Involuntary Bankruptcy

When you file for bankruptcy, you must disclose your debts, referred to as “creditor claims,” on official bankruptcy paperwork. However, as simple as that may sound, categorizing claims can be a bit tricky.

Involuntary bankruptcies are rarely filed against individuals. 

Involuntary bankruptcies don’t occur frequently, and creditors usually bring them against a business organization rather than an individual. Creditors follow a procedure that includes filing a bankruptcy action on behalf of the person or company that owes the money. In this article, you’ll learn more about the involuntary bankruptcy process.

Creditors Target Assets for Involuntary Bankruptcy

Creditors want to get paid—and forcing the bankruptcy of a person or business without any assets can be a bad move. So it shouldn’t come as a surprise that the focus of involuntary bankruptcy will likely be either on:

• a business with assets or, in more unusual cases,
• a wealthy individual.

When an individual or business doesn’t own much, a creditor is better off trying to grab all of whatever money and property might be available outside of the rules of bankruptcy. Once a debtor is in bankruptcy, the automatic stay—an order prohibiting collection activities—stops creditors from attempting to collect the debt on their own, leaving the creditor to share whatever gets recovered by the bankruptcy trustee appointed to the case.

How Involuntary Bankruptcy Works

An involuntary bankruptcy starts when one or more creditors file a petition with the bankruptcy court. A creditor can file an involuntary bankruptcy case under Chapter 7 or Chapter 11. Cases under Chapter 13 and Chapter 12 cases aren’t permitted.

The bankruptcy petition must indicate which of two circumstances justifies the involuntary bankruptcy:

• the debtor isn’t paying debts as they come due, or
• within the last 120 days, a custodian, receiver, or agent took control of the debtor’s property to enforce a lien.

Once filed, the debtor can respond to the petition. If the debtor fails to do so, the court will allow the matter to move forward, and the debtor will have to participate in the bankruptcy.

If the debtor responds, the court will set a hearing and decide whether the bankruptcy should go forward. A judge who finds in favor of the debtor will dismiss the case. The judge might also require a filing creditor to pay the debtor’s costs and fees.

You can find the official forms for involuntary petitions (individual and non-individual) on the U.S. Court’s bankruptcy form page.