Can a Creditor Make You Bankrupt?

Creditors looking to recoup cash may be able to collude to force debtors to file for Chapter 7 or Chapter 13 bankruptcy. However, the vast majority of bankruptcies filed in the United States are done so at the behest of debtors -- not at the behest of creditors. Moreover, for a “small fry” creditor to push you to file to bankruptcy, he must jump through numerous legal hoops. Thus, even in situations where creditors are owed hundreds of thousands of dollars, collection agencies prefer to go through other legal routes.

Moreover, if a creditor forces a debtor into bankruptcy, he may not necessarily recoup his debt investment. The bankruptcy trustee (appointed by the courts) will allocate the debtor's liquidated estate to creditors based on a preordained hierarchy outlined by the law. Thus, the creditor who forces the debtor into bankruptcy may not necessarily recoup -- indeed, the creditor may help other higher priority creditors get their funds without being remunerated.

Creditors are also typically “gun-shy” about pushing their debtors to bankruptcy, since unsecured debts (payday loans, auto loans, many types of personal loans, and credit card debts) are by and large discharged during the bankruptcy proceedings. A payday loan creditor, therefore, will be doing himself no favors by encouraging bankruptcy. Indeed, many unsecured creditors go to great lengths to prevent debtors from filing for bankruptcy. Even secured creditors can get burned by certain bankruptcy agreements.

For instance, debtors in some cases may be allowed to retain security interests which can increase in value over time. The creditor in this case may not be entitled to the benefits of this increase -- allowing the debtor to retain “extra” assets in the form of something called lien stripping.

Rules covering the restrictions and rights of creditors under Chapter 7 and Chapter 13 bankruptcy filings vary widely from state to state. Creditors would be wise to work with their attorneys to check out precedent for urging debtors to go to bankruptcy before they initiate any legal or administrative action to that end.