Is Involuntary Bankruptcy Petition Possible Before Creditor’s Judgme...

One of my clients says his creditors have threatened to force him into Chapter 7 bankruptcy. The client is in default of a loan agreement over $1 million, but the creditor has not yet filed a lawsuit. The client’s recently purchased Florida homestead would not be exempt in a bankruptcy case filed in the near future.

This single creditor can initiate an involuntary bankruptcy if the debtor has less than 12 creditors. However, this particular creditor, itself, does not qualify as a “creditor” for purposes of filing an involuntary petition. The reason is that only those creditors with liquidated and uncontested claims may join in an involuntary petition. If the debtor has a bona fide dispute over the liability or the amount of the claim the creditor holding the claim may not file an involuntary petition.

A debtor’s appeal of a final judgment does not disqualify the creditor. However, this particular creditor has not even filed suit let alone obtained a judgment for an amount certain. If the creditor does sue, the debtor’s defense of the lawsuit would probably create a bona fide dispute that would postpone an involuntary petition.

I suggested to this client that the creditor’s threats of filing involuntary bankruptcy were premature. The debtor should make sure he has at least 12 qualifying creditors so that the aggressive creditor could not alone force him into bankruptcy.

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