Why Would A Creditor Try To Force You Into Bankruptcy?

Posted on: 21 May 2020

One of the seemingly craziest ideas in the world of bankruptcy is the notion that a creditor may be able to force a debtor into filing. This is the sort of thing that will rightly have you contacting a bankruptcy lawyer and asking for a consultation. You'd probably like a few answers before you sit down with a bankruptcy attorney so let's take a look at how this process might work.

"Forced" vs. Forced Bankruptcy

It's important to appreciate the difference between a "forced" scenario and a forced one. Some situations involve creditors leaning hard on debtors to encourage them to voluntarily seek bankruptcy protections. For example, a creditor might simply refuse to renegotiate debts based on the belief they'd do better in court than working one-on-one with the debtor.

On the other hand, forced bankruptcy is a truly involuntary process. In this scenario, the creditor goes to the court with a petition and demands relief.

Wait! This Can Happen?

Yes, it can happen. While people tend to think of bankruptcy as largely a system that debtors use to seek relief, creditors have rights within the system, too.

Notably, a creditor can only push for a Chapter 7 or Chapter 11 bankruptcy. Chapter 12 and 13 filings aren't possible in genuinely involuntary proceedings.

Why Would a Creditor Want This?

Most involuntary proceedings involve cases where a creditor thinks a debtor has sufficient assets to pay back a decent portion of what is owed. They may suspect the debtor is dragging their feet, too.

To be clear, no creditor pursues this process if they're fairly sure the debtor has close to zilch. In that scenario, the creditor would likely get wiped out on the debt.

Can This Be Stopped?

In many cases, yes, it can be halted. Judges generally aren't fond of involuntary bankruptcies because they assume debtors have some idea of whether they're past the point of no return on what they owe. A court will want to see a lot of evidence from a creditor that a filing is justified, and your bankruptcy attorney will have an opportunity to present arguments to the contrary.

Also, there are limitations. The creditor must be owed at least $15,775. Likewise, a single creditor can only force an involuntary proceeding if there are fewer than 12 unsecured creditors. Otherwise, at least three creditors have to agree to bring an action for the court to hear the case. 

For more information, reach out to a bankruptcy attorney.