Involuntary Order for Bankruptcy Relief Cases

While involuntary bankruptcy cases make up a small percentage of bankruptcy filings each year, it is important to understand the restrictions and limitations if you are forced into bankruptcy. Involuntary relief is only available in a narrow range of circumstances.

Rare, But Available to Some

To obtain an involuntary order for bankruptcy relief, petitioners must satisfy two different sets of requirements. First, the qualifications under 303(a), (b), and (c) must be met. Second, at the hearing of a controverted involuntary case, the petitioners must establish grounds for relief under 303(h). If the involuntary petition is not successful, the petitioners could be liable to the debtor for attorney’s fees, costs, and/or damages.

Section 303(a), (b), and (c) address the nature of the debtor and creditor as well as the actual number of creditors. First, the debtor cannot be involuntarily placed into bankruptcy under chapter 12 or 13 and can only be placed in a Chapter 7 or 11.  Second, the aggregate amount of claims must be within the code’s limits and excludes claims that are contingent as to liability (look to previous blog regarding “non-contingent debt”), the subject of a dispute as to the liability or amount, or fully secured by a lien. This means that if there is a bona fide dispute as to the amount owed or if a creditor is fully secured, an involuntary case may not be allowed. Third, if the debtor has 12 or more creditors, at least three must join in the petition. If the debtor has 11 or fewer creditors, only one petitioner is needed.

Must Show Two Alternative Grounds

Lastly, 303(h) permits an order for relief to be granted only if the petitioners are able to establish two alternative grounds for relief. Either the debtor is generally not paying debts as they becomes due or within 120 days before filing of the petition, a custodian was appointed to take possession of the debtor’s property. Known as equity insolvency, the first requires a general pattern of nonpayment of undisputed mature debts during the period immediately preceding the petition.  The second, like the first, is premised on the debtor’s insolvency but comes from nonbankruptcy law.  These grounds for relief are justification for forcing an unwilling debtor into bankruptcy and limit the power of creditors to obtain bankruptcy relief. Thus, it is not enough for creditors to merely show that the debtor owes them money and has not paid.

If you think that you could be forced into an involuntary bankruptcy, contact Lanigan and Lanigan in Winter Park, FL. Attorneys Roddy and Eric Lanigan have over 36 years of experience in all bankruptcy related issues and know how to tackle to problems associated with an involuntary bankruptcy.