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American Bar Association

ABA Section of Business Law

Business Law Today

Nonbinding Opinion
By Maria Ann Milano
Involuntary bankruptcy: The end has come
Editor's note: In the last issue of Business Law Today (Nov./Dec. 2006) we published an article suggesting that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) revived a creditors' remedy that had previously been seldom used—the involuntary petition against an individual debtor. Samole and Keyfetz, "New law, new tools for creditors: A fresh look at the involuntary bankruptcy petition." On this page is a short article noting that when Congress imposed credit-counseling as a prerequisite for an individual to be a debtor in a bankruptcy case, it may have inadvertently eliminated involuntary bankruptcy petitions as a creditor's remedy against an individual.

Congress should be wary of unintended consequences. The recently enacted Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) contains numerous provisions that make it more difficult for debtors to discharge their debts to creditors. What Congress did not intend was to enact a statute that would enable individual debtors to evade their creditors. The proponents of BAPCPA will surely be surprised to learn that they enacted a statute that removes a weapon from the creditors' arsenal — the petition for an involuntary bankruptcy of an individual.

The involuntary bankruptcy petition has long been available to creditors who want to subject their debtors to the jurisdiction of the bankruptcy court. Involuntary bankruptcies can require debtors to disclose assets, can prevent the dissipation of assets, and can remedy fraudulent transfers and preferences. In the BLT article in the last issue, "New law, new tools for creditors: A fresh look at the involuntary bankruptcy petition," David A. Samole and Lisa B. Keyfetz suggest that involuntary bankruptcy can subject an individual debtor to the federal homestead exemption limit, rather than the much more generous homestead exemption granted by some states (Florida and Texas being the most notorious.).

Samole and Keyfetz (like Congress before them) fail to appreciate how a change to the debtor eligibility provisions in Section 109(h) of the Bankruptcy Code makes an involuntary petition as useless as a rubber sword.

BAPCPA left untouched Section 303(a), which states that an involuntary case may be commenced only against a person "that may be a debtor under the chapter under which such case is commenced." However, BAPCPA rigidly restricts who may be a debtor. Section 109(h) states "an individual may not be a debtor" unless he has had credit counseling from an approved nonprofit agency within the "180 day period preceding the filing of the petition by such individual." Since BAPCPA became effective on Oct. 17, 2005, there have been numerous reported decisions striking petitions and dismissing voluntary bankruptcies filed by debtors who did not have credit counseling before the bankruptcy petition was filed.

Congress surely did not intend the credit counseling requirement to be an impediment to involuntary bankruptcies. Nevertheless, Section 109(h) provides an individual with a shield against an involuntary bankruptcy petition. Section 303(a) says that involuntary cases may only be commenced against eligible debtors, and Section 109(h) says that an individual is an eligible debtor only if he has taken a credit counseling course in the 180 days before the petition date. To protect oneself against a creditor's involuntary bankruptcy petition, an individual debtor need only stay away from credit counselors!
Milano is a principal at Riddell Williams P.S. in Seattle. Her e-mail is mmilano@riddellwilliams.com

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