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Basic Bankruptcy How to file a case.

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Presentation on theme: "Basic Bankruptcy How to file a case."— Presentation transcript:

1 Basic Bankruptcy How to file a case.
Is filing bankruptcy the best solution? If so, Chapter 7 or Chapter 13? When should case be filed? Pre-bankruptcy planning How to file a case. How a bankruptcy affects other cases

2 Purposes of Bankruptcy Code
Fresh start For the honest but unfortunate debtor Who can’t afford to pay debts – see “means test” Reorganization (Chapters 11, 12, 13) Plan to pay at least some debts Individual debtor retains property Business can continued to operate and save jobs

3 Bankruptcy is for Creditors Too
Promotes fairness among creditors Equal treatment of similarly situated creditors Discourages race to the court house

4 Key concepts Automatic Stay Property of the bankruptcy estate
Protects debtor Protects property of the estate Property of the bankruptcy estate Broad definition– all property rights & interests Discharge Injunction against collection of debts Some debts may not be discharged

5 Property of the estate All legal or equitable interests of the debtor
Wherever located and by whomever held Whether listed on bankruptcy schedules or not Equitable vs. legal interest If debtor has equitable interest but not legal title, this is property of the estate Exception – does not include defined benefit pensions and spendthrift trusts

6 Exempt property Debtor keeps exempt property
Property must be listed and claimed as exempt Illinois has opted out of federal exemptions Debtor can claim Illinois exemptions Non bankruptcy federal exemptions

7 Illinois exemptions 735 ILCS 5/12-1001 & 12-1006
Necessary clothing Child support reasonably necessary In practice, 100% Retirement plans or accounts – unlimited Social security & public assistance Includes earned income credit Principal residence owned in tenancy by the entireties is exempt from unsecured debts owed only by one spouse Except child support owed to former spouse?

8 Illinois Exemptions 735 ILCS 5/12-901 & 5/12-1001
Homestead - $15,000 one; $30,000 two or more Wild card any personal property - $4,000 One motor vehicle - $2,400 Can stack unused wild card onto motor vehicle exemption

9 Exemption issues Limits on exemptions
Will not stop mortgage foreclosure Purchase money security interests Debts for child support or alimony Non purchase money security interests Can avoid liens on household goods, tools of the trade Special rules if lived out-of-state in last 2 years FTC credit practices rules

10 Discharge of debts Purpose – fresh start for debtor
Discharge is injunction against collection attempts Remedy for violation is contempt Can only get Chapter 7 discharges once every 8 years; Chapter 13 discussed later Doesn’t cover post-petition debts Must complete debtor education

11 Discharge Fresh start Utility service Drivers license
Cannot be denied because of dischargeable debt Must pay deposit but not old bill If stolen service, Chapter 13 Drivers license Restored if suspended for nonpayment of tort debt No discrimination by governmental units or employers

12 Discharge Exceptions to discharge
Some debts are never discharged Creditor can collect once automatic stay ends, does not need express permission from court Debts which are discharged unless creditor takes timely action in bankruptcy court Student loans are only discharged if debtor proves undue hardship in bankruptcy court Alternatives – loan consolidation, deferrals

13 Discharge Debts that are never discharged
Child support and alimony Criminal fines and restitution orders Drunk driving resulting in personal injury Trust fund taxes

14 Discharge Debts that may be discharged
Income taxes ~ > 3 years, 3 months & 15 days old, return filed Debts where creditor fails to timely object Fraud Theft, embezzlement, breach of fiduciary duty Willful and malicious injury

15 Discharge Chapter 13 - enhanced discharge
Chapter 13 need not pay 100% of unsecured debts Successful Chapter 13 discharges a few debts which would not be discharged in Chapter 7 Civil fines Debts incurred to pay taxes Property settlements and division of debts arising out of divorce

16 Discharge and secured debt Only personal liability is discharged
Personal liability on a debt is discharged Non filing co-obligors are still liable But valid liens on property survive Debtor not liable for any deficiency after repossession or foreclosure

17 Serial filings – waiting periods for getting another discharge
Filing a Chapter 7 now, must wait 8 years since previous Chapter 7 6 years since previous Chapter 13 Previous Chapter 13 with % payment Filing Chapter 13 now, no discharge if Chapter 7 within 4 years Chapter 13 within 2 years Measured from filing date to filing date

