Question

21–1. Voluntary versus Involuntary Bankruptcy. Burke has been a rancher all her life, raising cattle and crops. Her ranch is valued at $500,000, almost all of which is exempt under state law. Burke has eight creditors and a total indebtedness of $70,000. Two of her largest creditors are Oman ($30,000 owed) and Sneed ($25,000 owed). The other six creditors have claims of less than $5,000 each. A drought has ruined all of Burke’s crops and forced her to sell many of her cattle at a loss. She cannot pay off her creditors. (See Liquidation Proceedings.)

1. Under the Bankruptcy Code, can Burke, with a $500,000 ranch, voluntarily petition herself into bankruptcy? Explain.

2. Could either Oman or Sneed force Burke into involuntary bankruptcy? Explain.

Answer 1

(a)        Any person, including a rancher or farmer, can voluntarily petition himself or herself into bankruptcy.  The person has only to be a debtor.  This in­cludes partner­ships and corporations that are liable on a claim held by a credi­tor, as well as individu­als.  The debtor does not have to be insolvent to file a peti­tion.  Under the Code, a debtor is pre­sumed to be insolvent when his or her debts exceed the fair market value of nonex­empt assets.  Thus, even though Burke owns a $500,000 ranch and has debts of only $70,000, she can voluntarily petition herself into bankruptcy.

(b)       Neither Oman nor Sneed—nor any combination of Burke’s credi­tors—can in­voluntarily petition Burke into bankruptcy.  The Code provides that invol­untary bank­ruptcy proceedings cannot be commenced against a farmer.  The definition of a farmer includes persons who receive 50 percent of their gross in­come from farming op­erations such as tilling the soil, ranching, or the produc­tion or raising of crops or live­stock.  Be­cause Burke obviously fits the definition of a farmer, no creditor can force her into bankruptcy.