Involuntary Bankruptcy

By October 18, 2018 July 30th, 2019 No Comments
stacked coins on the table

A former business bankruptcy client called the other day. Her company successfully emerged from Chapter 11 much stronger than when they first met with me several years ago. But the process of bankruptcy taught her that when a company has value, creditors get paid.

​She has a customer that is getting very bad at paying their bill, and is several hundred thousand dollars behind in payment. Though that would seem like a lot of money to anyone, that happens to be a rather small account for them and is just a couple of months of work. She knows the customer has value and could/should be able to pay the bill, but they are not paying in an effort to negotiate an unwarranted discount.

Her thought – “I’ve heard of an involuntary bankruptcy. I suspect this customer is doing the same thing with others and I could get others to join with me. Why don’t we all get together and file an involuntary bankruptcy against them to force them to pay us all?”

The problem – there is legal risk when filing an involuntary bankruptcy. If an involuntary bankruptcy is dismissed without all of the petitioning creditor(s)’ and the debtor’s consent, Bankruptcy Code Section 303(i) can result in a judgment against the petitioning creditors for costs and reasonable attorney’s fees, and in the case of a bad faith filing, for damages proximately caused by such filing or punitive damages. OUCH!

While my client’s thought was indeed creative, this assumption of risk is not worth it. State law remedies do not expose a creditor to these risks, and are often a better recourse than an involuntary bankruptcy.

There are, however, times when an involuntary bankruptcy can make sense. If someone owes you money and you feel that forcing them into bankruptcy is a good strategy, meet with your lawyer to talk about the risks, or whether you should simply pursue your state law remedies.

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