18 Repeat filings Can file even if no discharge
Can file even if debtor would not be eligible for discharge Chapter 13 filed within 4 years of Chapter 7 Not eligible for discharge but Can save property by catching up on mortgage or by paying secured debt in full

19 Automatic Stay Automatic nature
Filing petition invokes stay Exception if this is 3rd case pending during last 12 months No court order is necessary Actions in violation of stay are void

20 Automatic Stay Broad scope
Applies to acts against debtor Lawsuits & other action to collect debts Applies if debt nondischargeable unless DSO Applies to acts against property to recover property for pre-petition debts to recover property of bankruptcy estate

21 Extension of time Trustee has up to 60 days to take action if the time for such action had not expired when the case was filed. 11 USC §108(b) This can be used to get more time to redeem property taxes Debtor may get more time by filing Chapter 13.

22 Automatic Stay Notable exceptions
Criminal and regulatory Domestic relations (almost everything) Establishing paternity Establishing or modifying alimony or support Collecting alimony or child support Stay does apply to division of property Post-petition debts

23 Automatic Stay Relief from automatic stay
Grounds No adequate protection of creditor’s interest Debtor has no equity in property AND not needed for effective reorganization Other “cause” Examples Recover car which is not insured Foreclose when debtor not making payments

24 Repeat filings Limits on automatic stay
If case filed within 1 year after previous case dismissed, stay expires after 30 days Stay can be extended by court. Motion must be filed and granted within 30 days. Must show clear and convincing evidence of changed circumstances. Stay may still apply to property of the estate If 2 dismissals in previous year, no automatic stay Must file motion to impose stay

25 Automatic Stay Expiration
When discharge granted (or denied) When case dismissed or closed

26 Sources of law – jurisdiction, venue & substance
Jurisdiction & venue in Title 28, U.S. Code Judiciary & Judicial Procedure Substance - Bankruptcy Code, Title 11 “means test” use IRS collection standards and Census Bureau statistics Property rights based on state law and nonbankruptcy federal law

27 Sources of law - procedure
Bankruptcy Rules Incorporates some sections of Federal Rules of Civil Procedure Bankruptcy code has some procedural rules Administrative office of US Courts N.D. Illinois local rules & general orders mandatory electronic case filing (ECF) Individual judges standing orders – Web site – “judges” tab


29 Bankruptcy players Case Trustee United States Trustee *************
Chapter 7 – panel trustee Chapter 13 – standing trustee United States Trustee ************* Auditors United States Attorney

30 Bankruptcy events Creditors meeting (341 meeting) – all cases
Confirmation hearing – Chapter 13 No asset report by trustee - Chapter 7 Discharge (no hearing required) Reaffirmation hearing when presumption of undue hardship Closing of case Dismissal of case,

31 Discovery & mandatory disclosures
Required documents – tax returns, pay advices, bank statements, Debtor’s duty to cooperate with trustee (or auditor) Failure to cooperate can lead to denial of discharge Discovery – when there is a contested matter or an adversary proceeding Rule 2004 exam. When discovery not available

32 Litigation Contested matters – within bankruptcy case
Adversary proceedings – separate case More like normal litigation

33 Practice & procedure Important differences
Motions must be served on represented debtor in addition to debtor’s attorney Motion filed by debtor’s attorney to withdraw or for approval of fees must be served on debtor US Trustee and/or case trustee must be served

34 Important differences, cont.
Notice required - 5 business days, unless Service by ECF- 3 business days Personal delivery - 2 business days Rules require longer period Emergency - attorney must file Rule 9011 certification, give as much notice as possible

35 Important differences, cont.
Time to file motion to vacate or for “reconsideration” is only 10 days Time to appeal is only 10 days Jury trials rare; by filing bankruptcy, debtor has waived jury filing claim waives jury

36 Case analysis Alternatives; Chapter 7 or 13; cost
Doing “nothing” “Judgment proof” client; claiming exemptions, preserving exempt property Negotiating workouts, refinancing State court litigation, Fair Debt Collection Practices Act, etc. Chapter 7 or Chapter 13 Costs – filing fee; opportunity cost; reduced access to credit

37 Access to credit Bankruptcy stays on credit record for 10 years
Effect on credit score Paradoxically, can improve after bankruptcy Usually 2 years before qualified for mortgage Beware of post-discharge vultures Credit during Chapter 13? Requires court authorization

