CHAPTER

10

The Involuntary Bankruptcy:

Chapter 7 or Chapter 11
CHAPTER OUTLINE
SECTION 1

LIMITATIONS ON FILING AN INVOLUNTARY PETITION

A. Debtors Who May Be Subject to an Involuntary Petition
B. Requirements of a Petitioning Creditor
SECTION 2

FLOW CHART FOR THE INVOLUNTARY PETITIONS

SECTION 3

THE FILING OF THE CREDITORS PETITION

SECTION 4

THE SIGNIFICANCE OF FILING A PETITION

A. The Order for Relief, the Bankruptcy Estate, and the Automatic Stay
B. Appointment of a Trustee
C. Gap Period Creditors
SECTION 5

THE DEBTORS ANSWER

SECTION 6

HEARING AND DISPOSITION OF AN INVOLUNTARY PETITION

A. The Order for Relief
B. Dismissal of an Involuntary Petition

hapter Ten focuses exclusively on the involuntary bankruptcy, Chapter 7 or Chapter 11. An involuntary petition cannot be filed under Chapter 12 or Chapter 13. Chapter Ten will not be an exhaustive treatment of involuntary bankruptcy, but rather a quick glimpse of an involuntary case. Because the involuntary Chapter 7 and
Chapter 11 cases ultimately will become identical to their voluntary counterparts (unless dismissed), this chapter
will discuss these cases only up to this crossover point.
The introduction discusses why a creditor would want to put a debtor into bankruptcy involuntarily.

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CHAPTER 10

The Involuntary Bankruptcy: Chapter 7 or Chapter 11

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SECTION 1
LIMITATIONS ON FILING AN INVOLUNTARY PETITION (p. 545)
A. DEBTORS WHO MAY BE SUBJECT TO AN INVOLUNTARY PETITION (p. 545)
B. REQUIREMENTS OF A PETITIONING CREDITOR (p. 545)
If a debtor has more than 12 creditors, three creditors must join in the filing of an involuntary petition.
Note that dollar amounts for an involuntary petition are adjusted every three years. 11 U.S.C.A. 104.
11 U.S.C.A. 303(b)Minimum Aggregate Claims Needed for
the Commencement of an Involuntary Bankruptcy

(1)
(2)

1979

1994

$5,000
$5,000

10,000
10,000

April 1,
1998
10,775
10,775

April 1,
2001
11,625
11,625

April 1,
2004
12,300
12,300

The involuntary petition requires three creditors. How does a creditor find out who other creditors are to come
up with at least three eligible creditors? A search of the county court records in the county where the debtor resides
(plaintiff/defendant indices at the courthouse) and a check of the UCC filings (searching the name of the debtor)
may prove helpful. If a creditor receives a judgment against a debtor, the creditor can have the court hold a hearing
on assets. Through discovery, the creditor can find other creditors.
In re Faberge Restaurant of Florida, Inc. (p. 546) involves the count of creditors. Faberge, the debtor, moved to dismiss the petition on the ground that the three-creditor requirement had not been met. Faberge raises the questions
whether a claimant whose claim is subject to a bona fide dispute and whether a claimant who has been paid in full
after the petition has been filed count toward the minimum number of creditors.

SECTION 2
FLOW CHART FOR THE INVOLUNTARY PETITION (p. 548)
Section 2 shows the flow chart for involuntary Chapter 7 and Chapter 11 cases, Exhibit 101 (p. 549).

SECTION 3
THE FILING OF THE CREDITORS PETITION (p. 548)
SECTION 4
THE SIGNIFICANCE OF FILING A PETITION (p. 548)
A. THE ORDER FOR RELIEF, THE BANKRUPTCY ESTATE, AND THE AUTOMATIC STAY (p. 548)
B. APPOINTMENT OF A TRUSTEE (p. 551)

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C. GAP PERIOD CREDITORS (p. 556)

Credit extended by a creditor postpetition is ordinarily afforded administrative claim status. Yet here Congress says
that such claims are considered prepetition claims, but if an order for relief is entered, those claims are given secondlevel priority.

SECTION 5
THE DEBTORS ANSWER (p. 556)
SECTION 6
HEARING AND DISPOSITION OF AN INVOLUNTARY PETITION (p. 557)
The bankruptcy court, on an involuntary petition, will enter an order for relief without a trial if the petition is not
timely controverted. If, however, the debtor contests the petition, a trial will be held.

A. THE ORDER FOR RELIEF (p. 557)

Relief against a debtor will be ordered after trial if the debtor is generally not paying his or her debts as the debts
become due unless the debts are subject to a bona fide dispute. In In re Palace Oriental Rugs, Inc. (p. 557), the debtor
in an involuntary Chapter 7 case, claimed that the claims were subject to a bona fide dispute, that the creditors were
being paid as their claims became due, and that the involuntary petition was filed in bad faith.

B. DISMISSAL OF AN INVOLUNTARY PETITION (p. 559)

The court may dismiss an involuntary petition after notice and a hearing on the motion of a petitioner, on consent
of all petitioners and the debtor, or for want of prosecution. If an involuntary petition is dismissed other than by
consent of all petitioning creditors and the debtor, the dismissal of the involuntary petition may be a costly business
for the petitioner.
In In re Runyon (p. 561), the bankruptcy court awarded the debtors $15,000 in attorneys fees and $10,000 in punitive damages for the creditors bad faith filing of an involuntary petition. The creditor challenged the punitive
damages award contending that the bankruptcy court erred in finding that he filed in bad faith.