. Involuntary Bankruptcy

What is an Involuntary Bankruptcy?

Involuntary bankruptcy cases can be filed against an individual or a business and commences with the filing of the bankruptcy petition in the bankruptcy court. If the debtor has more than 12 creditors at least 3 of the creditors must file their petition together and must have contingent claims (not subject to a bona fide dispute) which collectively equal a specified amount. Debtors with a legitimate defense against the amount or the liability of the debt can not be forced into an involuntary bankruptcy.

Why creditors decide to file involuntary bankruptcy petitions

What are the reasons creditors may decide to file an involuntary bankruptcy petition.There are several reasons including the insolvency of the debtor and their failure to make debt payments. Chapter 7 Bankruptcy involuntary petition requests are the most common, and after the petition is filed a trustee is assigned to liquidate the debtor's assets and repay the creditors. The benefits of an involuntary bankruptcy for one particular creditor may be limited. Liquidation of the assets and subsequent debt payments are made to all secured creditors and the recovery amount for one creditor may be limited. It may be advisable for creditors to seek relief by other debt collection actions allowed under federal and state laws to increase the amount of their debt recovery.

If the involuntary bankruptcy petition is dismissed, the creditors who file the bankruptcy petition must pay all administrative costs associated with the bankruptcy claim, including bankruptcy lawyer fees and any additional costs. Legal requirements can make it complicated and risky for creditors to initiate an involuntary bankruptcy. If you are a creditor considering filing an involuntary bankruptcy petition it is important to talk to a bankruptcy lawyer.