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Involuntary Bankruptcy

Debtors usually file bankruptcy voluntarily. Sometimes, creditors want to force a debtor into an involuntary bankruptcy case. Three creditors with undisputed, liquidated claims in excess of about $15,000 can file an involuntary bankruptcy petition.  This process is not particularly expensive and allows the creditors to force the debtor into a “collective proceeding” for the benefit of all creditors instead of fighting each other over limited resources. The trustee also has important powers and rights allowing for recovery in many instances where normal creditors rights would not be effective.  Creditors must exercise care in filing an involuntary bankruptcy case.  If the relief is denied, they may be required to pay substantial damages and attorneys’ fees.

 

Lakelaw has been involved in numerous involuntary bankruptcy cases not only as representative of petitioning creditors but also in service as chapter 7 trustee.

Frequently asked Questions about Involuntary Bankruptcy

Why would I want to file an involuntary bankruptcy?

There could be many reasons to file an involuntary bankruptcy against a debtor:

  • The debtor has granted a security interest or made some otherwise avoidable transfer within the past 90 days
  • The debtor is dissipating assets
  • The debtor is engaged in fraud
  • The debtor seems to be preferring particular creditors or insiders

How many creditors are needed to file an involuntary bankruptcy petition?

Three creditors are needed if the company has 12 or more creditors.

What kind of claim must the creditor hold?

The claim must be for a certain amount. It must be undisputed. It must be unsecured either in full or at least to the extent that a secured claim is being counted for the minimum amount needed to file an involuntary bankruptcy petition.

What must we prove?

You must prove that you are a proper petitioning creditor. You must prove that the debtor is not generally paying debts as it becomes due. You must prove that it is eligible to be a debtor for either chapter 7 or chapter 11 as the case might be. You also must show that there hasn’t been a custodian, like a receiver or an assignee for the benefit of creditors who has taken charge of the debtor’s assets within the past 120 days.

What is the effective date of the bankruptcy?

If the bankruptcy is ordered, then the case is effective from the date of filing.

Can a trustee be appointed right away?

An interim trustee may be appointed for cause shown. This is not always the case, however.

Is there a downside?

Yes, substantial fees and damages could be imposed upon you if an involuntary bankruptcy petition is denied.

Do I need a lawyer to file an involuntary bankruptcy petition?

Corporations or other artificial entities can’t appear in court without an attorney. Involuntary bankruptcy petitions are serious and should not be filed without an attorney and proper legal advice.

Does the debtor have duties if an involuntary bankruptcy petition is granted?

Yes, the debtor must cooperate with the bankruptcy trustee, if one is appointed. Otherwise, the debtor must perform as it is required to in chapter 11 as a debtor in possession.

Can I get attorneys’ fees for filing an involuntary bankruptcy?

Yes, the petitioning creditors can recover their attorneys’ fees and expenses as an administrative expense in the debtor’s bankruptcy case if the involuntary bankruptcy petition is granted.

Case Study

Lakelaw’s client was a machine tool shop in Wisconsin. An Illinois firm owed it several hundred thousand dollars. The Illinois firm was deeply in debt to the Bank but the Bank was not fully secured. It obtained an updated security agreement less than 90 days before. Lakelaw solicited additional creditors of the Illinois firm and filed an involuntary bankruptcy case against it. The order for relief was granted. Lakelaw became special counsel to the Trustee and sued the Bank to avoid the preferential transfer. In the meantime, the Trustee sold substantially all of the assets of the Debtor. While the Bank had a big claim, as a result of Lakelaw’s efforts, the Bank’s claim became unsecured. Moreover, the Bank retained its rights against the Debtor’s individual owners. That left more of the Debtor’s money to be paid to petitioning creditors like Lakelaw’s Wisconsin client. As a result, Lakelaw’s client received a substantial dividend when it would have otherwise received nothing. Not only that, but Lakelaw’s client also received 100% of its attorneys’ fees and costs as a recovery from the bankruptcy estate.

Trustee Case Study

Petitioning creditors filed an involuntary bankruptcy petition against a Ponzi scheme fraudster. David Leibowitz was appointed trustee. The fraudster is now in jail. Trustee Leibowitz has recovered over $1 million so far and continues his efforts. This case has been documented and seen on national television in episode 77 of American Greed.


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