Arizona Bankruptcy Lawyers

Wednesday, August 22, 2012

Involuntary Bankruptcy

     Many people that I talk to are not aware that a bankruptcy of an individual or business can be commenced involuntarily.  An involuntary bankruptcy is commenced by the filing of an involuntary petition by one or more creditors of the debtor.  If the debtor has more than 12 creditors, an involuntary petition must be filed by three or more creditors holding noncontingent claims that are not disputed as to amount or liability.  The aggregate amount of their claims must be at least $14,425.  If there are fewer than 12 creditors, then a single creditor may file the involuntary petition.  A petitioning creditor bears the burden of showing that (1) its claim is not contingent as to liability or subject to a bona fide dispute as to amount or liability and (2) the debtor is not generally paying debts as they become due.
     When an involuntary petition is filed, a summons will be issued and the petition and the summons must be served on the debtor.  The debtor then has 20 days to file an answer.  A hearing will then be held and if the court determines that the requirements for an involuntary bankruptcy have been met, an "order for relief" will be entered, and the case will proceed as any other bankruptcy would.


     Section 303(i) provides for damages against a petitioning creditor for an improper petition.  That section provides that if an involuntary petition is dismissed by the court without an order for relief being entered, the court may order the petitioning creditor to pay the debtor's costs and attorneys' fees whether or not the petition was filed in bad faith.  If the court determines that the petition was filed in bad faith, the petitioning creditors may be exposed to awards of compensatory and punitive damages.

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