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Understanding a Creditors' Right to File for Bankruptcy Protection

creditors rights.jpgIn the vast majority of cases, companies voluntarily file for bankruptcy protection. While bankruptcy is generally associated with providing protection to debtors, it also provides some important legal protections for creditors. Indeed, creditors even have the right to file an involuntary bankruptcy petition. By doing this, creditors may be able to force a company into bankruptcy. While this does not happen often, the right to do so is incredibly valuable for creditors. As such, it is important to discuss what you need to know about involuntary bankruptcy petitions.

Forcing a Company into Bankruptcy

Filing Requirements

The requirements associated with filing an involuntary bankruptcy petition can be found under Section 303 of the U.S. Bankruptcy Code. First and foremost, this section of the Code specifies a minimum number of creditors that must join the filing. This depends on the number of creditors a company has. When a debtor company has 12 or more creditors, then at least three different creditors must join the filing. If the company has fewer than 12 creditors, then one single creditor can bring the involuntary petition. Additionally, the creditors filing for the involuntary petition must have a collective claim that is worth at least $15,775.

Two Important Differences Between a Voluntary and Involuntary Bankruptcy Filing

1. When a company files for bankruptcy, it is granted an automatic stay. However, that is not true with involuntary filings. An involuntary filing is more akin to a legal complaint. It requests that a company be put into bankruptcy, but it does not automatically make it so.

2. Companies have a chance to respond to an involuntary filing with their own voluntary bankruptcy position. If a company chooses to respond in this manner, then the company representatives will become the debtor in possession and they will be able to take control of the case.

Involuntary Bankruptcy as a Collection Tool

Ultimately, the ability to push a company into bankruptcy should be viewed as a legal tool. When used correctly, this tool can help protect the claims rights of creditors. Involuntary bankruptcy petitions are particularly useful in situations in which the debtor company is at-risk of transferring away its assets. Far too often, debtor companies will try to transfer their assets to other entities, typically related firms, in times of deep financial distress. This is done to try to deny or deter debt collection. When this happens, the ability to file an immediate involuntary bankruptcy petition is a valuable tool that can be used to preserve critically important debt collections rights.

Request Your Free Business Bankruptcy Consultation Today

At Diemer, Whitman & Cardosi, LLP, our dedicated San Jose creditors' rights attorneys are standing by, ready to help protect your firm. To learn more about what we can do for you, please do not hesitate to give us a call today at 408-971-6270. We proudly serve clients throughout the Bay Area, including in Marin County, Contra Costa County, Napa County and Solano County.



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  • Santa Clara County Bar Association | 1917
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  • CWL | California Woman Lawyers
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