Involuntary bankruptcy

Involuntary bankruptcy is a legal filing by creditors, petitioning that a debtor be sent into bankruptcy proceedings. This situation usually arises when a debtor is very late in paying bills to a number of creditors, who feel that they are more likely to be paid if the business is in bankruptcy proceedings. This process is time-consuming and expensive, so it is usually followed only if creditors believe they are at considerable risk of not being paid via any other action, and the debtor is holding assets that can be used to pay its debts.

Several conditions must be met before creditors can file for an involuntary bankruptcy. Depending on the situation, a minimum of three creditors must force the issue, and only if a certain unpaid debt level has been reached for the qualifying claims. Further, the debtor must generally not be paying its debts as they come due for payment.

An involuntary bankruptcy petition is served to the debtor, along with a summons. The debtor can consent to the petition or elect to fight it in court. If the court decides in favor of the creditors, an order for relief is entered and the debtor is placed in bankruptcy proceedings. If the court decides in favor of the debtor, the creditors may be liable for the debtor's court costs.