What you need to know about Petitioning Creditor's Bonds

By law, creditors have the right to file a petition to force a delinquent debtor into bankruptcy when the debtor is reluctant to file a voluntary bankruptcy. Once a petition is filed, a court can declare the debtor bankrupt and appoint a trustee or receiver to assume control of the debtor’s assets.

However, the courts will require a creditor to obtain a surety bond before filing the petition. This type of bond is called the Bond for Petitioning Creditors in Bankruptcy (aka Petitioning Creditor’s Bond). In this type of bond, the creditor is the Principal (one who must perform), while the court is the Obligee (recipient of an obligation).

The Petitioning Creditor’s Bond's primary objective is to provide a guarantee that the creditor will compensate the debtor for all possible damages and costs should the court dismiss or withdraw the petition. Fortunately, the court usually sets a relatively small penalty for these types of bonds.


What is a Petitioning Creditor’s Bond?

A Bond for Petitioning Creditors in Bankruptcy, or more commonly known as Petitioning Creditor’s Bond, is a type of surety bond used in certain bankruptcy proceedings. The court requires such a bond when a plaintiff is petitioning a defendant to be declared as officially bankrupt.

After a petition is filed, the court will appoint a receiver or a trustee to take control of the assets and properties of the bankrupt person until the case is resolved. The court will then ask the petition to post a Petitioning Creditor’s Bond to ensure that the party who files the petition to declare an individual bankrupt will indemnify the debtor.

The Petitioning Creditor’s Bond guarantees that the debtor will be compensated for any costs or fees they might suffer as a result of the seizure of their assets or properties in case the court decides to deny the petition for bankruptcy. The bond can also be used by the debtor in case the petition to declare him or her as bankrupt is withdrawn. In essence, the Petitioning Creditor’s Bond protects the debtor against any damages or loss.


How Much Does a Petitioning Creditor’s Bond Cost

Like in all bonds, sureties or underwriters that write Bonds for Petitioning Creditors in Bankruptcy must conduct a thorough background investigation of the applicants, particularly focusing on the creditor’s financial strength. An applicant with good credit background and significant net worth relative to the bond penalty is assured to be issued this type of bond without reservation.


Examples of Petitioning Creditor’s Bonds

Case 1:

Carl owes a large amount of money to Derrick. However, even after repeated requests by Derrick, Carl refuses to pay his debt, saying he has no money because he was laid off from work. But Derrick knows Carl’s house is fully paid for, and its value is enough to cover the amount owed to him.

Derrick decides to petition the court to declare Carl legally bankrupt and to appoint a trustee to take control of his house. Before filing his petition, Derrick must first obtain a Bond for Petitioning Creditors in Bankruptcy (aka Petitioning Creditor’s Bond) to protect the rights of Carl while the litigation is ongoing.

Carl can seek indemnification from the bond in case he sustains any damages or loss if the court decides he is not bankrupt or if Derrick withdraws the petition.

Case 2:

Manny has inherited a publishing house from his late father. The publication has been with Manny’s family for several generations. However, when Manny took over the operations, he found that the publishing house is heavily in debt and is running in the red for several years now.

Manny does not want to downsize his staff, and he does not want to terminate any of his employees. He decided that all his business needs is a new capital input to keep it in the black again so he can keep both the company and his employees who have served his family for generations.

However, the bank that evaluated Manny’s request to refinance the business refused to give a fresh loan. The bank, after conducting due diligence on the business, has concluded that Manny’s rehabilitation plan is insufficient and there is a big chance that the publishing house will be further indebted.

Besides, the publishing house’s loans are already maturing, and the bank wants to garnish the company’s assets to pay off its debt. Still, Manny refuses to give up the company and his employees that he decided to seek financing elsewhere.

But the bank sought the court’s intervention and filed a petition to declare Manny’s business bankrupt and petitioned the court to have the business’ assets under a receivership. The court then asked the bank to post a Petitioning Creditor’s Bonds before acting on its petition.


How to File a Petition to Declare an Individual Bankrupt?

Often a lawyer is recommended.  However, it is relatively easy to do on your own.  You need to file a petition before the court. All it takes is some legwork and time to file the necessary forms.

The first step in filing a petition is to locate the bankruptcy forms. Some of these forms are available online, but some forms need to be secured directly from county courthouses. Simply approach the court clerks and pay the necessary fee for the forms.

The next step is to fill out the forms and then file them after paying the appropriate filing fees. Filing fees differ depending on the situation. Some states also require that the signed forms are duly notarized.

Make at least three copies of all the forms, fill them out, sign and file before the court. Have all the copies stamped by the clerk of the court indicating all the needed information, including the case number, trial or hearing date for the case, and the court where the case will be heard.

It is imperative that you seek a competent surety firm to obtain a Petitioning Creditor’s Bonds and submit a copy of the bond to the court.


How to File a Creditor's Proof of Claim in Bankruptcy Court?

Under U.S. laws, there are two major legal actions in insolvency proceedings that must be in federal bankruptcy courts. These are petitions and proofs of claims. The petition for bankruptcy can be submitted by debtors, who can either be an individual or a business entity that is incapable of paying their outstanding financial obligations or debts. A proof of claim or a petition to declare an individual bankrupt can be filed by creditors who want to seek payment out of the bankruptcy estate determined by the court and controlled by the receiver or trustee.

The timing for filing a proof of claim is crucial for creditors. Failing to file a proof of claim on time will forfeit the right of the creditor to distributions from the bankruptcy estate. However, not all unsecured creditors that are listed in the debtor’s schedule are expected to file proof of claim. Some will consider that the amount of money they are running after is not worth the effort, while some may think that the cost of the bankruptcy proceedings will be worth more than the amount expected to be recovered.

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Please call us at 800-333-7800 and our courteous and competent staff will handle all your questions and provide you with a free quote. We also have online platforms to handle bonding requirements.

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