Dealing with an Involuntary Bankruptcy
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Most people have some familiarity with voluntary bankruptcy filings. Far fewer understand the possibility that an involuntary bankruptcy can be filed against them or their business. Involuntary bankruptcies are relatively rare but can be devastating for an individual or business that is the subject of such a filing.
An involuntary bankruptcy case is initiated when one or more creditors files a petition and a summons with the clerk of the U.S. Bankruptcy Court. The debtor has 20 days to file objections. If that happens, the case can go to trial to determine if the filing was appropriate. If the debtor does not object, the bankruptcy proceeds in the same fashion as a voluntary case. An involuntary case can be initiated only under Chapter 7 or Chapter 11 of the Bankruptcy Code, not under Chapter 13. A debtor may elect to convert an involuntary Chapter 7 to a Chapter 11.
Most creditors prefer to pursue their claims outside of bankruptcy to avoid having to share the debtors assets with other creditors and to avoid the expenses that are involved in a bankruptcy. However, when friendly creditors are being paid out of the debtors available assets but not other creditors, or when assets are being wasted or hidden, an involuntary bankruptcy can provide relief in a number of ways. First, it will stop any further payments or transfers. Second, it may allow a trustee to recover preferential payments or fraudulent transfers. Bankruptcy trustees have greater recovery powers than a general creditor. A trustee may also be paid out of the recovery.
Involuntary Bankruptcies Under the Bankruptcy Reform Act of 2005
Five states (including Florida) offer their residents an unlimited homestead exemption. One aspect of the 2005 reform legislation limits the homestead exemption that can be claimed in bankruptcy during the first 1215 days of ownership. That limitation may remain past the first 1215 days of ownership if the debtor is a defendant in a fraud lawsuit. A second provision in the 2005 Act prevents a debtor in bankruptcy from claiming as exempt any equity fraudulently transferred into the home within the past ten years. For these reasons and others an individual with a homestead in Florida may wish to avoid the bankruptcy courts
The 2005 bankruptcy laws limit the homestead protection available in bankruptcy. A creative creditor may file an involuntary bankruptcy for the sole purpose of destroying the debtors homestead protection. This can be a major concern for someone with either of these issues.
There are also strategies to avoid an involuntary bankruptcy that may help a judgment debtor retain his or her home. Call us if you would like more information on this subject or bankruptcy in general. There is no charge for the initial consultation.
