When my husband I decided to start a business, we didn't think about the legal aspects of doing so. We didn't realize that purchasing business insurance, getting building permits and making investments all required some type of legal advice. But after speaking to a close friend, who also happens to own a small business, we contacted a business attorney. Now, we have the legal smarts to make the best decisions for our business, as well as the legal representation in case something happens to our company. I hope that you find my blog helpful and informative for your own business. It's a great resource for finding the legal advice, resources and guidance you need to get your company up and running.
Filing for bankruptcy is never an easy choice to make. Sometimes, people who could benefit from bankruptcy are hesitant to file because of concerns about the aftermath. In fact, in some cases, even the best intentions to avoid bankruptcy could find you facing it anyway. Sometimes, a creditor may decide to try to force you into filing bankruptcy. This is known as involuntary bankruptcy, and if you're struggling financially, you should understand the fundamentals of how it works. Here are answers to a few common questions about involuntary bankruptcy.
Why Would a Creditor Force You Into Bankruptcy?
When your creditors can see that you are financially overextended, their first concern is going to be trying to recover the money that you owe. Filing an involuntary bankruptcy case is one way to do just that. After all, filing bankruptcy provides your creditors with the assurance that every one of them will receive something from the settlement, because you can't pick and choose who to pay in the process.
Another benefit of an involuntary bankruptcy is that you're required to stop using your assets as soon as the bankruptcy is filed. This means that any savings you have is frozen to be claimed as part of the liquidated assets during the bankruptcy process. If your creditors waited for you to file on your own, there's a risk that you may spend your savings or reduce your assets before filing, which will reduce the amount that each creditor receives in the settlement.
Is Anyone Protected from Involuntary Bankruptcy?
There are certain companies and people that are protected from involuntary bankruptcy. If your business is a non-profit, a credit union, an insurance company or a bank, your business is protected from an involuntary bankruptcy. Additionally, farmers are protected as well. Creditors cannot bring an involuntary bankruptcy case against you or your business if you fall under one of these categories.
What If You Owe Multiple Creditors?
If you owe multiple creditors, there are a few special considerations that apply to involuntary bankruptcies. In cases where you owe more than 12 creditors, at least three of them must agree to participate in the involuntary bankruptcy case. Every creditor who participates in the case is required to prove that you, as the debtor, are not paying your debts on time. This may mean providing payment records and account statements to the courts to show that you are behind on your payments and have been for some time.
Is There Anything You Can Do to Avoid Involuntary Bankruptcy?
Just because your creditors file an involuntary bankruptcy case doesn't mean that you automatically have to accept the petition and file bankruptcy. The courts permit you a specific time period to file an objection. When you receive the petition, you'll have to file your objection within that rebuttal period. If you object to the bankruptcy petition, it will force a court hearing in which the judge will determine the validity of the claim.
How Can You Get the Case Dismissed?
Once you've filed the objection and the court date is set, there are a few ways that you can potentially have the case dismissed. If you have documentation that the balance your creditor claims you owe is incorrect, providing that evidence in court may lead to a dismissal.
You might also be able to get the case dismissed if you can provide evidence of a history of timely payments or show that you have the resources to make your payments on time now and moving forward. Finally, if you have any evidence that the creditor acted in bad faith, that may be grounds to dismiss the bankruptcy as well. There are no clear laws defining bad faith, but if there's evidence that the creditor is trying to shut down your business, wants to take control of your business or is manipulating the situation to gain leverage for other means, those are sure signs of bad faith.
Involuntary bankruptcy is a serious process with a lot of complexity. If one of your creditors initiates an involuntary bankruptcy filing against you, it's in your best interest to work with a bankruptcy attorney to protect your finances.