Paralegal Advanced Competency Exam (PACE) Practice Exam

What initiates involuntary bankruptcy proceedings?

1. A debtor's request for discharge

2. Creditors requesting the court to place a debtor in liquidation

3. A company's failure to pay taxes

4. A personal bankruptcy declaration

The correct answer is: Creditors requesting the court to place a debtor in liquidation

Involuntary bankruptcy proceedings are initiated specifically when creditors file a petition with the bankruptcy court to force a debtor into bankruptcy. This process is typically initiated when creditors believe that the debtor is unable to pay their debts and seeks court intervention to protect their interests. The correctness of this choice hinges on the legal framework established under the Bankruptcy Code, which allows creditors to take such action under certain conditions, provided that they meet the threshold for the number of creditors and the amount of debt. The other choices represented do not pertain directly to the initiation of involuntary bankruptcy. A debtor's request for discharge refers to a process that occurs after a voluntary bankruptcy filing when they seek relief from certain debts. A company's failure to pay taxes may indicate financial distress but does not in itself trigger involuntary bankruptcy proceedings. Similarly, a personal bankruptcy declaration is a voluntary action taken by an individual rather than a response from outside creditors attempting to initiate the bankruptcy process. Thus, the correct answer clearly aligns with the legal procedure surrounding involuntary bankruptcy filings.