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Fears of Involuntary Bankruptcy
Involuntary bankruptcy has become one of the biggest concerns of my clients since the Senate passed the new bankruptcy law. Involuntary bankruptcy will be a more important planning issue when the Bankruptcy Reform Act is effective, but in most cases, people are overly worried about this contingency. The new bankruptcy law creates a disparity between asset protection in state courts and in bankruptcy court with the latter becoming a much more creditor friendly environment because the new bankruptcy law strips away many protections otherwise available in state court. What most people do not understand is that it is difficult for any creditor to force a debtor into involuntary bankruptcy.
Although the Bankruptcy Code says that one creditor can file a petition for involuntary bankruptcy against debtors with less than 12 creditors, and in the case of debtors with over 12 creditors any three can file the petition, it is difficult for a creditor to get a court to grant the petition and force someone into bankruptcy court. For example, only creditors with final judgments which are not being appealed are eligible to join in a petition. That a debtor is not paying one or two creditors does not warrant involuntary bankruptcy; the petitioners must show that the debtor is generally not paying creditors. Florida courts have repeatedly refused to grant involuntary bankruptcy when the petition is being used by a creditor as a collection tool and where the creditor has adequate state court remedies. Aggressive creditors that cajole two other creditors to sponsor an involuntary petition are denied where the petition is obviously being used as one creditor’s collection weapon. Most court opinions refer to involuntary bankruptcy as an extreme remedy, and petitions typically granted where they would serve a bankruptcy purpose such as ensuring fairness among a large group of creditors or prevented a debtor from dissipating assets. Most importantly, if a creditor files a petition for involuntary bankruptcy, and the petition is denied for any reason, the creditor liable for the debtor’s costs and attorneys fees and may be liable for additional monetary sanctions.
Involuntary bankruptcy will be a more important part of Florida asset protection planning, but people who do not fully understand the intricate issues of involuntary bankruptcy will not plan appropriately for this contingency.
April 3, 2005 in Bankruptcy Planning | Permalink
Comments
I just received an automobile verdict in excess of $2,000,000 in Fedral court in Colorado. When the accident occurred we lived in California a common property state. We sold that house and bought a house for the same price in
florida
My house is worth about $600,000. The only income they can reach appears to be a private pension plan of mine worth $267.86 a month. I have not been in Florida for the required time under the new bankruptcy laws for the Homestead exemption. I known I/2 my home is worth $300,000. The verdict was in my name only.
lifornia
Posted by: C. Martino | Oct 6, 2007 9:02:30 AM
I hold a final judgment against a Florida Corporation and an NASD member firm. We negotiated a payment plan post perfection of the judgment which included provisions for personal guarantees to be tendered as collateral should the negotiated collateral fail to be produced by the agreed upon date. They have not adhered to the payment plan and are in default. Furthermore they have been removing assets from the firm despite their covenants to the contrary.
If I petition for involuntary bankruptcy will this discharge the obligations of the personal guarantors or will the trustee look to those personal guarantors to satisfy the creditors?
Posted by: Warren | Sep 4, 2007 1:49:06 PM
I thought that retirement funds covered by IRC 401,403,408,408a,414,457, 01 501a are exempt whether state or federal exemptions are elected.
IRA or SEP under 408 or 408a up to 1 million is exempt.
Rollovers from qualified plans are exempt.
Is this not the current bill's content?
Posted by: mark | Apr 10, 2005 1:45:47 PM
It occurs to me that while homesteads are the focus of most commentary on the bankruptcy bill, most commentators fail to mention the other class of asset whose state-law protections have been eviscerated: the pension plan. Large pension plans (an anti-OJ provision, I assume) are now subject to attack, and are a much more juicy item considering how much more liquid they are than real estate. Further, unlike homesteads there's no grace period or other mechanism to reacquire state-law protection for your pension. As such, owners of large pension plans are now inviting targets for involuntary bankruptcy petitions.
Posted by: Bob | Apr 4, 2005 11:53:58 AM
