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involuntary bankruptcy

The bankruptcy process is designed to help creditors (persons or entities who are owed money) as well as debtors (persons or entities who owe money). And one of the powers given to creditors under bankruptcy law is the power to force a debtor into bankruptcy against the debtor’s wishes—known as involuntary bankruptcy.

Involuntary bankruptcy usually involves a group of creditors filing a bankruptcy on behalf of a debtor—usually a business—where the creditors believe the business can pay its obligations to the creditors, but is refusing to do so. Involuntary bankruptcy petitions against individuals are less common, as only affluent individuals are likely to have assets that may be used to pay the creditors. And a creditor can only file an involuntary bankruptcy case under Chapter 7 or Chapter 11—not under Chapter 12 or Chapter 13.

In Texas, as in all states, the bankruptcy process is governed by federal law, specifically the U.S. Bankruptcy Code. Creditors have the right to file an involuntary bankruptcy petition against a debtor under Chapter 7 or Chapter 11 of the Bankruptcy Code. This action is typically taken when creditors believe a business debtor is not paying its debts despite having the means to do so. For an involuntary bankruptcy to proceed, certain criteria must be met, including a minimum number of creditors and a minimum amount of debt. Involuntary bankruptcy petitions against individuals are rarer and usually involve individuals with substantial assets. It's important to note that involuntary bankruptcy cannot be initiated under Chapter 12, which is for family farmers and fishermen, or Chapter 13, which is for individuals with regular income who can pay back a portion of their debts over time. If an involuntary bankruptcy petition is successful, the bankruptcy process will proceed similarly to a voluntary case, with the court overseeing the distribution of the debtor's assets to creditors. Debtors have the right to contest an involuntary petition, and if the petition is dismissed, the creditors may be responsible for costs and damages. An attorney specializing in bankruptcy law can provide guidance specific to the circumstances of the debtor or creditor involved.

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