Q: What is involuntary bankruptcy, and can it happen to my business?

—Concerned Borrower

A: Dear Concerned:

While uncommon, creditors who believe they have no other recourse to get paid by a business debtor can force that company into what’s known as “involuntary bankruptcy.”

Though involuntary bankruptcies against businesses do happen, several rigid conditions must be met for creditors to qualify.

For example, if a debtor has more than 12 creditors, at least three must join the bankruptcy, and the debtor must owe a combined amount of at least $15,775 to them. If a debtor has fewer than 12 creditors, a sole creditor can file if they’re owed at least $15,775.

Involuntary bankruptcies start by the creditor(s) filing a petition in court. The debtor has 20 days to respond, and if they don’t answer, the court orders the bankruptcy to proceed. If they do respond, a hearing is held where a judge decides whether the petition is in good faith and that the debtor is not paying the debt despite the ability to do so.

If the judge rules for the creditor(s), the bankruptcy begins. If the debtor wins, the case is dismissed, and the creditor(s) can be ordered to pay the debtor’s legal costs—and even punitive damages.

A Family Business Lawyer™, if you’re involved with an involuntary bankruptcy or think you might be soon, can help.