Consumer Law - Magaña, Cathcart and McCarthy: NEWSLETTER

Although seldom used, a creditor can force an individual into Chapter 7 or Chapter 11 bankruptcy by filing an involuntary bankruptcy petition. For creditors, such a collection tool can prove effective in protecting debtor assets from dissemination and liquidation.

However, tax protestors and others have abused this collection tool by improperly using it against public officials and non-bankrupt individuals. Even though bankruptcy courts ultimately may dismiss these claims once fraudulency has been established, the individuals will still experience the ramifications of filing bankruptcy. As such, in early 2005, the Congress passed the Involuntary Bankruptcy Improvement Act as a subpart of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Objectives of Involuntary Bankruptcy Improvement Act
The objectives of the Involuntary Bankruptcy Improvement Act are twofold:

To expunge all records of fraudulently filed bankruptcy petitions if the debtor is an individual
To prohibit all credit agencies from issuing consumer reports regarding fraudulently filed bankruptcy petitions if the debtor is an individual and a bankruptcy court has dismissed the case

Provisions of the Act

The bankruptcy code provides that the court shall "seal all the records" relating to an involuntary petition against an individual that is dismissed by the court and "is false or contains any materially false, fictitious, or fraudulent statement." The court may also enter an order prohibiting all consumer reporting agencies from making any consumer report that contains any information relating to such a petition or to the case commenced by the filing of such a petition. Furthermore, the act gives the debtor, in certain circumstances, the right to file a motion to expunge any records relating to a petition filed under this section. Finally, the act specifically adds fraudulent involuntary bankruptcy petitions to Section 157 of Title 18, criminalizing bankruptcy fraud. Section 157 provides that a person found guilty of bankruptcy fraud may be fined or imprisoned for a term of not more than five years.