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When Can a Creditor Initiate an Involuntary Bankruptcy?

Most of the time debtors are the ones who file New York bankruptcy. However, the Bankruptcy Code allows creditors to force debtors into bankruptcy under certain circumstances. Importantly, the debtor in question must be either a for-profit corporation or a person, but not an unincorporated farmer or family farmer. Creditors can initiate involuntary proceedings in chapter 7 or chapter 11 and never chapters 9, 12, or 13.

There are several other conditions that must be met before an involuntary bankruptcy can be filed.

(1)  The debtor must owe the creditors no less than $15,325.

(2)  If there are twelve or more creditors, then at least three must join the petition.

(3)  If there are fewer than 12 creditors, as many creditors who are owed $15,325 or more are necessary to file. This excludes the debtor’s employees, insiders, and recipients of voidable transfers.

(4)  None of the debts owed to these creditors may be “contingent” to the debtor’s liability, e.g. a lawsuit that hasn’t gone to judgment yet. The debts also can’t be subject to a bona fide dispute as to liability or amount.

(5)  Moreover, if the debtor is a partnership, then not all of the general partners are necessary to file, but if all of the general partners have received relief under the Bankruptcy Code, then any general partner or their trustees, or a claimant against the partnership can file the petition.

(6)  Alternatively, a foreign representative of an estate in a foreign proceeding concerning the debtor can also start an involuntary bankruptcy.

Debtors and non-filing general partners of partnership debtors may file an answer to the involuntary bankruptcy. After that, the court will hold a trial and order relief for the creditors either if the debtor is not paying debts as they become due, or if within 120 days before the case was filed, a custodian was appointed or took possession of “less than substantially all the debtor’s property for the purpose of enforcing a lien.”

If the debtor doesn’t file an answer, the court shall order relief against the debtor, but only after notice and a hearing.

There are a few other ways an involuntary bankruptcy differs from one filed by the debtor. For example, during the case, debtors may conduct their business, including buying and selling property, as though the petition had not been filed.

The Bankruptcy Code goes to some length to protect debtors in involuntary bankruptcies too: If the court dismisses the petition, the court can also order the petitioners to pay either the costs of the case or reasonable attorney’s fees. If the petitioner filed the case in bad faith, the court can award damages that are “proximately caused” by the filing or punitive damages—something that’s rare in bankruptcy. The court can also require creditors to indemnify the debtor for cause for these costs, attorney’s fees, proximate damages, or punitive damages before the case is dismissed.

Additionally, if the petition contains any materially false statement against an individual debtor, then the bankruptcy court can seal the case’s records relating to the petition. Moreover, the creditors will be disallowed from reporting the bankruptcy to any of the credit bureaus.

Thankfully, involuntary bankruptcies are rare, and the safeguards for debtors ought to deter creditors from initiating them frivolously. Creditors aren’t going to force a debtor into bankruptcy court unless they are sure the debtor can actually pay the debts. That having been said, if you have been served with an involuntary bankruptcy or you represent a creditor and think you have a case against a debtor, then it’s imperative to consult with an experienced New York bankruptcy lawyer.

For answers to more questions about involuntary bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy law firm Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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