38 Secured debts Chapter 7 – approved ways to retain property
Lien avoidance, exempt property Judicial liens that impair exemptions Non purchase money liens on household goods Redemption (redemption lenders for cars) Has to be at retail value, not wholesale Reaffirmation on original terms As if bankruptcy never happened for this debt Must perform choice stated on Form 8 (statement of intentions) within specified time

39 Secured debts Chapter 7 – other ways to retain property
Other options, not mentioned in Code Reaffirmation on better terms than original contact? Will creditor act in its own best interests? Making all payments without reaffirmation? Can lead to repossession of vehicles even if current

40 Secured debt Chapter 13 strategies
“Cram down” If creditor is “under secured” Pay value of collateral, not amount of debt Plus interest – prime rate is starting point Can’t cram down home mortgages Unless creditor takes additional security “Strip off” Wholly unsecured junior lien (e.g. 2nd or 3rd mortgage) can be “stripped off”

41 Secured debt Chapter 13 strategies – limits
Can’t cram down cars bought within 910 days of filing personal property bought w/in 365 days Will have to pay contract amount even though collateral worth much less Can lower interest rate

42 Case analysis Chapter 7 Liquidation analysis Dischargeability analysis
Is there non exempt property? Dischargeability analysis Debts that can never be discharged Debts that could be discharged in Chapter 13 Secured debts, leases What property can debtor keep? At what cost? Could debtor keep property in Chapter 13 at less cost? Disposable income analysis

43 Case analysis Chapter 7 Disposable income – means test
If “current monthly income” > state median, debtor must pass means test or no Chapter 7 Based on 6 month average; Even low-income must fill out part of form If “current monthly income” < state median, disposable income should not matter

44 Case analysis Chapter 13 Best interests of creditors (cf. liquidation)
What debts will be discharged Ch 13 discharges a few more debts than Ch 7 Secured debt options Cure, cram down, strip off Best efforts Must pay all disposable income for 3 years

45 Case analysis Chapter 13 Debtor may want to file Chapter 13 even if no discharge, to save property Unsecured debt that can be paid 100% even when other debts are paid less Rent arrears if lease being assumed Utility service obtained by fraud or theft (only the nondischargeable portion) Long term debts not in default (student loans)

46 When to File Reasons to file sooner
Losing or about to lose property Foreclosure sale Tax deed Garnishment/ offset of benefits [tax intercept] Repossession / sale Eviction – 5/10/14 day notice for rent Utility shutoff/ restoration Involuntary transfer <90 days/ 2 yrs / 4 yrs

47 When to file Reasons to wait
Expenses still exceed income No health insurance Recent credit card charges over $500 for luxury goods within 90 days Over $750 for cash advances within70 days Recent voluntary transfers Exemption planning Tax refund Income taxes owed will be dischargeable

48 Who can/should file ? Husband and wife can file joint petition Heirs
Joint filing fee same as for individual Ch 13 codebtor stay protects non filing spouse If only one files, non filing spouse will still owe joint debt, but can file own case later Heirs Debtor who owns property but didn’t sign mortgage can file Chapter 13 to save property

49 How to file What to file - paperwork
Forms require full financial disclosure Credit counseling certificate “Emergency” filing – can be done same day If represented, electronic filing required 15 days to file the rest (can move for more time)

50 Credit counseling Has to be from approved agency
Provided without regard to ability to pay. Within 180 days before filing case But not on same day? Limited exception can file petition if exigent circumstances & attempted to get counseling at least 5 days before. But Judge has discretion.

51 Credit counseling Avoiding Potential problems
LAF clients get automatic fee waivers from preferred providers Can get certificate by Language problems Hearing impaired LEP – not Spanish

52 How to file Fees Filing fee
Chapter 13 - $274 Chapter $299 Pay in installments – any chapter If can’t pay in installments, waiver of fee? Fee waiver only in Chapter 7 case Income less than 150% of poverty guidelines

53 How to file Thorough investigation
Schedules must be complete & accurate Can’t choose who to file bankruptcy against Interviewing client Client pre-conceptions Use your common sense and experience Benefits counseling Reviewing public records Lawsuits, previous filings, property records Credit reports

54 Ethical issues Attorney client privilege is different in bankruptcy
LAF etc are not “debt relief agencies” Attorney must certify that debtor has been informed of all options Duty to conduct reasonable inquiry In Chapter 7 only, signature on petition is certification that after “an inquiry” attorney has no knowledge that information in schedules is incorrect

