Steve Leimberg’s newsletter issued on May 3, 2005, provided another analysis of the effect of the new bankruptcy law on asset protection planning. The newsletter entry written by Jay Adkisson and Cris Reiser states that the new bankruptcy law changes the debtor-creditor paradigm. Prior to the Act, the authors note, a debtor could threaten a creditor with bankruptcy. After the Bankruptcy Reform Act, creditors will likely threaten to force a debtor into bankruptcy so, “the debtor’s assets can be picked clean.” The authors state that new asset protection plans should be designed to avoid bankruptcy and keep assets out of the bankruptcy estate in the even of a creditor’s involuntary petition
I have commented before in the Blog that the core issue under the new bankruptcy law is the criterion for involuntary bankruptcy. The standards for court approval of involuntary bankruptcy petitions vary among courts throughout the country. Bankruptcy law is very much local law where the law is established district by district by bankruptcy judges. One critical issue, overlooked by many commentators to date, is the common requirement that involuntary bankruptcy is far from automatic and involuntary petitions must be filed by creditors in good faith. Most courts have stated that involuntary bankruptcy may not in good faith be used as a collection hammer by an aggressive creditor, and the involuntary bankruptcy must serve a bankruptcy purpose, i.e, it must benefit creditors as a whole. Oversimplification of involuntary bankruptcy rules will lead to misguided asset protection planning.
posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida