What is an Involuntary Bankruptcy Case in New York?

An involuntary bankruptcy case is a bankruptcy case started against a debtor by its creditors. The debtor can be either an individual or a business entity. The creditors file a petition with the bankruptcy court and then if the debtor — if he, she or it doesn’t want to be in bankruptcy — can challenge that the requirements for an involuntary bankruptcy are not satisfied.

If a debtor has more than 12 creditors, and most debtors will have more than 12 creditors,
an involuntary bankruptcy requires 3 or more petitioning creditors that don’t have contingent claims, or claims that are subject to dispute as to liability or amount, totaling at least $13,475. So one creditor alone holding a judgment can’t file an involuntary bankruptcy against a debtor. It is usually a good idea to have more than 3 petitioning creditors so that if the validity of any creditor’s claim is challenged, such as that the claim is subject to bona fide dispute, there are still additional petitioning creditors with valid claims.

The grounds for an involuntary bankruptcy filing are that the debtor is insolvent — either not paying its debts as they come due or has debts in excess of assets.

The typical involuntary bankruptcy case is started as a chapter 7 liquidation case. If the involuntary bankruptcy petition is granted then a chapter 7 trustee will be appointed to marshal the debtor’s assets and liquidate them to pay creditors’ claims.

An involuntary bankruptcy proceeding will often not be as effective a method of obtaining recovery on a past due claim as pursuing creditor’s remedies under state or federal law. The bankruptcy trustee is charged with paying the claims of all coeditors. If the debtor has many creditors the amount of recovery for any one creditor may be very small. However, if the creditor was just pursuing its own claims against the debtor — and there was no bankruptcy — the potential recovery for a single creditor could be higher,

There are certain situations, however, where an involuntary bankruptcy filing may make sense. A trustee in bankruptcy has broad powers under the Bankruptcy Code to avoid and recover certain pre-bankruptcy transfers made by the debtor. Some of these powers — such as the ability to avoid a preferential transfer — are unique powers under the Bankruptcy Code that often do not have a state law equivalent.

Typically prior to pursuing an involuntary bankruptcy on behalf of client we would try to vigorously enforce a creditor’s claim against a debtor by filing a lawsuit and seeking to enforce any resulting judgment through execution and levy.

A petitioning creditor may be held liable for costs and attorneys fees and damages if an involuntary bankruptcy petition is dismissed, so it only makes sense to file an involuntary petition if it is likely to be successful (and not for the purpose of trying to obtain leverage in collections).

At Starr & Starr, PLLC we can assist with either prosecuting or defending an involuntary bankruptcy case. Please feel free to contact us at 888-867-8165 for further information or to schedule a consultation.