Can A Creditor Force You Into Bankruptcy? Let’s Explore Together

April 11th, 2023 by A Licensed Insolvency Trustee

Reviewed and Fact-checked by Barton Goth, CIRP, Licensed Insolvency Trustee & Proposal Administrator

People are often worried about their financial situation and have many questions about the bankruptcy process. One question that we hear quite often is: “Can a creditor force me into bankruptcy?” This is an important question, and I’m here to help you navigate through it. In this blog post, we’ll explore the concept of creditor-initiated bankruptcy, as outlined in the Bankruptcy & Insolvency Act (BIA), and we’ll walk you through the details in a warm and friendly manner.

Understanding Creditor-Initiated Bankruptcy: What Does It Mean?

You may already be familiar with the idea of bankruptcy as a way for individuals or businesses to seek relief from overwhelming debts. Usually, this is a voluntary decision made by the debtor. However, there are situations where a creditor, rather than the debtor, starts the bankruptcy process. This is known as creditor-initiated bankruptcy, involuntary bankruptcy, or bankruptcy by petition. Let’s take a closer look at how this works.

The Bankruptcy & Insolvency Act sets out specific criteria that must be met for a creditor to initiate a bankruptcy petition against a debtor:

  • Monetary Threshold: First and foremost, the debtor needs to owe at least $1,000 to one or more creditors for this process to be applicable.
  • Act of Bankruptcy: The debtor must have committed what is known as an “act of bankruptcy” within the six months prior to the petition being filed. An act of bankruptcy can include things like not being able to make payments on time or trying to hide assets from creditors.
  • Notice of Petition: It’s important that the debtor is made aware of the petition, so the creditor needs to provide proper notice and an opportunity for the debtor to respond.

While we’ve discussed the concept of creditor-initiated bankruptcy, it’s important to highlight that this process is largely used in the corporate context and is relatively rare in cases of consumer insolvency. For individuals facing financial difficulties, creditors often pursue alternative methods of debt recovery, and involuntary bankruptcy is not a common occurrence. 

However, when it comes to corporate insolvency, creditor-initiated bankruptcy is a more frequently used tool. Businesses that are unable to meet their financial obligations may find themselves subject to a bankruptcy petition initiated by their creditors. This avenue provides creditors with a mechanism to recover debts from companies that are in financial distress. As such, the prevalence of creditor-initiated bankruptcy is notably higher in the corporate sphere compared to consumer cases.

What Happens Next? The Consequences and Outcomes

If the court approves the petition and the debtor is declared bankrupt, the formal bankruptcy process begins. A licensed insolvency trustee (like myself) is appointed to oversee the process and help both the debtor and the creditors. Some of the trustee’s responsibilities include:

  • Selling the debtor’s non-exempt assets and distributing the funds to the creditors fairly;
  • Reviewing claims made by creditors and verifying their accuracy;
  • Holding meetings with creditors if needed; and
  • Helping the debtor complete the bankruptcy process and receive a discharge, subject to certain conditions.

Being declared bankrupt can have a big impact on the debtor, including affecting their credit rating and potentially losing some assets. However, there are also some benefits, such as protection from further legal action by creditors.

Wrapping Up: You’re Not Alone

Facing financial challenges can be daunting, but please remember that you’re not alone. Creditors do have the legal right to petition for bankruptcy, but it’s not a decision they take lightly. The process can be complicated and may not always be the best option for all parties. If you’re feeling overwhelmed by debt, I encourage you to reach out for professional guidance. Whether it’s bankruptcy or another debt relief option, we’ll work together to find a solution that suits your unique situation.

Please keep in mind that this blog post is for informational purposes and does not replace personalized legal advice. If you have specific questions or concerns, don’t hesitate to get in touch with a licensed insolvency trustee or legal professional who can provide the support you need.

A Licensed Insolvency Trustee
  • Posted in Learn
  • Comments Off on Can A Creditor Force You Into Bankruptcy? Let’s Explore Together

Comments are closed.