Involuntary Bankruptcy
| Publication year | 1990 |
| Pages | 1061 |
1990, June, Pg. 1061. Involuntary Bankruptcy
Most creditors do not enthusiastically greet the news that one of their debtors has filed bankruptcy. However, under some circumstances, a creditor may find it beneficial to commence a bankruptcy proceeding on behalf of one of its debtors. This article discusses the process of commencing an involuntary bankruptcy proceeding, as well as some of the advantages and disadvantages of this method of creditor protection.
Involuntary bankruptcy is not a substitute for ordinary collection procedures. Normally, involuntary bankruptcy can hamper efforts to collect money or recover property because of (1) the imposition of the automatic stay and (2) the debtor's right to use property, including a creditor's collateral, during the pendency of a case. Moreover, the use of an involuntary bankruptcy petition to harass a debtor can have disastrous consequences. If the court dismisses the petition, it can award the debtor attorney fees, costs and actual and punitive damages (as discussed below).
However, in the proper situation, involuntary bankruptcy can be advantageous. If the debtor is giving preferred treatment to certain creditors or making fraudulent transfers, a properly timed bankruptcy filing may allow assets to be recovered for the benefit of all creditors.(fn1) Likewise, if a debtor dissipates assets or mismanages a business, an involuntary bankruptcy may allow the creditor to seek to replace the debtor's management with a trustee.(fn2) Finally, an involuntary case may allow a creditor to oversee and influence a debtor's business to a greater degree than would otherwise be advisable.
Bankruptcy Code ("Code") § 303 allows creditors to file an involuntary bankruptcy case against a person (including an individual, partnership or corporation) who is not a farmer, family farmer or non-profit corporation. The involuntary debtor must be eligible for relief based on the chapter of the Code under which the involuntary case is commenced.(fn3) For example, a railroad may not be a debtor under Chapter 7 but may be a debtor under Chapter 11.(fn4)
Generally, a minimum of three creditors holding claims, the unsecured portion of which exceeds $5,000 in the aggregate, may file an involuntary petition. If a debtor has less than twelve holders of eligible claims, one or more of such holders, whose claims in the aggregate are at least $5,000, may file a petition.(fn5)
The claims referred to for the purpose of determining who is an eligible creditor (to satisfy the number-of-creditors requirements) must be neither contingent as to liability nor the subject of a bona fide dispute.(fn6) Holders of fully secured claims may qualify as petitioners as long as they...
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