Do Creditors Have the Ability to Force a Business into Bankruptcy?

Even a viable business may end up having trouble in paying its debts. If the amount of money owed to creditors keeps increasing and the business gradually loses its capacity of generating profit, bankruptcy may be the last resort. Many owners dread this moment as it usually represents the end of life for their company. However, bankruptcy is not only an end, in some cases, it can be a chance to start afresh.

As the critical moment of filing for bankruptcy approaches, owners often ask themselves if creditors have the legal capacity of forcing them to file. The answer is yes, creditors benefit from a certain degree of protection under the bankruptcy law and they are allowed to require debtors to file for bankruptcy. Nonetheless, the circumstances in which one would be forced by creditors to file for involuntary bankruptcy are limited. Moreover, not all bankruptcy forms are open to involuntary reliefs; companies can only choose between Chapter 7 and Chapter 11. Involuntary bankruptcy is rare, but it is useful to understand when it may occur so, let's look into some essential factors that enable this approach.

Circumstances when involuntary bankruptcy may occur

Involuntary bankruptcies are typically filed against companies that cannot manage to pay their debts in due time but have assets out of which creditors would be able to recover their money. In other words, creditors can urge a company to file for bankruptcy when they are aware that it has the ability to pay its debts but it is not willing to do so.

However, in real life, when a company is 'forced' to file for bankruptcy, what usually happens is that it will opt for one of the voluntary bankruptcy procedures. Practically, the company's director decides to file for bankruptcy due to the financial situation that leaves no hope for revival and, probably, the creditors' pressure. In this case, the company will voluntarily choose one form of bankruptcy; either Chapter 11 which is a reorganization process or Chapter 7 which means liquidation. It's essential to stress once again that involuntary bankruptcy rarely occurs and being convinced to file for voluntary bankruptcy is not the same as being forced to go through involuntary bankruptcy.

Furthermore, when a company chooses to go into bankruptcy, it immediately becomes bankrupt and it is supervised by the court and governed by the bankruptcy code. Conversely, if the company is forced into it involuntarily, its status doesn't automatically change.

As a general rule, companies that are confronted with involuntary bankruptcy have incurred significant debts which they failed to pay as they became due. Consequently, they are also incapable of covering all or most of their expenses. Moreover, in order to require a business to file for involuntary bankruptcy, its creditors must make sure that the company meets a set of necessary requirements specified in the Bankruptcy Code under section 303.

Firstly, this procedure is enabled based on a specific number of creditors. If there are more than 12 unsecured creditors, an involuntary bankruptcy petition is filed in order to start the procedure. The petition will be filed by 3 of the creditors, but their claims should have a total value of at least $15,775 and the debt has to be undisputed and unsecured. In other words, the company must admit owing the debt which should not be guaranteed by collateral property. If the company has less than 12 creditors, it's sufficient if one of them qualifies to file. But if a sole creditor wants to commence an involuntary bankruptcy procedure, the debt they want to recover should equal the same amount; $15,775.

Why involuntary bankruptcy is not common

Companies are rarely forced into involuntary bankruptcy by their creditors, mainly because it is hard to meet the requirements that enable this procedure.

Moreover, creditors are often reluctant to work together during bankruptcy because once they agree to proceed, they have to share the assets and each one would only manage to get a part of the amount owed.

Involuntary bankruptcy can be expensive and this is another reason why creditors often avoid it. If the company that is forced to file opposes the creditors' request, they might end up having a trial case which means time and money. Therefore, creditors typically evaluate their chances of success before asking a debtor to file for bankruptcy.

Frequently, the prospects of going through a formal trial are too disheartening to take the risk and force a business into bankruptcy. Also, as the case gets to trial, the court might decide that the creditors didn't have the right to pursue involuntary bankruptcy. In these circumstances, the creditors would also be required to pay the debtor's legal fees.

If your creditors try to push you into bankruptcy, don't give up at the first sign of threat and seek legal assistance. An experienced commercial lawyer can help you clear your doubts and choose the most appropriate course of action. The Law Offices of Kevin S. Neiman are ready to take on your case and help you avoid bankruptcy or choose the type of procedure that benefits you the most. Contact us at any time or come visit our office in Denver for an initial consultation.