Can a Creditor Force Me Into Bankruptcy?
Yes, they can, but it’s very rare in the context of an individual bankruptcy. I have had a potential client though, who was placed in an involuntary bankruptcy case by an angry creditor (a lawyer, of course). That case did not go well for the creditor, however.
11 U.S.C. §303 provides for involuntary bankruptcy cases. It states,
(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title—
(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such non-contingent, undisputed claims aggregate at least $10,000 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;
(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724 (a) of this title, by one or more of such holders that hold in the aggregate at least $10,000 of such claims;
Creditors can force Debtors into Chapter 7 or Chapter 11 bankruptcy. If the Debtor has more than 12 creditors, an involuntary petition requires three or more creditors to join in filing the involuntary case. Those creditors must have bona fide claims with no dispute as to liability or amounts. The combined amounts owed must exceed $15,325.00 (it says $10,000.00 above but that number is adjusted every three years). If any of the claims are secured, then the claim balances must be $15,325.00 higher than the liened amount of the secured portion.
If the Debtor has less than 12 creditors, then just one creditor is needed to file the involuntary bankruptcy petition. The same rules about having no dispute as to liability or amount and having at least $15,325.00 owed apply.
The part about not having a bona-fide dispute as to liability or amount owed is particularly important. That means there can be no disagreement regarding validity of the debt or the amount owed. It’s fairly rare in the consumer context that this prong can be overcome.
The Debtor can oppose the involuntary bankruptcy and in that scenario the burden of showing there is no bona fide dispute as to liability or amount fall squarely on the filing creditor(s). They also have to show that the Debtor has generally not been paying debts as they have become due.
If the Debtor prevails in contesting the involuntary bankruptcy, the bankruptcy Court can award monetary damages to the Debtor for both the actual damages incurred due to the bankruptcy filing and punitive damages for filing an involuntary bankruptcy in bad faith.
The potential client I described above contested the involuntary bankruptcy case. The attorney creditor made a number of mistakes with the involuntary filing. He had a long dispute with the client and filed an involuntary bankruptcy against her for a large, unpaid legal bill. She had real reasons to dispute major portions of what was owed. He had never liquidated the “debt” through civil judgment prior to filing. The client also claimed she had possible legal malpractice claims against the attorney. He also didn’t check to see if she had more than 12 unsecured creditors (she did).
In the end, the attorney ended up facing a large monetary judgment owed to the ex-client resulting from the poorly advised involuntary bankruptcy case.
So, yes, a creditor can force you into bankruptcy but it’s extremely rare and almost never used in the consumer context. When it is used, it’s often by an ill-advised, angry creditor and carries a big risk of turning the creditor into the one who owes the Debtor a large amount of money in the end
The Bodie Law Firm is a consumer bankruptcy firm serving Woodland Hills and the surrounding areas. If you have any questions or would like to schedule a free consultation with our experienced bankruptcy attorneys please contact us at 818-377-7413.