It’s not uncommon for a financially failing business to file bankruptcy. In the interests of self-preservation, the entity voluntarily files bankruptcy in an effort to maintain valuable assets and restructure its debt. However, debtors are not the only ones capable of initiating a bankruptcy case — the Bankruptcy Code also permits creditors to commence an involuntary bankruptcy case against the debtor. In the article “Forcing the Issue,” published in the July/August 2016 issue of Los Angeles Lawyer, Asa Hami discusses the costs and benefits of involuntary bankruptcies.
There are strict thresholds that the petitioning creditors must meet, as well as a series of risks to consider before taking the plunge, as outlined in Section 303 of the Bankruptcy Code. “The most notable risk is the exposure to liability based on an unsuccessful petition,” Mr. Hami writes. When a petition fails, fees or damages are often assessed “against the petitioners.”
Despite the risks, the ability to file an involuntary bankruptcy petition can be a useful tool. When successful, the filing may preserve the debtor’s valuable assets for the creditors’ benefit or “serve as an effective tool in a creditor’s attempt to recover on an outstanding debt.” Ultimately, it is important for creditors to carefully weigh the potential costs and rewards before pursuing an involuntary petition.