When The Decision Is No Longer Yours: Understanding Involuntary Bankruptcy

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Some financial decisions don't come easy, including filing for bankruptcy. Sometimes, the people who benefit the most from bankruptcy are afraid to file because of the length of time that a bankruptcy stays on your credit report. In some situations, even your best intentions to avoid bankruptcy won't keep you out of it, though. Believe it or not, one of your creditors may decide to force you to file bankruptcy. This process is known as involuntary bankruptcy, and it's in your best interest to understand the basics – especially if you're in a financial bind.

Why Would Creditors Force You to File?

When it becomes apparent to your creditors that you are overextended and unable to meet your obligations, their primary concern is going to be recovering as much on your account as possible. Filing an involuntary bankruptcy case can help them do that. The bankruptcy process ensures creditors that they will receive something from the settlement, because you don't get to be selective about who you pay through the process.

Another benefit of an involuntary bankruptcy process for creditors is the fact that filing the case automatically means that you're required to stop using all of your assets. This means that your bank accounts will be frozen as part of your liquidated assets. The more assets there are to liquidate, the more money each creditor will receive. If a creditor is concerned that you might reduce your assets or spend your savings before you file for bankruptcy, this is one way to prevent that.

Who is Protected from Involuntary Bankruptcy?

Certain people and businesses are protected from an involuntary bankruptcy filing. If you own a non-profit, insurance company, farm, credit union or bank, your business is protected from involuntary bankruptcy.

What Happens if You Have Multiple Creditors?

If you owe multiple creditors, there are some specific guidelines that may apply. For example, if you owe many creditors, several of them have to agree to participate. Additionally, every creditor involved must prove that you are past due and not making regular payments.

How Do You Avoid Involuntary Bankruptcy?

Just because your creditors have filed for involuntary bankruptcy against you, that doesn't mean that you have to accept the petition and agree to the bankruptcy. You'll be given a specific rebuttal period in which to file an objection. The period varies from court to court, so read your paperwork carefully to see what your courts permit. Objecting to an involuntary bankruptcy petition will allow you to present your side of the case to a judge, who will be responsible for determining if you should file or not.

What Kind of Defense Can You Claim?

After you file your objection, you'll be given a court date. You must appear on that date to present your case. Your bankruptcy attorney can help you build a case that might allow you to avoid the bankruptcy. If you can prove that the balance your creditor is demanding is incorrect, this mistake in the petition may be enough to get the case dismissed.

You might also be able to get a dismissal if you can show documentation of timely payments or evidence that you don't have the resources to make those payments on time. Finally, if you have any evidence that the creditor who started the process is doing so in an effort to take control of your business or is otherwise manipulating the situation to his or her own benefit, this can be cause for dismissal as well.

Involuntary bankruptcy is a serious and complex legal process. If one of your creditors has initiated proceedings, it's best to call an attorney who can help you navigate the system. For more information on how a lawyer can assist you through the bankruptcy process, click this link.