55 How to file Reasonable inquiry
Procedures Some things are easily done and should be done in all cases Other steps should be taken if client is not giving you accurate information you haven’t filed many bankruptcies your gut tells you that you should

56 How to file Listing all debts
Credit reports Lawsuits – Cook County Clerk’s web site Liens & judgments Cook County Recorder of Deeds

57 How to file Listing all assets
Can’t exempt property unless listed. Trustee owns all unlisted property even after case closed Broad definition of assets Real property – cook county recorder Personal property Cars – secretary of state Lawsuits – client as plaintiff

58 Pre-bankruptcy planning When is it proper?
Preventing or undoing client mistakes Sanctions for improper actions are harsh None of the benefits of bankruptcy, all of the burdens Keep exempt & non exempt assets separate Exemption planning is allowed (be reasonable) Defrauding or hindering creditors is not What are preferences, why does it matter? Pay on nondischargeable debts first if possible Don’t pay federal taxes with a credit card File required tax returns

59 Dismissal of case Dismissal of case
Grounds, Ch 7 or 13: failure to file schedules and other required documents; failure to attend creditors meeting; failure to provide required documents to trustee; failure to pay filing fee No absolute right to dismiss Chapter 7 case Problem if trustee trying to sell assets Chapter 13 – if payments not made or plan never approved

60 Denial of discharge and other sanctions
Sanction for hiding assets, destroying records, and other misconduct in the bankruptcy case Can’t discharge any debts in later Chapter 7 Bar to refiling another case 180 day bar if case voluntarily dismissed after creditor files motion to lift automatic stay Court can bar refiling for debtor abuse

61 Safety & privacy issues
Domestic violence Bankruptcy filings are public records/ on internet Sealing records/ protective orders – ex parte motion Creditors meetings (§ 341 meetings) open to the public Privacy Protecting sensitive information in tax returns

62 Debtor’s post-filing duties
File all tax returns that come due Chapter 13 debtors must file 4 years worth of returns. Chapter 13 debtors must be current in post-petition child support Take debtor education course, or else no discharge.

63 Post-filing financial education
In addition to pre-filing credit counseling Case will be closed without discharge if course not completed Costs $260 to reopen case; to avoid this, file motion for more time When? Chapter 7 – 45 days after 341 meeting Chapter 13 – before last plan payment

64 When You Are Not the Attorney Filing the Bankruptcy Case
Why you need to know if your client has already filed bankruptcy What should you do if an adverse party Has filed bankruptcy? Is a threat to file bankruptcy? Your client may be filing bankruptcy What you can do to preserve client’s ability to file bankruptcy

65 How a previous bankruptcy may affect current case
You may not be able to proceed with the lawsuit Who owns the lawsuit? Can the other side use judicial estoppel against your client?

66 Client is creditor of adverse party who has filed bankruptcy
How does the automatic stay affect your case? Can/should you stop adverse party From getting a discharge at all? From discharging your client’s claim? Can your client get any money from the bankruptcy case?

67 Traps for the advocate Don’t violate the automatic stay
Make sure client understands deadlines to object to exemptions (341 mtg + 30 days) object to discharge/dischargeability ( ) file proof of claim (341 mtg +90) CAUTION: filing a claim waives right to jury trial If you know bankruptcy was filed, you are on notice, even if not officially listed

68 Representing creditors Strategies
If debtor has assets, file a proof of claim (1) secured (2) priority (3) general unsecured unpaid wages, child support, alimony are priority debts Object to incorrect exemptions Get relief from automatic stay? No fee for child support creditor otherwise $150 Chapter 7 & 13 - excepting debt from discharge Requires adversary proceeding, $250 fee; Chapter 13 – objections to plan

69 Anticipating a bankruptcy
Get and record judgments ASAP Domestic relations negotiations Get alimony and child support, not property settlement or agreement to pay debts Get a property interest now, not an unsecured promise to pay out of a future sale Which marital debts can be discharged by bankruptcy of one or both? Can property awarded in divorce be saved through bankruptcy (probably Chapter 13)

70 Your client may file bankruptcy
Resolve lawsuit to preserve dischargeability Collateral estoppel rules –same as in state court Avoid damaging admissions Identify timing issues Avoid loss of exempt property Minimize nondischargeable debt

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