There is no denying that Americans watch too much TV. Don’t get me wrong, I’m as guilty as the rest. Today is Thursday? I’m only a little embarrassed to admit that there may be a little GTL in my near future. YEEEEAH BOY. Regardless, I tend to believe this American past time has honed our flair for the dramatics. That birthmark on your shoulder? Probably Sarcoidosis. Your colleague calls in sick? A conspiracy. On a similar note, below is a dramatized version of a common fear expressed by my bankruptcy clients:

Oh jeez, gosh darn. Creditors are forcing me into bankruptcy. Involuntary petition? Why won’t they leave me alone. I won’t do it. They can’t make me. Can they make me? WHAT CAN I DOOOO? [proceeds to pull out hair]

What is an Involuntary Bankruptcy?

arizona bankruptcy attorneyBankruptcy Code Section 303(b)(1) states that an involuntary case can be commenced against a person by the filing of a petition by “three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $14,425 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims.”

This provision allows creditors to seek recovery of their claim in instances when a debtor may be trying to unfairly divert funds away from legitimate creditors. Through the appointment of a bankruptcy trustee to the case, creditors are ensured that all available funds will be used to satisfy claims set forth by the creditors and that all claims will be treated without preference. In addition, it allows creditors to submit a claim for actual and necessary expenses.

Who Can Force an Involuntary Bankruptcy?

An individual or business can be forced into involuntary bankruptcy under chapter 7 or chapter 13 of bankruptcy code, provided that several provisions are met. The first involves the number of creditors. If the debtor has more than twelve creditors, the case must be commenced by at lease three non-insider creditors. One creditor is sufficient when the debtor has less than 12 creditors. A second provision states that claims may not be contingent on pending lawsuits or subject to a “bona fi de dispute.” In aggregate, they must include $12,300 of unsecured debt.

If the creditors meet the above requirements outlined above and in § 303, they must file an involuntary petition, providing proper service to the debtor in question. Subsequent to service, the debtor has only 20 days to respond to the involuntary petition. There are numerous plausible defenses against an involuntary petition, which can be explained further by any experienced bankruptcy attorney.

Why You Shouldn’t be Scared of an Involuntary Bankruptcy

As previously mentioned, when a debtor has 12 or more creditors the commencement of an involuntary petition depends on the combined effort of 3 or more creditors. In addition, the creditors must be non-insiders and the debts non-contingent. Such a combined efforts is uncommon.

In addition, there is little reason to initiate an involuntary petition against most individual debtors. Remember that the majority of chapter 7 bankruptcy cases filed in Arizona are classified as “no-asset,” meaning the bankruptcy trustee has found no assets worth liquidating in partial fulfillment of any unsecured debts. This means the creditors initiating the bankruptcy proceedings are arguably worse off than prior to filing, when the debtor was still liable for their claim.

Though the possibility exists for creditors to commence an involuntary petition against an individual debtor, it is rarely carried out in actuality. More commonly such petitions are filed to force a corporation to address their debts, when funds are unjustly diverted away from creditors.

On a final note, if you are currently struggling to repay your debts and are at risk of an involuntary bankruptcy petition, you may consider whether bankruptcy is actually a good option for you. Filing for bankruptcy can be a prudent financial decision for those struggling with burdensome debt and consulting with an experienced Arizona bankruptcy attorney may actually be your best option.