Filing for bankruptcy is a way that debtors make a new financial start. However, there are times when bankruptcy is involuntary. In this process, creditors ask the Court to enter into bankruptcy proceedings against your wishes. Although this process is rare, involuntary bankruptcy in Salt Lake City can happen to you or your business, and you should consult a bankruptcy attorney right away if you find yourself in this situation.
Unlike traditional bankruptcies, in which you file a petition for relief from your debts, an involuntary bankruptcy is initiated by creditors who believe you or your business have the money or assets to satisfy your obligations.
If you or your business have fewer than twelve creditors, only one needs to petition the Court. For more than twelve creditors, at least three creditors must petition the courts. When answering the petition, you’ll need to list all creditors, how much you owe each, and for what. You will then file an objection, and the Court will decide whether to dismiss the petition or proceed.
Creditors can file involuntary bankruptcy petitions for claims of non-payment that are not subject to a legal dispute over the terms or amount of debt. The minimum debt is $16,750, and the creditor must show that you are not making payments when they are due. However, creditors are not permitted to seek a petition against just any entity or individual, as some are exempt from involuntary bankruptcy petitions such as farmers, not-for-profit organizations, and banks.
Once creditors file an involuntary bankruptcy petition, you have 21 days to respond before bankruptcy proceedings begin. If you don’t respond or the Court rules the creditor has a valid claim, a judge will enter an order of relief and place you in bankruptcy. At that point, you can convert the involuntary bankruptcy to a voluntary one.
Chapter 7 bankruptcy, often called liquidation, is commonly utilized by individuals. Chapter 11, called reorganization, is used for businesses. Trustees oversee both types, but debts are paid back differently.
In Chapter 7 bankruptcy, debtors rarely lose assets, but they must negotiate with the trustee to “buy back” their non-exempt assets’ fair value. Typically, the debtor agrees to a periodic payment plan at zero percent interest. After paying the trustee their fee, the remaining balance is distributed pro-rata to general unsecured creditors. Concerning creditors who hold a security interest in a debtor’s asset (known as “collateral”), debtors can choose to keep the collateral and continue paying the debt (known as “reaffirmation”) or stop paying the debt and give up the collateral (known as “surrender”). Debtors can also propose to pay the secured creditor the fair market value of the collateral in a lump sum (known as “redemption”). Whatever balances remain owing after this process are wiped out (known as “discharge”).
In Chapter 11 bankruptcies, commonly known as corporate reorganization, businesses restructure their debts through negotiations (or sometimes coercion) with creditors for lower interest rates or extended loan terms. Though the trustee “oversees” the process, the debtor remains in control of the business so that it remains open, with some or all debt paid back through future company earnings.
If the company repays its debts per its confirmed plan, it emerges from bankruptcy and continues to operate. If the company flounders, the Court typically converts the case to Chapter 7, so the trustee can liquidate its assets.
Though businesses are the primary users of Chapter 11, individual debtors will often turn to Chapter 11 Reorganization when their debts exceed the allowable limits of Chapter 13. In 2020, the Small Business Reorganization Act of 2019 became effective, making bankruptcy proceedings streamlined for small businesses and individuals.
If you face significant debt in Salt Lake City and creditors have filed an involuntary bankruptcy petition against you, reach out to a qualified legal professional.
Work with one of our experienced lawyers to file an objection, if one is warranted, and inform your choices as you go through the rest of the process. To learn more about your options, schedule a consultation today.