Your creditors can force you into bankruptcy – literally and figuratively.
At least twice a week someone tells me that they’d never file for bankruptcy if only their creditors would “work with them.”
It’s as if the credit card companies, car lenders and mortgage banks are conspiring against you.
What you don’t know is that in some ways, they are doing just that.
Creditors Often Don’t Care If You File For Bankruptcy
When you go past due on a debt, the creditor will try to collect for awhile. Then, after 180 days, the creditor is required to charge-off the debt.
That doesn’t mean you don’t owe the money anymore, however. Charge-off is nothing more than an accounting term that means, “we don’t reasonably expect that this debt is going to be paid voluntarily.”
When the debt is charged off, most creditors will sell the account to a debt buyer. Often, the deal is done years in advance by means of a forward flow agreement (sometimes called a future flow agreement).
The creditor makes back some of the losses, takes a tax write-off for the rest of the unpaid balance, and is out of it entirely. If you pay the debt, the money goes to the debt buyer as profit.
Sometimes, Creditors Want You To File For Bankruptcy
If you file for a Chapter 13 bankruptcy, your creditors will get paid back some of what’s owed to them. Secured creditors will be paid in full, as will folks like taxing authorities.
If you file a Chapter 7 bankruptcy and have non-exempt assets that the trustee takes and sells, your creditors will be paid through the proceeds of sale.
In both situations, creditors are happy with the prospect of you filing for bankruptcy.
Involuntary Bankruptcy – A Rare Situation
In very limited situations, creditors can formally force you into bankruptcy under either Chapter 7 or Chapter 11. This is called an involuntary bankruptcy, and can happen only in limited situations.
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If you have fewer than 12 creditors, just one creditor can file an involuntary bankruptcy petition against you. If you’ve got more than 12 creditors, at least 3 of them need to come together to file a bankruptcy case against you.
In order for a creditor to file an involuntary bankruptcy proceeding against you, that creditor must have a debt that’s not in dispute and prove to the court that you’re not paying your debts as they come due.
Involuntary bankruptcy is rare for individuals, and it’s used primarily if the creditors get together and see that you’ve got major assets that you’re trying to hide – assets they could get if you were in bankruptcy.
It’s rare because most people have institutional consumer creditors – Citibank, Chase, Wells Fargo and the like. These companies have procedures in place for the sale of debts, recovery of money and other collection actions.
Involuntary bankruptcy is more expensive for them given the relative low debt level associated with each account.
Psychological Terror Tactics More Common
Though creditors don’t often force people into involuntary bankruptcy, it’s not uncommon for people to feel as if that’s exactly what’s happening.
Collection calls, threats of lawsuits and wage garnishments, and the general fear of uncertainty makes it feels as if they’re forcing you into a corner.
For some, bankruptcy provides an escape hatch. The law operates as a steel gate, slamming down between you and the companies that are terrorizing you day and night.
It happens far more often than involuntary bankruptcy, and that’s good because it provides you with control over your financial situation.
Your Remedy, Your Choice
In the end, bankruptcy is seldom truly involuntary. People who need the relief may feel as if they’re being forced into bankruptcy, but the reality is far different.
Look at your choices for debt relief and decide which one works best for you.