BY JAY AND ARTHUR WINSTON, WINSTON & WINSTON, P.C.
To file an involuntary petition, the creditor must show that the debtor is not paying debts as they mature. The key is not whether the debtor is insolvent or the liabilities exceed the assets, but whether the debtor is able to meet the debts as the bills are presented to the debtor. An involuntary petition may be filed by three or more creditors who hold noncontingent undisputed claims (indebtedness) totalling at least $10,000 in debts due from the bankrupt debtor. If the creditor or creditors hold security for the debt, such as an automobile or a mortgage on the residence, the indebtedness must be $5000 more than the value of the security (auto or real property). The claims must be subject to simple calculations which value the claims over $10,000 and must not be subject to offset or setoff which may reduce the amount owing to less than $10,000.1 (Footnote from Original Book – U.S.C. 303(b)).
The bankrupt may contest an Involuntary Petition and both parties may seek discovery prior to the trial on the issue of the Involuntary Petition. If the petitioning creditors are successful, the cost and attorney’s fees and expenses will be paid from the debtor’s estate. If the debtor is successful, a judgment may be granted against the petitioning creditors for reasonable attorney’s fees as well as any damages caused to the debtor by such filing. The petitioners’ exposure is limited to the costs and attorney’s fees providing the petitioners acted in good faith. If the petitioning creditors have acted in bad faith, and the petition was dismissed and the debtor’s reputation was damaged or suffered other damages, the creditors may be exposed to liability for compensatory damages as well as punitive damages.
A major risk lies when there is a single creditor who files an Involuntary Petition. The courts seem to feel that this creditor should make a reasonable inquiry to consider the prevailing facts. The courts suspect an ulterior motive on behalf of a single petitioning creditor, if the petition ultimately is dismissed. The petitioning creditor must understand that the courts examine these situations carefully. Consultation with counsel is absolutely recommended before any Involuntary Petition is filed.
The debtor may contest the filing of an involuntary petition and may operate the business. However, the court may appoint a trustee to run the business during the pendency of the proceeding to contest the filing of the involuntary petition.
A business debtor may be placed in involuntary bankruptcy either under chapter 7 or chapter 11.
Consultation with an attorney is recommended when you consider filing an involuntary petition.
Credit and Collection Tip: Contacting other creditors may violate the provisions of the Fair Debt Collection Practices Act and, prior to the filing, may create liability due to an invasion of privacy in that the creditor is distributing information to other creditors about the credit reputation of a debtor — another reason to consult with counsel.
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Revised: July 29, 2003