The vast majority of Chapter 11 bankruptcies are voluntary, in the sense that the debtor, not the creditors, initiated the filing.  However, there are instances where a Chapter 11 petition is filed not by the debtor, but by creditors.  Good cause must exist for this to happen.  While some creditors may use the threat of an involuntary filing as a collection device, a creditor who filed an involuntary petition against a debtor without meeting the mandatory requirements would be sternly rebuked.

The only chapters under which an involuntary petition may be filed are Chapter 7 and Chapter 11.  In a Chapter 7 case, relief comes in the form of a liquidation.  In a Chapter 11, relief can be had in the form of a reorganization or a liquidation.  Various factors are analyzed to determine which chapter is most suitable to file under.

Regarding grounds for filing, an involuntary petition should allege either one of the following grounds for relief:  (1)  the debtor is not paying its debts as they come due, unless they are the subject of a good faith dispute; OR (2) that within the previous 120 days before the bankruptcy petition was filed, a custodian was appointed or took possession of the debtor’s property (this is not common).

The first “ground” cited above is the most commonly alleged.  It is vague enough that is has been the subject of dispute in various cases, and there is no clear-cut rule as to what constitutes “not paying debts as they come due.”  Involuntary petitions are, usually, hotly contested by debtors.  A variety of defenses and counterclaims can be alleged by a debtor who finds himself or herself the subject of an involuntary petition.  They are quite complicated, and it is important to consult with an attorney to see just what your options are.

Read More:  The “New Value Exception” To The Absolute Priority Rule In Chapter 11 In Kansas City