What is an involuntary bankruptcy?

An involuntary bankruptcy occurs when three or more creditors join together to force a debtor into bankruptcy court jurisdiction. These involuntary petitions usually occur when the debtor has acted in a way that causes creditors concern that the debtor’s assets and value are rapidly depreciation, or has recently dropped. This may happen when, for example, a debtor transfers assets to insiders or preferred creditors leaving insufficient assets to pay creditors in full.

The following are the main threshold requirements to initiate an involuntary bankruptcy case:

  1. If the debtor has more than eleven creditors, three creditors can join together to file an involuntary bankruptcy petition.
  2. The debtor is generally not paying its debts as they become due.
  3. The three creditors must have noncontingent debts.
  4. The debts of the petitioning creditors must not be subject to a bona fide dispute.
  5. The aggregate amount of the unsecured claims of the petitioning creditors must be more than $14,425.

For more information on the topic of involuntary bankruptcy please see this article.

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