Involuntary Bankruptcy
Section 303 of the Bankruptcy Code provides for the filing of an involuntary bankruptcy case under chapter 7 or chapter 11. An involuntary case is started by the filing of a petition which is served on the involuntary debtor.
If the involuntary debtor has more than 12 creditors, at least three entities each of which holds a separate claim are required to file an involuntary case. If the involuntary debtor has less than 12 creditors excluding interested parties, a single qualifying creditor may file an involuntary petition. The petitioning creditors' claims must not be contingent as to liability or be the subject of a bona fide dispute. The claims must also exceed $13,475.00. Before the involuntary petition is dismissed or an order for relief is entered (the "gap period"), further creditors may join in the involuntary petition.
The automatic stay is imposed upon the filing of the involuntary petition to protect the alleged involuntary debtor. Until an order for relief is entered, the involuntary debtor may generally continue to operate its business.
The involuntary debtor has 20 days to file a responsive pleading after the involuntary petition is filed. If the involuntary petition is not timely controverted, a order of relief against the debtor is entered. An involuntary debtor may contest the involuntary petition.
If the involuntary debtor contests the petition, the court will holder a hearing to either enter an order for relief, dismiss the petition, or enter other appropriate relief. At the hearing, the court will determine whether the involuntary debtor is generally not paying debts as they come due unless they are the subject of a bona fide dispute or whether within 120 days prior to the filing a certain custodian was appointed. In determining whether a debtor is "generally not paying debts" as they become due, the courts look to the totality of the circumstances existing when the involuntary petition was filed. Among the factors the court consider are: the number of debts, the amount of the delinquency, the materiality of the nonpayment, and the nature and conduct of the debtor's business.
If the petition for involuntary relief is granted, the court will enter an order for relief and the bankruptcy case will proceed under chapter 7 or 11. If the case proceeds under chapter 7, an interim trustee will be appointed.
If an involuntary case is dismissed other than on consent of the involuntary debtor and the petitioning creditors, the petitioning creditors may be responsible for costs and attorneys' fees. If the involuntary petition is found to have been filed in bad faith, the petitioning creditors may be liable for damages, including punitive damages.
If the involuntary debtor has more than 12 creditors, at least three entities each of which holds a separate claim are required to file an involuntary case. If the involuntary debtor has less than 12 creditors excluding interested parties, a single qualifying creditor may file an involuntary petition. The petitioning creditors' claims must not be contingent as to liability or be the subject of a bona fide dispute. The claims must also exceed $13,475.00. Before the involuntary petition is dismissed or an order for relief is entered (the "gap period"), further creditors may join in the involuntary petition.
The automatic stay is imposed upon the filing of the involuntary petition to protect the alleged involuntary debtor. Until an order for relief is entered, the involuntary debtor may generally continue to operate its business.
The involuntary debtor has 20 days to file a responsive pleading after the involuntary petition is filed. If the involuntary petition is not timely controverted, a order of relief against the debtor is entered. An involuntary debtor may contest the involuntary petition.
If the involuntary debtor contests the petition, the court will holder a hearing to either enter an order for relief, dismiss the petition, or enter other appropriate relief. At the hearing, the court will determine whether the involuntary debtor is generally not paying debts as they come due unless they are the subject of a bona fide dispute or whether within 120 days prior to the filing a certain custodian was appointed. In determining whether a debtor is "generally not paying debts" as they become due, the courts look to the totality of the circumstances existing when the involuntary petition was filed. Among the factors the court consider are: the number of debts, the amount of the delinquency, the materiality of the nonpayment, and the nature and conduct of the debtor's business.
If the petition for involuntary relief is granted, the court will enter an order for relief and the bankruptcy case will proceed under chapter 7 or 11. If the case proceeds under chapter 7, an interim trustee will be appointed.
If an involuntary case is dismissed other than on consent of the involuntary debtor and the petitioning creditors, the petitioning creditors may be responsible for costs and attorneys' fees. If the involuntary petition is found to have been filed in bad faith, the petitioning creditors may be liable for damages, including punitive damages.