What is Bad Faith by a Creditor in Bankruptcy?

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Bad faith bankruptcy occurs when a creditor forces a debtor into involuntary bankruptcy, and in doing so, the creditor is acting in bad faith. The law allows for creditors to come together and to force a debtor, usually a business, into bankruptcy. This is done for many reasons, but usually so that all of the assets of the person or business can be considered collateral towards all of the debt owed. How does a creditor do this in bad faith? It is something to discuss with your attorney if you do feel this has occurred to you.

What Is Bad Faith?

In involuntary bankruptcy, creditors often come together to get results. The goal could be to ensure that assets are split properly or to freeze the business's assets so that the business owner cannot sell them to hide property. It may also be done if the creditors believe the business owner plans to file bankruptcy and wants to stop any loss of assets.

However, when a creditor files an involuntary bankruptcy, the creditor must ensure that the creditor is an eligible creditor and that the process is done in good faith. Unfortunately, the law does not define what bad faith is specifically. There are court cases that help to back up and give attorneys an idea of what is meant under this law. In situations like the following, the creditor filing involuntary bankruptcy on a business may be considered doing so in bad faith.

  • The creditor hopes to shut down the debtor's business.
  • The creditor hopes to force the debtor into some type of negotiations, including labor negotiations
  • The debtor wants to take over the corporation itself.
  • The debtor wants to gain settlement leverage over the business or the debtor.

These are some examples of when a creditor may be considered acting in bad faith when filing an involuntary bankruptcy. The key to remember is that should this be determined in a court of law, the creditor may face legal action for taking such bad faith actions. For this reason, creditors must carefully consider why they are filing involuntary bankruptcy on a debtor before taking this action.

Hire an Attorney

No matter if you are the creditor or the debt in this situation, an attorney will help you to work through the process and determine if you are in fact facing a bad faith bankruptcy filing. The attorney will offer guidance and information to help you avoid possible legal problems.

Updated by: , J.D.

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