Man dealing with bankruptcy documents

5 Facts About Involuntary Bankruptcy

There are few aspects of the bankruptcy system that are more shocking to Milwaukee area residents and business owners than finding out about involuntary bankruptcies. The idea that someone else can force you or your business into bankruptcy seems unbelievable. 

Learning a bit more about these unusual bankruptcies is the best way to understand why they exist, and why they remain relatively rare. Below are five facts the Hanson & Payne team hopes will clear up some confusion about involuntary bankruptcies. 

1. Debtors cannot be forced into bankruptcy without cause. 

Involuntary bankruptcies are not an option in every situation where a debtor is unable to meet their obligations. The indebted party must owe a significant amount of money, and the creditor or creditors seeking repayment must have a good reason for filing an involuntary bankruptcy petition, such as: 

  • The creditor’s failure to pay over a long period of time;
  • A completely unresponsive debtor; or 
  • A third party that has taken over the debtor’s obligations or assets, or is trying to do so. 

The creditor or creditors seeking repayment must be able to show the court how much they are owed and persuade the court that bankruptcy is the best way to get repaid. A petition cannot be based on an unknown amount of debt or speculation that the debtor will not be able to repay debts. 

2. Creditors must work together. 

We say a creditor or creditors above because creditors must often work together to file a successful involuntary bankruptcy petition. If a debtor has fewer than 12 creditors, one creditor can file a petition. If a debtor has more than 12 creditors, a minimum of three creditors must agree that an involuntary bankruptcy is desirable. 

3. There is a process for contesting an involuntary bankruptcy petition. 

Once a creditor or group of creditors has filed a petition for an involuntary bankruptcy with the court, the debtor has the opportunity to respond. Debtors are not forced into bankruptcy without having this opportunity to tell their side of the story. 

4. Certain businesses are exempt from involuntary bankruptcies. 

Not everyone can be forced into involuntary bankruptcy. Banks, insurance companies, not-for-profit organizations, credit unions, and farmers, are exempt from the involuntary bankruptcy law. 

5. Involuntary bankruptcies are rare. 

One of the reasons people are unfamiliar with involuntary bankruptcy is that it is relatively rare. 

Creditors are much more likely to seek compensation outside the bankruptcy system than try to force someone into bankruptcy. The biggest reason for this is that involuntary bankruptcy only works in the creditors’ favor if the debtor has sufficient cash flow to meet their obligations but is for some reason refusing to do so. Most individuals and troubled businesses do not have the cash flow to make involuntary bankruptcy appealing to their creditors. 

In many situations where an involuntary bankruptcy would technically be possible, creditors avoid it because they have a better chance of getting paid outside of the bankruptcy system. Debtors in bankruptcy often end up paying their creditors pennies on the dollar. Outside of the bankruptcy system, creditors can seek as much money as possible from a debtor. 

A Full-Service Milwaukee Bankruptcy Firm

Hanson & Payne’s experienced team of bankruptcy attorneys represent creditors in the Milwaukee area who want to do everything they can to recoup the money they are owed by delinquent debtors. 

Petitioning the court for involuntary bankruptcy is one path forward, but it is typically not the only available option in these situations. We help our clients weigh the pros and cons of the different avenues open to them, and work to get them the money they are owed. 

We are ready to assist you the best we can, so please contact us today to schedule a meeting.