When you think about bankruptcy, you may think of it as an option. In most cases, people make the decision to pursue financial relief by hiring an attorney and filing in court. You may be surprised to know that you can actually be forced to file bankruptcy. When we say “forced” we do not mean by circumstance, we mean “forced” by creditors or a governing body. In many of our articles, we explain that bankruptcy is a legal tool intended to protect individuals and businesses from perpetual financial distress. On the other side of that coin, bankruptcy is intended to protect creditors from perpetual mounting debt.
Who can be forced into involuntary bankruptcy?
Well, in the majority of cases, a creditor will file against a business that has borrowed and is not paying but has assets which can be liquidated to offset most or all of the outstanding debt. That being said, involuntary bankruptcy can be filed against individuals. This is most common when an individual is not paying down their outstanding debt but has assets. This is most common with wealthy individuals. There are stipulations which pertain to individuals and businesses when involuntary bankruptcy is being considered:
- The debt has to have met the criteria (if any exist) for a motion to seek collection. These details are set forth in the loan agreement.
- The debt cannot be disputed by either party.
Who cannot be forced into an involuntary bankruptcy case?
While most businesses and technically most individuals can face involuntary bankruptcy, some entities cannot. Those include:
- Government entities including municipalities;
- Farmers;
- Credit unions;
- Not-for-profit organizations;
- Insurance companies; and
This list is not all-encompassing.
Who is at risk of this involuntary action?
The good news is, while an involuntary bankruptcy filing can be thrust upon any individual or business, the debt has to meet certain criteria:
- As of April of 2019, the debt has to be greater than or equal to $16,750.
- The borrower (individual or business) has to have 12 (or less creditors) with debt totaling the afore mentioned figure. (If the borrower has more than 12 creditors, only three creditors can file the involuntary motion and their owned debt must meet the $16,750 threshold).
If an involuntary bankruptcy motion is filed against you, you are not powerless
You or your business have 20 days to respond to the motion. You can oppose it by proving that you are paying or have attempted to pay the debt. You can also say the motion was filed in bad faith. An example of this would be if you tried to start paying the debt and creditor refused your payments because they intend to try to seize assets.
A business or individual can file to convert the involuntary bankruptcy to a voluntary motion. This allows the debtor to work with a trustee to choose assets to be used to offset debt and it allows the debtor to seek asset protection/exemptions. An additional benefit of the conversion is, it allows the debtor to choose between chapter 7 and chapter 11 whereas an involuntary filing would allow the court to make the choice.
Bankruptcy can be scary. It is not something that should be handled without the assistance of licensed and skilled attorney. The attorneys at Dsouza and Strachan Law Group have the knowledge and experience you need to get back on the path to financial freedom. Contact Dsouza and Strachan today for a free consultation.