Involuntary Bankruptcy and How It Works?

Let’s look at the other side of the bankruptcy filing process, at the creditor’s side, people who let you cross the limit and take more money than allowed. Even if some of you think that if you don’t want to file for bankruptcy no one can make you do it, then you are wrong. Contrary to popular belief, a bankruptcy is not always a choice initiated by the debtor. In some cases, a business or person in debt can be legally compelled to file bankruptcy based on a request made by creditors.

Because the law must protect both debtors and creditors, and justice must be satisfied, there are bankruptcy laws that protect creditors who are trying to get their money back. Even if involuntary bankruptcies are rare and are usually filed against businesses with valid justification, creditors can file a petition against you if you don’t get your bills and debts in order. It is less common, however, for creditors to use bankruptcy to protect themselves from individuals and entities transferring assets or preferring one creditor over another.

Involuntary Bankruptcy

So when a creditor decides to initiate a bankruptcy case against a debtor, it is referred to as an “involuntary bankruptcy” and it is better to be informed and to know how to deal with this kind of threat and to take some action before it is too late.

How Involuntary Bankruptcy Works

This type of bankruptcy starts when one or more creditors decide to file a petition in the bankruptcy court. However, simply filing the petition does not entitle the creditor to any type of relief as it does in the case of a voluntary bankruptcy. After the petition is filed, the debtor has 20 days to respond, to file an answer with the court and dispute the bankruptcy. If the debtor responds in time, there will be a hearing and based on the situation and evidence the judge decides if the process of involuntary bankruptcy goes forward. In some cases, if the judge finds in the debtor’s favor, however, he or she will dismiss the case and might require the creditors that filed the case to pay the debtor’s costs and fees. If the debtor does not timely answer the petition, the court will automatically allow the process of bankruptcy to proceed and the debtor will have no choice other than to participate.

Here is a brief explanation about the process for filing an Involuntary Bankruptcy Petition:

  1. Filling the papers. The Creditor or creditors before filling the documents decides whether to file as a Chapter 7 or Chapter 11. They file a Form B5, which must be signed by all creditors participating.
  2. Debtor Objection. There is a 20 day time span to respond to this and filing an objection to the petition. It there is no objection the Bankruptcy process proceeds in the normal manner.
  3. Court Hearing. If an objection is filed, both sides are granted a hearing to present their cases.
  4. Court Decision. Based on the evidence and the whole case situation the court makes a decision. If the decision is made in favor of the creditors, it must be proven that:
  • The debtor is not generally paying its debts as they come due. This is called “equitable insolvency.
  • A receiver, assignee, or custodian takes possession of substantially all of the debtor’s property, or is appointed to take charge of substantially all of the debtor’s property.

If the creditor wins, the debtor is forced into bankruptcy and the case proceeds as a normal Chapter 7 or Chapter 11. If the debtor wins, the petition for bankruptcy is denied and the petitioning creditors may have to pay the debtor’s legal costs and damages.

Resource:

Marc Aaron Goldbach attorney at Goldbach Law Group handles all sorts of Bankruptcy cases and he is ranked as one of the premier Bankruptcy Lawyer in Long Beach areas. He can also be reached at (562) 696-0582.

You can follow Marc on Avvo, where he has explained about Bankruptcy’s Do’s and Don’ts or on Google+ to seek his advice.

About Marc Aaron Goldbach

Marc Aaron Goldbach has worked tirelessly to develop a successful bankruptcy and civil law practice for clients located throughout Los Angeles County. Mr. Goldbach at GoldBach Law Group have represented a wide array of small businesses and individuals with 100% client success rate. Mr. Goldbach is always available to answer questions and willing to guide you through the entire legal process.
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