Michael H. Traison
Chicago/NYC – 312.860.4230
Under the United States Bankruptcy Code, 11 U.S.C. § 303, creditors may initiate an involuntary bankruptcy proceeding against a debtor, forcing it into insolvency proceedings, continuing a tradition that dates back to the former Bankruptcy Act.
This provision, retained and revised under the Bankruptcy Reform Act of 1978 and its subsequent amendments, allows creditors to force a debtor into bankruptcy only when specific legal conditions are met.
The number of petitioning creditors required depends upon how many creditors the debtor has. If the debtor has fewer than 12 creditors, one qualifying creditor may file an involuntary petition. However, If the debtor has 12 or more creditors, at least three petitioning creditors are required.
Moreover, their claims must be (a) not contingent as to liability, (b) not subject to bona fide dispute as to liability or amount; and (c) in the aggregate amount of at least $21,050 (as of April 2025 through March 2028) in unsecured claims (subject to periodic adjustment under 11 U.S.C. § 104(a) — always verify the current amount on the U.S. Courts website or in the Federal Register).
The creditors must allege that the debtor is generally not paying its debts as they become due, whatever that means. It’s unclear whether this language refers to the quantity of debts or the amount of debt. As has been said about “obscenity” sometimes it’s a matter of knowing it when seeing it.[1] :
Once served, the debtor may contest the petition, arguing that the debts are disputed, contingent, or that the debtor is paying debts as they come due. If the debtor prevails, the court may dismiss the petition and may award (a) costs, (b) attorney’s fees and/or (c) damages (if the petition was filed in bad faith). Beware!
We have cautioned before about the risks of misusing involuntary bankruptcy as a collection tactic. For a more in-depth discussion of this concern, see our earlier article: Using Involuntary Bankruptcy for Debt Collection and Using Involuntary Bankruptcy for Debt Collection - Update.
Although filing an involuntary petition may be viewed as a way to benefit other creditors or serve the public interest, abusing that privilege can trigger severe sanctions. As we’ve previously noted, this section can be a friend or a foe to the creditor.
Most recently, a case in the First Circuit highlights a developing split of authority among the federal circuits. The question presented was whether a bankruptcy judge may impose a deadline for additional creditors to join an involuntary petition when fewer than three petitioners initially filed. The circuit court upheld the bankruptcy judge’s authority to set a joinder deadline. In other jurisdictions, courts have allowed creditor joinder at any time before the petition is dismissed or granted, without such a deadline. In In re HH Technology Corp., PCC Rokita, S.A. et al. v. HH Technology Corp. et al. (1st Cir., 2025), this split may eventually call for Supreme Court resolution or further legislative clarification.
In addition to Involuntary Bankruptcy, Creditors owed money have multiple legal options under both state and federal law, including traditional litigation for debt collection (in state or federal court, depending on diversity and amount in controversy) or appointment of a receiver, by filing a complaint under state or federal law. The choice of remedy will depend on (a) the size of the claim, (b) strategic considerations, such as whether the creditor may become subject to (1) avoidance actions, (2) recovery of preferential transfers and/or (3)fraudulent conveyance claims.
Creditors considering action should consult legal counsel to evaluate the most appropriate and least risky course of action. Debtors served with an involuntary petition should seek immediate legal advice to determine their defenses and response strategy.
This advisory provides a brief overview of the most significant updates in the law and does not constitute legal advice. Nothing herein creates an attorney-client relationship between the sender and recipient.
Footnotes
[1] Justice Potter Stewart, Jacobellis v Ohio, 1964.