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An introduction to involuntary bankruptcy proceedings

On Behalf of | Sep 6, 2019 | Chapter 7

Most bankruptcy proceedings in the Chattanooga area are started by a person or corporation who is struggling with a heavy debt load and an insufficient cash flow. On occasion, a bankruptcy proceeding is started by one or more creditors of the debtor who fear they will not be paid because the debtor will squander its assets instead of paying its debts. Such proceedings are called involuntary bankruptcies, and they operate under a special section of the Bankruptcy Code.

The requirements for commencing an involuntary proceeding are very strict. Deviation from these requirements can subject the violator to significant penalties. An involuntary case can be started under either Chapter 7 or Chapter 11 against any person, except a farmer or a non-profit corporation, that may be a debtor under either Chapter 7 or Chapter 11. An involuntary case can be started by three or more entities, each of which holds a claim against the debtor that is not (a) contingent as to liability or (b) subject to a bona fide dispute as to liability. The total amount of claims held by the filers of the involuntary petition must exceed by $10,000 the value of any lien against property of the debtor. After the initial petition is filed, other creditors can ask to join the proceeding as a creditor.

The debtor may continue to operate its business, and the provisions of the automatic stay section will not apply. The court may order the parties filing the petition to post a bond for the indemnification of the debtor if the petition is finally dismissed. Any time after the filing of the petition, the court may, upon the request of any interested party, direct the United States Trustee to appoint an interim trustee to take possession of the debtor’s property. If the petition was not answered in a timely manner, the court can direct relief in favor of the creditors, that is, taking possession of the debtor’s property and selling it subject to any liens. The proceeds will be distributed among the creditors according to other provisions of the bankruptcy code.