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An introduction to involuntary bankruptcy

On Behalf of | Jan 9, 2024 | Business And Commercial Law |

One of the most hopeless positions for a Florida business is to be owed a substantial sum of money by a party that apparently has the means to pay the debt but instead spends its money on needless or wasteful expenses.

Does the creditor have a remedy?

Under certain circumstances prescribed by the Bankruptcy Code, one or more parties may commence an action against the alleged debtor to declare the debtor to be bankrupt. Because the debtor is not a party to the petition, the proceeding is generally called an “involuntary bankruptcy.”

Basic requirements

A party who begins an involuntary bankruptcy proceeding is referred to as the “petitioning creditor.” The party against whom the proceeding is brought is called the “alleged debtor.” The petition must be filed by at least three or more creditors, unless the alleged debtor has fewer than twelve petitioning creditors, in which case the claim can be filed by a single creditor.

The claims of the petitioning creditors must total $15,775 more than the value of all liens against the debtor’s property. These claims must be valid and not subject to a bona fide dispute. If the debtor believes that the so-called “numerosity rules” have been violated by the petitioning creditor, an answer to the allegations of the petition must be filed within 21 days.

After discovery and a hearing, the bankruptcy court will enter an order for relief if “the debtor is generally not paying such debtor’s debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount.”

If the creditors win. . .

If the petitioning creditors prevail, the court will take charge of the debtor’s assets and use them to pay the claims of the debtor’s existing creditors.

The fate of a petitioning creditor who loses

If a petitioning creditor loses its petition to have the debtor declared “involuntarily bankrupt,” the penalties can be severe. In one recent case, the petitioning creditors were charged with more than $5,000,000 in punitive damages and compensatory damages, and ordered to pay the debtor nearly $575,000 in attorneys’ fees.

Care required

Anyone considering commencing an action for an involuntary bankruptcy against a debtor should carefully investigate the circumstances of the alleged debtor before filing a petition.