While bankruptcy is known widely in America in a general sense, there are some variations to bankruptcy law that very few citizens know anything about. As a case in point, there are not a lot of people who have never heard about involuntary bankruptcy. Just as the name implies, involuntary bankruptcy is a situation where an individual or business is forced into a bankruptcy proceeding against their will. Such a situation can get ugly and is wrought with many pitfalls.
It must be noted that federal courts look on bankruptcy as a last resort. That's true whether the filing is voluntary or involuntary. Therefore, to the same extent an individual would have to prove his case in a voluntary bankruptcy, creditors also have to prove their case to force an involuntary one. Suffice it to say that a business or individual forced into the involuntary bankruptcy party has the deck stacked against them significantly.
Who can initiate involuntary bankruptcy?
According to the law, any creditor whose debts are considered dischargeable by a bankruptcy court may initiate a proceeding against an individual or business. Typically however, there will be a group of creditors working together to build a case against the individual or business. The lawyer for the creditors will then have to take the case before a federal bankruptcy judge along with a petition, hopefully convincing the judge of the need for the bankruptcy.
If creditors do their due diligence this sort of petition is rarely turned down. Federal courts understand the need to protect creditors just as much as those being forced into bankruptcy. As long as creditors are able to provide sufficient evidence that they are in jeopardy of not being paid, they generally don't have a problem forcing involuntary bankruptcy.
What if I'm forced into involuntary bankruptcy?
If you're the one being forced into this scenario your first course of action is to immediately consult with an attorney. Many people get themselves in hot water during an involuntary bankruptcy because it has caught them off guard and they have not sought the proper legal device. Even though an attorney will cost you more money you don't have, in the long run it will be to your benefit. An experienced bankruptcy attorney will know exactly how to handle your case according to your best interests.
Your attorney will also help you decide under which chapter to file for bankruptcy. For individuals the two most common types are the reorganization known as Chapter 13 and a full liquidation known as Chapter 7. If there is an upside to involuntary bankruptcy it's the fact that you still get control over the decision of how to file. Of course, you still have to submit to the final decision of the court, but at least you'll have the opportunity to make your case.
Involuntary Bankruptcy and Corporations
Although individuals can be forced into involuntary bankruptcy by creditors, it's usually something that we see with corporations. That's because corporations have significantly more creditors who stand to lose significantly more money. Not only that, but company officers and employees are protected in a corporate setting because the corporation is considered by law to be its own separate entity. Therefore, officers may want to continue to try to keep the business afloat rather than submit to bankruptcy. Creditors, fearing they may not get paid, sometimes force a bankruptcy because they believe they have no other options.
Even if an involuntary bankruptcy is thrust upon a corporation, they still have the same rights as the individual in terms of being in control of their petition. Most corporations will have either a staff or contracted attorney who will be able to handle the process for them. In a forced bankruptcy scenario creditors know they will be given no choice but to accept whatever amount of money the court approves; but that's better than nothing. If they've gone to the trouble to force an involuntary bankruptcy that means they probably already are prepared to settle for whatever they can get.
If creditors do not succeed in forcing involuntary bankruptcy that doesn't mean the individual or corporation is off the hook. It should serve as an eye-opener to motivate that individual or business to get its financial house in order. Just because an involuntary bankruptcy petition failed today doesn't mean it will fail next time around.