Bankruptcy Lawyer Bryan W. Stone answers the question “What is Chapter 7 Bankruptcy?”
Most people are familiar with the basic outlines of the bankruptcy process: debtor files for bankruptcy protection, debts are either forgiven or restructured, creditors are given a chance to offer input, bankruptcy is discharged. Though this is how many such bankruptcies go, it isn’t always the case. In fact, when most people think of bankruptcy they are often talking about the voluntary bankruptcy approach, not realizing that there’s another option known as involuntary bankruptcy. To find out more about the involuntary bankruptcy process, keep reading.
First things first, involuntary bankruptcy occurs when the creditors, not the debtor, file. In voluntary bankruptcies, the debtor decides that he or she needs protection and wants the help of a bankruptcy court to manage the repayment process. In an involuntary bankruptcy, it’s the creditors that make the first move, essentially forcing the debtor into bankruptcy. This is certainly unusual and occurs with much less frequency today than it used to, but it still can happen should creditors jump through the right hoops.
How does involuntary bankruptcy happen?
Another important point to understand is that involuntary bankruptcies cannot happen in every case. Instead, creditors can only file an involuntary bankruptcy under Chapter 7 or Chapter 11. This means that creditors are not allowed to file involuntary claims in Chapter 13 or Chapter 12 cases. Involuntary bankruptcy claims are also not allowed to be filed against certain categories of people or companies such as banks, insurance companies, not-for-profits, credit unions and farmers.
For an involuntary claim to be filed, creditors must often work together. That’s because in the vast majority of cases, an involuntary claim must be filed jointly by at least three creditors. The rules say that if a debtor has more than 12 unsecured creditors, an involuntary claim can only occur if at least three of them join together in a petition. Even then, the three creditors must hold at least $14,000 in unsecured debt, a rule designed to ensure that small creditors aren’t able to force a company into bankruptcy. Solo creditors can only force an involuntary bankruptcy in limited cases such as when the debtor has less than 12 unsecured creditors and the one person is owed more than $14,000.
What’s the reason for involuntary bankruptcy?
You might be wondering why a creditor would even do something like this, after all, if a debtor isn’t able to repay his or her loans, you’d think he or she would be interested in filing and would not need the help of a creditor. The reason that involuntary petitions are filed is often because the creditor is afraid that the debtor is burning through assets and won’t have anything left to repay creditors. The involuntary claim is thus an attempt to put a halt to the bad business practices while there’s still some assets left to the company, ensuring that creditors are able to walk away with something rather than nothing. A good example of this is if a company is rapidly depleting its dwindling savings. If the company is allowed to keep operating until the money actually runs out, there will be nothing left to pay creditors. However, if the creditors step in up front, while there’s still something left, they might actually receive a payout, mitigating their risk in the bankruptcy process.
If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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