February 23, 2018

Chapter 7 Bankruptcy: Voluntary vs. Involuntary

When it comes to a chapter 7 bankruptcy, there are two options available: 1.) it can be filed voluntarily by the debtor; or, 2) it can be filed by a debtor’s creditors, thereby resulting in an involuntary bankruptcy.  This post discusses both voluntary and involuntary bankruptcies, and when involuntary bankruptcies may occur (which is rare).

The vast majority of chapter 7 bankruptcy cases are voluntarily filed; a person has decided that he or she wants to file bankruptcy, and does so.  However, there is a second, yet very uncommon type, of filing: an involuntary chapter 7 bankruptcy.  Involuntary bankruptcy filings usually involve a business as the debtor.  In the common situation, the business owes creditors money and has defaulted on contracts with the creditors.  The creditors are having difficulty getting paid or pursuing the business’s assets.  Faced with the difficulty of recovery, some creditors may file an involuntary bankruptcy for the business.  This is particularly true if the creditors know the business can repay or liquidate assets to pay its debts, but refuses to do so.    It is extremely rare that creditors would file an involuntary bankruptcy for an individual, though.

Once the creditor files a bankruptcy petition “for” the business, the business will receive notice of the bankruptcy filing.  The business will then have 20 days to respond.  If the business does not respond, the bankruptcy court will allow the bankruptcy to proceed.  But if the business does respond, there will be a hearing before a bankruptcy judge to determine whether the petition was filed in good faith and if the business has failed to pay its debts.  If the court determines that the bankruptcy petition was indeed filed in good faith and that the business is refusing to pay its creditors, the chapter 7 bankruptcy proceeding will continue. If the judge, however, rules for the business, the bankruptcy case will be dismissed and the business may be entitled to any damages as a result of the involuntary bankruptcy filing.

If the bankruptcy moves forward, however, a Chapter 7 Trustee will be appointed to administer the bankruptcy estate for the business.   The Chapter 7 Trustee will be in a position to liquidate the assets of the business in order to pay some (if not all) of the debt owed to the creditors.  Such assets would include, but are not limited to, accounts receivables, investments, inventory, goodwill (selling the business name), tools, intangible property such as copyrights, patents, and other various assets.   As a result of a chapter 7 bankruptcy, creditors may be in a better position to be paid on contract; however, such a maneuver should be saved only for the most extreme cases.  Therefore, involuntary chapter 7 bankruptcies are extremely uncommon for business debtors, and even more uncommon for individuals.


Exemptions & Bankruptcy – What State’s Exemptions Apply & Why?

I have written several posts on exemption law and bankruptcy, because exemptions are such an important part of the bankruptcy process.  Exemptions simply are laws that protect a client’s property when he or she files for chapter 7 bankruptcy and even chapter 13 bankruptcy.

Oregon has two exemption schemes: 1) exemptions based on Oregon law, or 2) exemptions based on federal law.  Generally the Federal exemptions are much more advantageous to use, as they contain a powerful wildcard exemption that can protect assets that may not be protected using Oregon exemptions.

But what are the requirements to be eligible to use Oregon exemptions or Federal exemptions? Can another state’s exemption scheme apply to your bankruptcy if you file in Oregon?

To be eligible for Oregon exemptions or eligible to elect the Federal exemptions in Oregon, you must have lived in Oregon for the past 2 years.  If you moved from another state to Oregon a year ago, for example, another state’s exemption laws may apply.

The rule, simply stated, is: a debtor in bankruptcy can use the exemptions available in Oregon provided that the debtor lived in Oregon for the past 2 years.  If the debtor lived in more than one state in the past 2 years, then you look at what state the debtor predominantly lived in the 6 months prior to the last 2 years (or where the debtor lived predominantly between months 24-30).

An example of the above principal is in order: Client has moved to Oregon from Arizona a year ago, and had lived in Arizona for 5 years.  Client, therefore, has lived in more than 1 state in the past 2 years.  Since the client lived in more than 1 state during the past 2 years, then you must look at where the client lived predominantly during the 6 months before the 2 years (or lived between 24 – 30 months ago).  In this case, since client moved to Oregon less than 2 years ago, and lived in Arizona for the 6 months prior to the 2 years, Arizona exemption law applies despite the client filing bankruptcy in Oregon.

Now, some state’s exemption laws only apply to residents of that state.  This is usually clearly written into the state’s exemption laws.  What happens when, based on the above analysis, a state’s exemption laws apply to a person, but only if that person is a resident of that state? Federal exemptions then will apply.

Why is this convoluted system in place?  To deter “forum shopping,” or moving to a state that has better exemption laws to protect assets and then filing bankruptcy in that state.  By making it more difficult to forum shop, Congress intended to help deter abuse of the bankruptcy system.

Determining what exemption law applies is not always a simple process.

If you have lived in more than one state in the past 2 years, another state’s exemption laws may apply (other than Oregon).  If you have questions about bankruptcy, exemptions, and what laws may apply, please feel free to contact me today for a free in-office bankruptcy consultation.


Pursuant to 11 U.S. Code § 528: "I am a debt relief agency. I help people file for bankruptcy relief under the Bankruptcy Code."

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