Creditors have the power to force a company into bankruptcy, but only under certain conditions. Here’s what you need to know:
- A company can be forced into a bankruptcy if they have failed to make payments on debts. Creditors usually don’t begin to push a company into bankruptcy until a significant number of payments are missed.
- Creditors can only force a company into a Chapter 7 bankruptcy or Chapter 11 bankruptcy. If a creditor successfully files an involuntary Chapter 7 bankruptcy on a company debtor, the company’s assets will be liquidated and the proceeds will be used to pay all eligible creditors. If the creditor forces a company into Chapter 11 bankruptcy, the debts will be restructured. In other words, once the involuntary petition is filed and approved the bankruptcy process is basically the same as a voluntary bankruptcy.
- Getting an involuntary bankruptcy petition filed and approved is no easy feat. If a debtor company has less than 12 creditors, only one creditor is needed to file for the involuntary petition. But if the debtor company has more than 12 creditors, at least 3 creditors must be willing to file an involuntary bankruptcy petition against a company. Any creditor that wants to file an involuntary bankruptcy petition against a company must first have a judgment against that company that is not in dispute. If a company debtor is challenging the validity of a debt, that creditor cannot file an involuntary bankruptcy petition.
- Finally, it is not enough that a debtor company is failing to pay a few of their bills. The company must be literally insolvent and not paying most or all of their bills before a creditor can successfully file an involuntary bankruptcy against the company.