What is involuntary bankruptcy?

Involuntary bankruptcy is when the creditors, rather then the debtor, files the petition in bankruptcy. Involuntary petitions are unusual and rare, however, they are occasionally used in business settings as a way to force a company into bankruptcy so that the creditors can receive their payments.

However, there is a risk in using involuntary bankruptcy petitions. If the court finds the petition was filed in bad faith, then it can award monetary damages and attorneys’ fees to the debtor. This would leave the creditor out of even more money. Therefore, a creditor will use this as a last resort when they are very certain of winning.