Involuntary 7 and 11 Bankruptcy

Involuntary Chapter 7 and Chapter 11 Bankruptcies. 

Our bankruptcy laws are often associated with providing relief for debtors.  However, the bankruptcy code also provides tools for creditors to compel unwilling debtors to either liquidate assets, or reorganize their debts in an effort to repay creditors. 

11 U.S.C. § 303 of Bankruptcy Code establishes the procedures and circumstances necessary for creditors to file an Involuntary Bankruptcy Petition against a debtor.    Proceeding under section 303 can be a useful tool for creditors who are owed large sums of money by debtors, especially untrustworthy corporate debtors. 

However, there are significant risks for the creditor petitioners who file an Involuntary Petition in bad faith.  Section 303 (i) allows the court to dismiss a case and grant judgement against the creditor petitioners in favor of the debtor for costs and reasonable attorney’s fees.  If the court finds that any of the petitioners filed the involuntary petition in bad faith, then the court can grant any damages proximately caused by the filing, i.e. compensatory damages.  The court can even grant punitive damages when the creditor petitioner’s bad faith is particularly egregious.  A worst case scenario situation can be examined with a reading of opinion of In re John Richards Homes Bldg. Co., L.L.C., 291 B.R. 727 (Bankr. E.D. Mich. 2003).  This court awarded compensatory damages of $4,100,000 and punitive damages of $2,000,000 in favor of the debtor who was wrongfully damaged by the creditors maliciously filed involuntary bankruptcy petition. 

Nonetheless, if the pitfalls and risks associated with filing an involuntary petition under Section 303 are negated and overcome, eligible petitioning creditors can initiate proceedings under Section 303 by filing a petition and summons with the appropriate U.S. Bankruptcy Court.  Involuntary bankruptcy petitions can only be filed under Chapter 7 or Chapter 11 of the Bankruptcy Code.  Involuntary Bankruptcy petitions cannot be filed against farmers, non-profits; or moneyed businesses such as Banks and Credit Unions, or Insurance Companies. 

At least three or more creditor petitioners must have claims that are not subject to a bona fide dispute by the debtor, whose aggregate claims against the debtor total at least $15,775.00. 

Once the petition has been filed, the debtor will be given an opportunity to defend against the petition.  After holding a hearing to determine if the petitioning creditors are eligible to proceed under Section 303, the court may order the petitioning creditors to post a bond to indemnify the debtor for such amounts as the court may later allow under Section 303 (i).

While there are significant risks involved in filing an Involuntary Petition under Section 303, the advantages can be tremendous.  If a petitioning creditor can fulfill the requirements of Section 303, and prove that their claims against the debtor are undisputed, total costs of litigation can be significantly less than if a creditor were to sue the debtor in state court for damages.  Therefore, if you are a creditor seeking money owned to you by a debtor with significant assets or an ability to reorganize their debt in a way that will enable you to get paid, then consider discussing your options under Section 303 with a skilled attorney.

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