It is a very common situation for a creditor to be owed a large sum of money from a debtor who continues to operate by paying other creditors or parties. Naturally, this is very frustrating. It can also be very disturbing because at the same time there are rumblings of the debtor’s financial instability. At this point, the creditor must decide on a course of action.
Certainly, the creditor has the option of filing a state court breach of contract action and working toward obtaining a judgment. However, litigating a lawsuit takes time and even more time is spent to execute on the judgment. The passage of time affords the debtor the opportunity to continue paying others and ultimately wind down the business.
There is another option, which is often overlooked. Force the debtor into bankruptcy. This is done by filing an involuntary bankruptcy petition. The reason for an involuntary bankruptcy is to prevent and protect creditors from unfair activities and treatment by debtors. The greatest advantage to an involuntary bankruptcy is that it forces bankruptcy upon the debtor rather than allowing the debtor to ultimately file on its own terms. This is extremely important because of the ability to recover payments or wrongful transfers by the debtor within certain time frames leading up to the filing of the bankruptcy petition. These payments and transfers can be brought back into the bankruptcy estate to be properly distributed by the bankruptcy court.
In sum, bankruptcy is not always a bad thing for unsecured creditors. It just simply depends upon whose terms the bankruptcy is filed.
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Bankruptcy is not the only legal status that an insolvent person or other entity may have, and the term bankruptcy is therefore not a synonym for insolvency. In some countries, including the United Kingdom, bankruptcy is limited to individuals, and other forms of insolvency proceedings (such as liquidation and administration) are applied to companies.:”;”
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