A question we have been getting a lot lately is: what is Involuntary Bankruptcy? Well according to our friends at Justia, Involuntary Bankruptcy is a proceeding initiated by creditors requesting the bankruptcy court to place a debtor in liquidation. There are a number of reasons why creditors would initiate bankruptcy:
Creditors begin these proceedings by filing a petition and a summons with the clerk of the U.S. Bankruptcy Court. After this has occured the debtor has 20 days to file objections. If the debtor elects to do this then the case can go to trial. If not, the bankruptcy will move forward. It should be kept in mind that these types of proceedings can only begin under Chapter 7 or Chapter 11 of the Bankruptcy Code.
Debtors become targeted for involuntary bankruptcy in two ways. One way is when a debtor is not paying his creditors. Certain activities that can lead to this type of action are missing a significant number of payments or missing sizable payments. The other ways is if a custodian took possession of the debtor’s property within approximately 4 months prior to the involuntary bankruptcy petition being filed. There is quite a bit of risk that goes into filing these types of petitions, therefore creditors use them only in extreme cases, where they feel confident of their ability to win.