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What is involuntary bankruptcy?

Thousands of Massachusetts residents and companies weigh the option of filing for bankruptcy every year. It's a difficult decision, involving not only financial considerations, but emotional and reputational ones as well. However, sometimes the decision to file is in the hands of creditors, not the debtor.

In certain limited circumstances, the US bankruptcy code allows for creditors to petition for bankruptcy against a debtor - a process known as involuntary bankruptcy. Involuntary bankruptcy is only permitted under Chapter 7 and Chapter 11 of the bankruptcy code. It is an adversarial proceeding, where the debtor is given 20 days to object to the filing.

To prevail, the petitioning creditors must prove that the debtor is not paying debts on time and that they are bringing the petition in good faith. The filers are responsible for all fees and costs associated with the bankruptcy proceedings. In the event that the court rules against them and terminates proceedings, they may also be ordered to pay the debtor's legal expenses and damages.

Voluntary bankruptcy proceedings are designed to give filers a fresh start financially. By contrast, involuntary bankruptcy proceedings are primarily designed to protect the interests of creditors. Under ideal circumstances, bankruptcy is a highly complex process that often involves dozens of creditors and their competing interests. Involuntary proceedings magnify those challenges because the debtor may not even want to file for bankruptcy in the first place. Getting the right information about the bankruptcy process can help a Massachusetts resident manage creditors, protect legal rights and develop a debt management plan.

Source: Cornell University, Legal Information Institute, "11 U.S. Code § 303 - Involuntary cases," accessed April 7, 2015

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