Involuntary Bankruptcy Is Usually An Empty Threat

We hear this threat all the time: “I am going to force you into involuntary bankruptcy.” Business owners get worried and wonder if it will really happen. What then?

Here is the deal. For the most part, it is an idle threat not to be taken too seriously as it so infrequently occurs. The threat happens all the time, the result being that sometimes business owners cower from the threat and pay whatever is being demanded. However, most often it is an empty threat that one ought not even respond to. There are reasons so few involuntary petitions are filed.

First, as you probably know, it requires three creditors to band together to force an involuntary bankruptcy. That, in and of itself, is a barrier of some significance. Further, it costs money. Bankruptcy court is not cheap and the creditors must be willing to invest further into this act of retribution as little will be actually gained.

Once filed, the business has a right to convert to a Chapter 11 and there is much cost associated with this on both sides for lawyers and preparation. This is another huge investment on the creditor’s behalf as Chapter 11 is very expensive for all involved. Only the lawyers are making money here. When the inevitable happens, a conversion to a liquidating Chapter 7, all the recovered capital goes to the superior creditors and the secured lien holders, not to the moving petitioners, the three creditors who forced the bankruptcy. So, what was the point? They would spend a lot of money and get nothing in return.

Some say the gratification of putting the business into liquidation was worth the cost. That’s a ridiculous notion. A loss of money for no reason is a waste and few business owners are that silly. Therefore, it seldom happens. If the business owner’s creditors are not aware of these realities, their lawyers will explain and typically will recommend that they not pursue such a wasteful strategy which is sure to yield few, if any, beneficial results.

Next time you hear such a threat, walk away. Don’t lose sleep over it because it ain’t gonna happen.