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 still relatively rare. New legislation
may change that.
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.
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.
Involuntary
Bankruptcies and Bankruptcy Reform
Involuntary
bankruptcies may dramatically increase under new bankruptcy reform
laws. One aspect of the new legislation limits the homestead exemption.
Five states (including Florida) now offer their residents an unlimited
homestead exemption. This has lead to numerous abuses. One new
law will limit the homestead protection available in bankruptcy
if the Debtor has not owned his or her home for a specified period.
A second proposal will prevent a debtor in bankruptcy from claiming
as exempt any equity fraudulently transferred into the home within
the past ten years. A creative creditor may file an involuntary
bankruptcy for the sole purpose of destroying the debtors homestead
protection. This may become a new cottage industry. Call us if
you would like more information on this subject or bankruptcy
in general.
