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Chapter 7 bankruptcy: Voluntary or involuntary property transfer

| Jan 10, 2019 | Uncategorized

A business entity or an individual borrower who is unable to repay creditors for loans, goods or services will generally file a court petition to declare bankruptcy. In some cases, however, U.S. bankruptcy laws under 11 U.S.C.§303 authorize creditors to force delinquent borrowers through bankruptcy court involuntarily. Perhaps the lender suspects the borrower of hiding assets or refusing to file bankruptcy on his or her own.

Whereas a few entities are not subject to forced bankruptcy, including certain government-related borrowers such as banks, credit unions or nonprofits, most involuntary bankruptcies involve business entities because, under the law, they cannot protect their assets from creditors.

Exemptions for personal assets in bankruptcy

Creditor-initiated bankruptcies against individual borrowers are rare because of personal asset exemption laws; the borrower usually cannot recover enough from a personal bankruptcy case to justify the cost of pursuit. United States Code 522 for exemptions in bankruptcy laws provides statutes which regulate individual borrowers’ rights to retain certain exempt assets from collectors during bankruptcy. Each state can choose whether to use state exemption laws only or allow a choice between state and federal exemptions.

Tennessee requires citizens to use only state exemptions. There are several annotated titles relating to types of bankruptcy exemptions spread throughout the Tennessee Code.

Chapter 7 bankruptcy in the real world

Legal codes cover standard situations; however, lawmakers cannot envision every possible scenario in an area of jurisdiction. The courts can judge a current nonstandard case by following precedent from judgments of similar unusual cases.

For example, there was a plaintiff who sued a senior man in small claims court. The man could provide financial and tax documents or else fork over a substantial sum to the plaintiff. The man claimed he sent the paperwork in, but because the court could not locate the records, the man incurred a bench warrant arrest. County deputies hauled the man away. The authorities said he could either pay the money or live in jail. The aged man was in fragile health. He did not relish spending his remaining days on earth behind bars. He managed to get a loan from a friend, paid the warrant plus processing fees, and went home. The next day, the besieged man filed for Chapter 7 bankruptcy.

The court created a bankruptcy estate and appointed a Chapter 7 asset trustee. The old man claimed the money he paid rather than go to jail was not a voluntary payment; it was a coercive payment—his money or his life. If the payment were voluntary, the assets would belong to his debtors. If the payment was involuntary, it became a protected exclusion. The judge did not appreciate the bounty hunter attitude of the deputies and ruled in the old man’s favor. The authorities refunded the money, the man paid back his friend, and the court excused him from any future payments to the plaintiff.

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