MODULE 27 BANKRUPTCY 237

1. If there are fewer than twelve creditors, a single creditor may file the petition as long as
his/her
claim aggregates $13,475 in excess of any security s/he may hold
(1) Claims must not be contingent
(z) If necessary, more than one creditor may join together to have combined debts of more than
$13,475 of unsecured claims
EXAMPLE: Poor-R-Us Company is not paying its debts as they become due. Its creditors are A (owed
$13,475), B (owed $8,000), and C (owed $10,000). A alone may file the involuntary petition to force the
company into bankruptcy; however, if A does not wish to do so, neither B nor C separately may force the
company into bankruptcy because offailure to meet the $13,475 test. Band C may join together to file the
petition.
EXAMPLE: XYZ Corporation is unable to pay current obligations. XYZ has three creditors: L (owed
$15,000 which is secured by personal property), M (owed $28,000 of which one-half is secured), and N (owed
$16,000 of which none is secured). L may not file an involuntary bankruptcy petition but can use the personal
property to pay off the debt. Either M or N can file the petition.
2. If there are twelve or more creditors, then at least three must sign the petition and they must
have
claims that aggregate $13,475 in excess of any security held by them
(1) Claims must not be contingent
(2) Claims subject to bona fide dispute are not counted in above $13,475 tests
EXAMPLE: Poor, Inc. is unable to meet its current obligations as they are becoming due because of severe
business difficulties. It owes over $20,000 to a dozen different creditors. One of the unsecured creditors,
Green, is owed $14,000. Green may not force Poor, Inc. into Chapter 7 bankruptcy because even though
Green is owed more than $13,475, Green must be joined by two other creditors, even if their claims are very
small.
EXAMPLE: Same facts as above except that Poor, Inc. has only eleven creditors. Now Green alone may
force Poor, Inc. into bankruptcy under Chapter 7.
3. Creditors who file petition in bankruptcy may need to post a bond that indemnifies debtor
for
losses caused by contesting petition to avoid frivolous petitions
I
(1) Bankruptcy court may award damages including attorneys' fees to debtor who successfully
challenges involuntary bankruptcy petition against creditors filing petition
(a) If petition was made in bad faith, punitive damages may also be awarded
4. Exempt from involuntary bankruptcy are
5. Persons (individuals, partnerships, 'or corporations) owing less than $13,475
6. Farmers
7. Charitable organizations
8. When valid petition in bankruptcy is filed, it stops enforcement of most collections of debts and legal
proceedings
EXAMPLE: A judgment lien against property in the bankrupt's estate may not be enforced once the petition in
bankruptcy is filed so that an orderly disposition of this debt and others can be accomplished.
9. Does not stop collection of alimony
10. Bankruptcy not available for deceased person's estate
a. But once bankruptcy has begun, it is not stopped if bankrupt (debtor) dies
11. An order of relief will be granted if the requirements for filing are met, and
12. The 'petition is uncontested; or
13. The petition is contested; and
(1) The debtor is generally not paying his/her debts as they become due; or
(2) During the 120 days preceding the filing of the petition, a custodian was appointed or took
possession of substantially all of the property of the debtor
EXAMPLE: Debtor assigns his property for the benefit of his creditor.
14. Note that the above rules involve a modified insolvency in the "equity sense" (i.e., debtor not
pay-
ing debts as they become due). The rest of the Bankruptcy Act uses insolvency in the "bankruptcy
sense" (i.e., liabilities exceed fair market value of all nonexempt assets). The use of insolvency in
the equity sense for involuntary proceedings is important.