Creditors may file a petition placing a debtor into bankruptcy, subject to requirements designed to prevent its use as a collection device.
Who may file. Three or more holders of claims that are not contingent as to liability and not the subject of a bona fide dispute as to liability or amount, aggregating above a threshold; or a single such creditor where the debtor has fewer than twelve qualifying creditors.
Bona fide dispute is the usual battleground. A creditor whose claim is genuinely disputed is not eligible, and a debtor’s first response is to show a dispute.
Grounds. The debtor is generally not paying debts as they become due, or a custodian was appointed within the preceding period.
The gap period. Between filing and the order for relief, the debtor may continue to operate, and gap creditors receive priority.
Dismissal consequences. If the petition is dismissed other than by consent, the court may award costs and fees; and if the petition was filed in bad faith, damages proximately caused and punitive damages.
Strategic use. Occasionally appropriate where assets are being dissipated and the alternatives are inadequate. Rarely appropriate as leverage, and courts recognise the difference.