How Can a Company Go Bankrupt? 5 Ways a Case Begins, Including One the Company Does Not Choose

A company goes bankrupt on the day a petition is filed, which is a narrower event than the months of shortfall that usually precede it. The Bankruptcy Code does not ask whether a business is insolvent before letting it file. It asks who filed, with what authority, and (when the company did not file) whether the petitioners can prove what the statute requires.

How a company goes bankrupt, then, is two questions. The financial one has a familiar shape: liabilities overtake assets at a fair valuation, which is the Code's definition of insolvency for an entity, or the business stops paying its debts as they come due, which New York's voidable transactions law treats as a presumption of insolvency. The legal one has five answers, and one of them is filed by the company's creditors against its will.

1. The Board Authorizes a Voluntary Petition

Ordinarily a business case begins when the company files for itself under chapter 7 or chapter 11. The filing is the order for relief; nothing more is needed to start the case. But someone must have the power to file. The Supreme Court held in Price v. Gurney (1945) that the authority to put a corporation into bankruptcy "finds its source in local law," and that a court finding the signers lacked it "has no alternative but to dismiss the petition." Courts still apply that rule. State law and the company's own bylaws or operating agreement decide whose vote is required.

The petition itself, Official Form 201, carries the signer's declaration: "I have been authorized to file this petition on behalf of the debtor." A second signature line belongs to the attorney, and it is not optional, since an entity may appear in federal court only through licensed counsel. An owner who signs without a board resolution or member consent in the file has, to put it carefully, filed a petition that someone else may later challenge.

2. Creditors File an Involuntary Petition

The case the company does not choose begins under 11 U.S.C. 303. Creditors may file only under chapter 7 or chapter 11, and never against a farmer, a family farmer, or a corporation that is not a moneyed, business, or commercial corporation.

On April 1, 2025, the dollar threshold rose from $18,600 to $21,050, and it stays there until the next adjustment in 2028. Three or more creditors may file if each holds a claim that is not contingent as to liability and not the subject of a bona fide dispute as to liability or amount, and those claims together exceed the value of any liens securing them by at least $21,050. A company with fewer than twelve such creditors (counting only qualifying holders, after excluding employees, insiders, and anyone who received a transfer the trustee could avoid) can be put into bankruptcy by a single creditor holding at least that amount.

The company is not helpless once served. Until the court enters an order for relief, the business may keep operating and using its property as if no case had been filed, unless the court orders otherwise. If the company contests the petition, the court grants relief only if the company is generally not paying its debts as they become due (disputed debts excepted), or if a custodian took charge of substantially all of its property within 120 days before the filing. The court may require the petitioners to post a bond. And if the petition is dismissed without everyone's consent, the court may award the company costs or a reasonable attorney's fee, and against a petitioner who filed in bad faith, damages including punitive damages.

Whether a claim is subject to a bona fide dispute is a fact question for the court, and a creditor whose own contract is under attack (a merchant cash advance funder whose agreement the company says is a disguised loan, for instance) may find its claim does not count toward the threshold, or may not. The statute does not say which, and the cases turn on facts no article can supply.

3. A Chapter 11 Converts to Chapter 7

A reorganization that fails often ends as a liquidation. The debtor may convert its own chapter 11 case to chapter 7, subject to three exceptions, including a case that began as an involuntary chapter 11. On a party's request and for cause, the court must convert or dismiss, whichever is in the best interests of creditors and the estate, and the list of causes in section 1112(b)(4) runs from continuing losses with no reasonable likelihood of rehabilitation to unpaid U.S. Trustee fees.

Conversion does not change the filing date. It does bring a chapter 7 trustee, and an entity in chapter 7 receives no discharge.

4. A Receiver or an Assignee Takes Charge First

Some companies end outside the federal courts. A state court receivership or an assignment for the benefit of creditors (New York addresses the latter in Article 2 of its Debtor and Creditor Law) puts a third party in control of the company's property without any bankruptcy filing. The Code calls such a person a custodian, and the label matters twice.

A custodian's appointment within 120 days before an involuntary petition is itself a ground for relief under section 303(h)(2), except where the custodian took charge of less than substantially all the property only to enforce a lien. And once a bankruptcy case begins, a custodian must stop administering the property, deliver it to the trustee, and file an accounting under section 543, unless the court excuses compliance. The bankruptcy court cannot appoint a receiver of its own. Section 105(b) forbids it.

5. A General Partner Files Against the Partnership

A partnership can be forced into bankruptcy from inside. Section 303(b)(3) lets fewer than all of the general partners file an involuntary petition against it, and the petitioners must send the petition to, or serve, each general partner who did not join.

Before a Petition Exists

An owner who has received an involuntary petition needs bankruptcy counsel that week; the case now moves on the court's calendar, and no negotiator can answer a petition. An owner still months away from any filing has a different question, which is whether the debt can be restructured before anyone reaches the courthouse. Delancey Street is a debt relief firm, not a law firm, and it cannot file or defend a bankruptcy case; it offers a free confidential review of merchant cash advance and related business debt and coordinates with independently licensed counsel when the answer is legal. Some businesses need a petition. Many of them could have used the months before it differently.