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Involuntary property transfer in Chapter 7 bankruptcy

The most common form of bankruptcy—and the type familiar to most Americans—is called Chapter 7. There are many flavors of bankruptcy law, each one covering particular situations.

The many kinds of bankruptcy require an equal number of different laws to meet the unique features of each bankruptcy type and satisfy various creditor needs. 

What are the different forms of bankruptcy?

  • Chapter 7 – This bankruptcy deals with liquidation of assets, which involves turning the property into funds to reimburse creditors.
  • Chapter 9 – This form of bankruptcy applies to city or state reorganization. Rather than the liquidation of assets, a municipal entity undergoes a process to restructure its debt.
  • Chapter 11, 12 or 13 – These forms of the bankruptcy code allow for more complex reorganization needs; they also allow a debtor to retain part or all of his or her property to earn money and pay off creditors.

What is involuntary bankruptcy

The public may usually consider bankruptcy an act initiated by those who owe funds they cannot timely repay. There are certain cases, however, where bankruptcy law allows creditors to force a bankruptcy proceeding.

Involuntary bankruptcy is requested through a creditor-filed court order when they believe the debtor—the person who owes them repayment—is secretly hiding assets or moving funds to places, off-shore for example, where creditors cannot touch them. Debtors have sold valuable assets to a family member for a dollar, just to avoid liquidation and distribution.

Consequences to pushy creditors who seek involuntary bankruptcy

A creditor should make sure the case against a debtor is iron clad because courts do not look favorably upon creditors who petition for involuntary bankruptcy without strong proof the debtor is refusing to pay them. If the creditor wrongly pushes the court for involuntary bankruptcy against a debtor, it may be guilty of a "bad faith" filing. By law, creditors cannot harass a debtor who intends to file bankruptcy before the date of the voluntary bankruptcy petition. 

In one showdown, a 74-year-old man had the choice of filing reams of financial paperwork or going to jail. The man filed, but the paperwork went missing. The deputy sheriff, on a bench warrant for the fellow's arrest, told the man, "your body or your money." Rather than remain in jail, the man borrowed money and paid the warrant sum. He voluntarily filed bankruptcy the next day, claiming he paid the bench warrant money involuntarily; thus, it belonged to him. The law does not allow creditors to collect from a person who plans to file bankruptcy voluntarily. The court overturned the bench warrant and returned the man's money. To support this decision, the court reviewed similar situations—in one, an agent attempted to collect a debtor's property by threatening to shoot the family dog unless the debtor paid up. Not surprisingly, the case of "your dog or your money" did not impress the court—or the dog.

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