Most people and businesses who file for bankruptcy do so because they believe it’s their only option or that it is the right thing to do. In some rare cases, however, a creditor may force a debtor to file. This is called an involuntary bankruptcy.
With involuntary bankruptcy, a debtor can be forced to file under Chapter 7 or Chapter 11 of the U.S. Bankruptcy Code. It does not apply in all scenarios and can only be pursued by specific creditors for certain types of debt. In many cases involving forced bankruptcy, the debtor is a business with a significant amount of debt owed to multiple creditors. Individual debtors rarely face involuntary bankruptcies and when they do, they usually have considerable assets. Creditors try to force bankruptcy only if they believe they can recover some or all of the debt they’re owed.
The Involuntary Bankruptcy Process in Texas
Involuntary bankruptcy proceedings begin when a creditor files a petition with the bankruptcy court. This can be filed under Chapter 7 or Chapter 11, but not Chapter 12 or Chapter 13. The petition must specify why involuntary bankruptcy is justified. The creditor must demonstrate that the debtor is not paying debts as they come due, and the debtor must have at least $16,750 in unsecured, undisputed debt.
The debtor will have the opportunity to file a response to the bankruptcy petition. If the debtor does not file a response, the court will move forward with the filing and the debtor will have to participate. If the debtor responds and contests the proceedings, the court will set a hearing to determine whether the case should move forward.
At the hearing, a bankruptcy court judge will hear from the debtor and the creditor/s who filed the petition. The judge will decide whether to dismiss the case or force bankruptcy. If the case is dismissed, the creditor/s may be required to pay the debtor’s legal fees and costs.
It is also important to note that, if a debtor has 12 or more creditors, at least 3 of them must participate in the involuntary bankruptcy petition. A petition may not be filed against a farmer, family farmer, not-for-profit organization, bank, or insurance company.
Why Would a Creditor Try to Force Bankruptcy?
Bankruptcy has two key purposes: to protect and help debtors who have overwhelming debt, and to help creditors recover the money they’re owed. Creditors who believe that a debtor can pay outstanding debt but refuse to do so may try to force bankruptcy so they have a chance to get paid. This will not be their first choice or option. They will try other debt collection efforts first, and only when these have failed—and when they believe the debtor has assets to liquidate or the ability to pay under a repayment plan—will they pursue involuntary bankruptcy.
Will You Be Forced to File Bankruptcy?
If you’re an individual debtor, the chances of facing a forced bankruptcy are slim. If you own a company with assets or are very wealthy, however, you could face involuntary bankruptcy proceedings if your creditors think you aren’t paying when you can and should.
Talk to a Fort Worth Bankruptcy Lawyer Today
If you have questions about involuntary bankruptcy or received a petition and want to know your next steps, I can offer the answers and insight you need. As a Fort Worth bankruptcy attorney with over 20 years of experience, I know the ins and outs of forced bankruptcy proceedings and what must be done to protect your interests. I can also provide guidance related to voluntary bankruptcy and how this can help you restructure or eliminate your debt so you can face a more stable financial future. Call (817) 576-1889 today to learn more!