Almost all consumer bankruptcy cases are voluntary. In a voluntary bankruptcy the debtor decides to file for bankruptcy on his or her own accord. This is what people refer to when talking about bankruptcy. (To learn about voluntary bankruptcy, see Chapter 7 Bankruptcy and Chapter 13 Bankruptcy.)
In an involuntary bankruptcy case, a creditor files a bankruptcy case against a consumer. Involuntary consumer bankruptcy cases are extremely rare.
Conditions for Filing an Involuntary Bankruptcy Case
An involuntary bankruptcy cannot be filed under Chapter 13. In addition, it cannot be filed against farmers or fisherman, nor against a husband and wife filing jointly.
In addition, an involuntary case may be filed in only two situations.
- A single creditor can file an involuntary case if the consumer has fewer than twelve unsecured creditors and the creditor has an unsecured claim of $15,775 or more (as of April 2016).
- Three or more creditors can file an involuntary case if the consumer has twelve or more unsecured (partially or wholly) creditors and the petitioning creditors have claims totaling at least $15,775 (as of April 2016).
Reasons Why Involuntary Bankruptcies Are Rare
It is often difficult for creditors to meet the above filing criteria. Even if they can, most creditors are reluctant to file an involuntary case for several reasons:
- Because of some of the powerful protections bankruptcy provides to debtors, and advantages in certain circumstances, creditors often do worse in bankruptcy than do debtors.
- If the court dismisses the involuntary bankruptcy, the petitioning creditor may be on the hook for attorneys’ fees, costs, and compensatory and punitive damages.
The Debtor’s Options in an Involuntary Bankruptcy Case
If a creditor files an involuntary bankruptcy against a debtor, the debtor has several options.
- Continue with the case. Because filing for Chapter 7 bankruptcy is often advantageous to the debtor, the debtor may decide that continuing is the best option.
- Convert from Chapter 7 to Chapter 13.
- Contest the involuntary bankruptcy.