Can a Business Be Forced into Bankruptcy?

The short answer to this question is “yes,” but not easily. There are two ways in which a company can be forced into bankruptcy:

1.“Forced” but technically voluntary bankruptcy: The first situation occurs when a company files a voluntary bankruptcy petition under Chapter 7 or Chapter 11 of the U.S. Bankruptcy Code in response to creditor actions, whether in the form of a lawsuit, harassment, threats, or other undesirable action that pushes the company to file for bankruptcy.

For example, a mortgage lender may have declared a default under its loan documents and commenced foreclosure proceedings, or an unsecured creditor such as a credit card company may have filed a lawsuit against the company in question. When a company files bankruptcy in response to such action from a creditor or creditors, it may seem like it was indeed “forced,” but because it is the company itself that is filing for bankruptcy, the action is a voluntary petition. Once a company files a bankruptcy petition under Chapter 7 or 11, it is immediately affected by the Bankruptcy Code’s provisions, and creditors are subject to the automatic stay.

2. Involuntary bankruptcy filed by the creditors: In contrast to the “forced” but voluntary bankruptcy described above, there are situations where creditors literally force a company into bankruptcy, without its consent. The most important requirements for a successful filing of involuntary bankruptcy against a business are outlined below.

Number of creditors requirement:

If a company has twelve or more creditors, an involuntary bankruptcy petition requires three or more creditors whose undisputed unsecured claims total at least $15,775.00 or, if secured, total at least $15,775.00 more than the value of any liens securing those claims.

If the company has fewer than twelve creditors, only one qualifying creditor is required to file an involuntary petition.

Necessary grounds for involuntary bankruptcy:

If the petition is timely disputed the court will only grant relief for involuntary bankruptcy under two grounds:

1) the company must not be paying its debts as they become due. Non-payment of debt is excused if the debts are the subject of a bona fide dispute as to liability or amount; or

2) within 120 days before the filing of the petition a custodian, with some exceptions, was appointed or took possession of substantially all of the assets.

What options do you have if your business becomes the subject of an involuntary bankruptcy filing?

Your business basically has two options, either consent to and cooperate in the involuntary bankruptcy filing or contest it and move to dismiss.

Hire a Denver Bankruptcy Attorney who was also a Trustee for the Bankruptcy Court

Martin Long of Long & Long P.C. has decades of experience representing both debtors and creditors in almost any factual or legal situation involving bankruptcy. In any case dealing with a potential adversarial bankruptcy case, you need the most experienced and skilled bankruptcy attorney possible. Our offices serve Aurora, Loveland, Highlands Ranch, Denver, Littleton, Castle Rock, Colorado and the Denver metro area with three convenient locations. Contact us now at 303-832-2655 for a free initial consultation.