Involuntary Bankruptcies: Proceed With Caution

 Posted on January 24, 2025 in Bankruptcy

In bankruptcy, debtors file to discharge debts and pay back creditors. Sometimes, creditors can force an involuntary bankruptcy on debtors. Involuntary bankruptcy can be a powerful tool for creditors to recover debt in certain circumstances, such as when the debtor is able to pay back the large amount of debt he owes but shows no signs he will do so.

Yet it comes with significant financial risks for creditors if not done properly. An experienced Chicago, IL creditors’ rights attorney can consult creditors on the advisability of forcing a debtor into involuntary bankruptcy.

What Are Requirements to File a Petition for Involuntary Bankruptcy?

There are a few requirements for filing a valid involuntary bankruptcy petition:

• The bankruptcy must be filed under Chapter 7 or Chapter 11 of the bankruptcy code.

• The debt in question must be for at least $18,600.

• The debt must be "undisputed," meaning there must not be a genuine dispute about the amount or the debtor’s liability.

• If the debtor has more than 12 creditors, at least three of them must join the petition for involuntary bankruptcy 

• Involuntary bankruptcy may generally not be filed against banks, farmers, or nonprofit organizations.

What Are the Risks of an Involuntary Bankruptcy Petition?

If the bankruptcy court dismisses a creditor’s petition for involuntary bankruptcy, it can order the creditor to pay significant damages, including compensatory damages. Likewise, if the court rules that the involuntary petition was filed in bad faith, it can also impose punitive damages. For creditors, these damages can add up to millions of dollars, and they have in certain court cases. Courts can also impose damages on creditors for attorneys’ fees, lost income, harm to the debtor’s reputation, and even damages for emotional distress.

Why Would a Creditor File an Involuntary Bankruptcy? 

Despite the risks, if a creditor has a legitimate case for involuntary bankruptcy, there are a few reasons why they would file, such as to preserve a debtor’s assets, ensure that the debtor’s assets are equally distributed among creditors, or prevent fraud.

How Can Creditors Minimize the Risks?

Creditors should turn to involuntary bankruptcy if they meet all the requirements and only after doing their full due diligence and speaking with an experienced bankruptcy attorney. At a minimum, a creditor should not file an involuntary bankruptcy petition before doing the following:

• Running a full credit report and lien search on the debtor.

• Finding out if other creditors are suing the debtor.

• Sending a written demand letter for the debtor to pay.

• Waiting for the debtor to file answers in any pending court case.

Contact a Chicago, IL Involuntary Bankruptcy Attorney 

While rare and not without its risks, involuntary bankruptcy can be a tool creditors can use when they have exhausted other methods of retrieving large amounts of debt. At Dimand Walinski Law Offices, P.C. we represent creditors against debtors in bankruptcy proceedings. Our experienced Chicago, IL creditors’ rights attorneys are here to help creditors recover debt. Call our offices at 312-704-0771 for a consultation today.