Although they make up only a small portion of filings, involuntary bankruptcy petitions do occur. When creditors file an involuntary proceeding against a company or individual, it can be quite daunting for the party being forced into bankruptcy. However, the company or individual can also fight back and seek to have the bankruptcy case dismissed.
An involuntary bankruptcy proceeding begins with the filing of a petition. The alleged debtor is then permitted 21 days to respond to that petition. In this responsive pleading, the alleged debtor is given an opportunity to tell the Court why he or she should not be forced into bankruptcy. The typical arguments that an alleged debtor may make when opposing an involuntary bankruptcy are: (i) the required number of creditors and claim amounts have not joined in the filing; or (ii) the debts associated with the filing creditors are subject to bona fide disputes.
Section 303(b) of the Bankruptcy Code sets out the general requirements for how many creditors must join in a bankruptcy proceeding and what the aggregate amount of those creditors’ claims must be. If the petitioning creditors have not met the requirements of this Code Section, the alleged debtor can use this as a defense to the involuntary petition and seek its dismissal on those grounds alone.
Additionally, an alleged debtor may challenge an involuntary bankruptcy on grounds that there exist bona fide disputes as to the liability with respect to the petitioning creditors. For purposes of this requirement, a bona fide dispute can be as to liability or amount. If an alleged debtor can show that the petitioning creditors’ debts are subject to bona fide disputes, the Court will dismiss the proceedings.
If you are a debtor or creditor and have any additional questions regarding involuntary bankruptcy filings, please contact the VC Law Group via telephone at (858) 519-7333 or email at info@thevclawgroup.com.