Involuntary Bankruptcy

Involuntary bankruptcy is defined as when an individual or business begins legal proceedings to go into bankruptcy, as requested by their creditors and not at their own discretion. In order to gain this status creditors have to first petition to the court to begin the process. Following this, the indebted person or company can file a rejection of this claim if they feel it is just.  It is worth noting that the majority of bankruptcies today are voluntary.

Forced but Voluntary Bankruptcy

An organization or person can be ‘forced’ into bankruptcy, but it is technically still voluntary.  In this situation usually the business or individual files a petition under ‘liquidation’ or ‘reorganization’ of the bankruptcy code – in reply to their creditor’s actions. While it is understood the bankruptcy has been forced, the decision has ultimately been taken by the indebted party. This means the case is handled differently to involuntary bankruptcy in terms of timeline and the codes and supervision it is subject to.

True Involuntary Bankruptcy

In certain situations, a company may not consent to bankruptcy. Their creditors then may force them into this. This happens if creditors feel they will not be paid unless bankruptcy is declared, and the indebted party is reluctant to do so.  There are certain requirements on the creditor’s part which must be fulfilled in order to begin proceedings.

An involuntary bankruptcy differs to a voluntary one in a number of ways:

1. An involuntary bankruptcy must be provided with a summons.
2. The company is not immediately given the bankrupt status i.e. they may continue to operate as a business.
3. The organization/individual may consent to the bankruptcy, or can respond to an involuntary filing with its own voluntary one.
4. The court has a right to impose restrictions and assign an interim trustee; however these do not automatically apply and have to be sought.
5. If the indebted party wishes to contest the bankruptcy, it must do so within 21 days
6. If the court rules on the side of the creditors, the company is officially declared bankrupt. Following this the party is subject to the Bankruptcy Code’s supervisions.

If you have any further questions or queries regarding bankruptcy, involuntary or otherwise, why not contact Cain & Daniels for expert advice.