Bankruptcy

Can a Creditor Force a Business Into Bankruptcy?

By Cara O'Neill, Attorney
Find out when a creditor can file an involuntary bankruptcy against your business.

Yes. If the business has valuable assets—such as cash, investments, equipment, or real estate—and a creditor is concerned that it won’t get paid, it can force the business into either a Chapter 7 or Chapter 11 bankruptcy (involuntary relief isn’t available under Chapter 12 or Chapter 13 bankruptcy).

Forcing a business into an involuntary bankruptcy can benefit a creditor in several ways. It causes the automatic stay—the order that puts a stop to collection activities—to go into effect. The stay evens the playing field because one creditor cannot gobble up all of the business assets to the detriment of the others.

Also, a bankruptcy trustee—the court-appointed individual that oversees the case—can step in and manage the business and unwind transfers of money or assets that the company might have made in an attempt to avoid paying creditors (fraudulent or preferential transfers).

However, involuntary bankruptcies rarely get filed because creditors must meet certain criteria—and it isn’t easy to do so. For instance, if the business has less than 12 creditors, a single creditor can file the petition as long as that creditor’s claim is at least $15,775 (as of September 2016). The debt must be undisputed (the business acknowledges that it owes it) and unsecured (not guaranteed by property called “collateral,” such as a commercial building or a company vehicle). A debt that would likely fit this description would be a credit card debt for $15,775 or more.

Although this test might sound simple to satisfy, it isn’t, and here’s why: If the business has more than 12 claims (bills), three creditors must join in and sign the involuntary petition—and all debts, no matter how small, must get counted. Most creditors don’t want to work together because once in bankruptcy, the creditor must share the assets with others and will likely receive a portion of the amount owed. It can be more lucrative to work towards collecting a debt in full.

An involuntary case can be expensive, too. If the business contests the case (disagrees with the creditors’ right to file it), the case will move into litigation and proceed to trial—and litigation is expensive. Before filing, a creditor would assess the likelihood of coming out ahead after paying for attorneys, experts, and other costs of suit.

Other risks exist, too. For instance, if the court finds that the creditors shouldn’t have filed the matter (improperly filed the case in bad faith), the creditors would be required to pay the attorneys’ fees of the business.

Go to the main business bankruptcy FAQ page.

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