Involuntary Bankruptcy

Individuals facing debt concerns will likely face creditors demanding payment. It may be credit card companies calling debtors and letting them know that if they do not remit payment soon then the credit card company will start the collections process against them. It may be a third party debt collector collecting amounts owed to a vendor like a bank or other lender that provides financing.

Under these circumstances, the creditor has a few options. First, the creditor will submit information about the debt owed to a public forum wherein other creditors can view the debtor’s credit score.

Low credit scores hamper the debtor from obtaining alternative financing. Next, the creditor can take action like filing a lien against the debtor’s property. Liens are usually against the debtor’s residence when the debtor owns that property. It is, however, difficult in California to evict a debtor for the purpose of selling the house. In actuality, the lien will remain on the house and, when sold, the creditor will have a right to collect amounts owed.

Another option is to place the debtor into involuntary bankruptcy. While the overwhelming majority of bankruptcy filings are voluntary, there are circumstances that allow creditors to place a debtor into bankruptcy. Once in bankruptcy, a bankruptcy judge will supervise the bankruptcy. Under certain circumstances, a bankruptcy court can compel an individual to sell his or her home to satisfy debt.

Involuntary Bankruptcy Process

The voluntary bankruptcy process contrasts with the involuntary process. With respect to voluntary bankruptcy, a debtor will file a petition with a bankruptcy court. Upon filing, the bankruptcy case commences and the debtor is immediately afforded protections like the automatic stay. At the same time, creditors holding claims submit paperwork that gives them certain rights. In contrast, creditors filing an involuntary bankruptcy petition against debtors have started the process with a filing but the debtor is not yet in bankruptcy.

Initially, involuntary bankruptcy must be filed by three creditors holding claims against the debtor. Overall, there must be at least 12 creditors holding claims against that debtor and, among those, at least three must file. Other rules also apply. The debt in question must not be subject to a contingency and must not be subject to a bona fide dispute (a debtor claiming that debt accrued due to identity theft may be a bona fide dispute). The debtor must not be paying back debt as it becomes due. What is more, the United States Bankruptcy Code, or Code, provides a minimum amount of unsecured debt that must be owed.

In this instance, the creditor petition constitutes an “order for relief” that is subject to court approval. Under the Code, the debtor can protest the filing so that a bankruptcy court may impose a hearing to determine whether the creditors’ case is legitimate. When a debtor does not dispute the petition or a court rules that the petition is legitimate, the rules of bankruptcy are then applicable. This means that the order of relief has been granted.

In debt? Bankruptcy may be right for you. Call the Bay area debt relief law firm of Melanie Tavare.