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MICHAEL LYNN GABRIEL
ATTORNEY AT LAW
B.S.,J.D., M.S.M., DIP.(TAX). LL.M.(TAX)
TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1. COMMON BANKRUPTCY QUESTIONS . . . . . . . . . . . . . . . . . . . . . . . . . .4
2. WHAT A CHAPTER 7 BANKRUPTCY AND THIS BOOK CAN AND
CANNOT DO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
3. STEPS IN A BANKRUPTCY ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
4. PREPARATION OF THE PETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
5. THE EFFECTS OF BANKRUPTCY UPON THE DEBTOR'S HOME . . 176
6. THE EFFECT OF BANKRUPTCY ON THE DEBTOR'S PENSION . . . 189
7. EXEMPTIONS AVAILABLE TO THE DEBTOR . . . . . . . . . . . . . . . . . . 199
8. THE MEETING OF CREDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .294
9. LIEN AVOIDANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .301
10. REDEMPTION OF SECURED PROPERTY . . . . . . . . . . . . . . . . . . . . . 328
11. REAFFIRMATION OF A DEBT ON SECURED PROPERTY . . . . . . .344
12. AMENDMENT TO THE PETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . .355
13. CREDITOR'S ATTEMPT TO LIFT THE AUTOMATIC STAY . . . . . .363
14. DISCHARGE HEARING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366
15. LIFE AFTER BANKRUPTCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382
BANKRUPTCY FORMS
CHAPTER 7 BANKRUPTCY
INTRODUCTION
This volume, one of a compendium, is freestanding, dealing with a specific legal discipline "Chapter 7 Bankruptcy." This volume was written, as were the other works, to help the user better understand this area of the law. The concept behind this series was to develop a set of specialized books designed to serve as a practical guide to specific disciplines in the law.
This volume deals with Chapter 7 bankruptcy. It was written to give an attorney or business person all the information needed to begin the bankruptcy process. The book contains the appropriate filing forms for Chapter 7 bankruptcy with detailed instructions and examples for their completion. The law on bankruptcy is covered as it now relates to exemptions and dischargeable debts. Issues that may require consultation with an attorney who specializes in bankruptcy are stated so that the user can verify current law. In many cases this book can be used with no more outside assistance than verification that exemptions have not changed.
This volume explains Chapter 7 bankruptcy procedure and includes sample motions for special relief (such as lien avoidance) redemption, ratification or reopening the estate. After reading this book a few times and following the guidelines contained herein to verify current exemptions under state law, the reader shouldhave no difficulty in applying this book to bankruptcy action.
The book is user-friendly as possible. In addition, the bankruptcy court has as its stated objective the goal of helping debtors begin anew. There are no honest mistakes that are not correctable before the final discharge in the case.
CHAPTER 1
COMMON BANKRUPTCY QUESTIONS
Bankruptcy was once considered a disgrace, a sign of utter failure. A generation ago people committed suicide rather than live with the stigma of a bankruptcy. This stigma regarding bankruptcy no longer exists. Bankruptcy filings have increased astronomically with nearly a million bankruptcies per year being filed.
The bankruptcy law was enacted to give debtors hope that they could start over. When the United States Congress enacted the bankruptcy code it saw how other countries dealt with their insolvent debtors. Both Great Britain and France had debtors' prisons and penal colonies where they jailed people for no other reason than that they could not pay their debts. In one of the great advances for personal dignity, the United States created the bankruptcy code to permit debtors to start over again.
An illustration of how bankruptcy can be a very sad affair. The client was an elderly widower who had retired from the Federal Aviation Administration. His wife of 30 years had died after a long painful struggle with cancer. His wife's medical bills had wiped out their entire life savings. The client even sold their house to pay for his wife's treatment. After his wife's death, the client still owed over $100,000 in debts. Bankruptcy was the only alternative.
This book does not deal with the entire bankruptcy code.Instead, it deals only with Chapter 7 Bankruptcy. This is the most common individual bankruptcy filing and is often called "liquidation." After a Chapter 7 bankruptcy becomes final, the debtor is discharged from the obligation of paying any discharged debts.
This chapter demystifies the bankruptcy process. The question-and- answer format presents most of the general information about a Chapter 7 bankruptcy. This chapter answers common questions asked by everyone considering bankruptcy. The reader should have a better understanding of the bankruptcy process and his rights under the law after reading this chapter.
1. WHAT IS CHAPTER 7 BANKRUPTCY?
Chapter 7 bankruptcy is also called "straight bankruptcy" or "liquidation." It is the simplest and easiest form of bankruptcy proceeding. Bankruptcy per se is a federal statutory proceeding whereby qualified individuals may surrender their nonexempt property for division among their creditors. To the extent that their nonexempt property does not pay their debts the debts are discharged (forgiven).
Chapter 7 bankruptcy takes between 100 and 180 days. The filing fees for a Chapter 7 bankruptcy are about $120. The creditor has to appear only once in court: at the meeting of creditors.
Once a discharge is given by the bankruptcy court, the debtor's dischargeable debts are forgiven. The debtor will still be obligated to pay debts the bankruptcy court determines should not be discharged for equitable reasons or are not dischargeable underfederal law.
2. WHAT IS A BANKRUPTCY TRUSTEE?
The bankruptcy court appoints a person called a "trustee" to handle the normal administration and management affairs of debtor's estate. It is the trustee's responsibility to take possession and control of the bankruptcy estate and to develop a plan whereby creditors are paid from nonexempt property of the debtor to the extent possible. The trustee also has the power to bring and defend lawsuits on behalf of the bankruptcy estate.
The trustee calls and oversees the creditors' meeting where the creditors examine the debtor to discover the location of assets. After the meeting of creditors, the trustee will assemble the assets of the bankruptcy estate and prepare a plan for diving the assets among the creditors.
Once the trustee's plan for division of the bankruptcy estate is approved by the bankruptcy court, it is implemented and a discharge is granted for the debtor's remaining unpaid dischargeable debts. The Chapter 7 bankruptcy is complete when the discharge is granted.
3. WHAT IS CHAPTER 13 BANKRUPTCY?
Chapter 13 is another type of bankruptcy proceeding. Unlike Chapter 7 bankruptcy, a Chapter 13 is not a liquidation of the debtor's property; it is a reorganization of his debts.
In a Chapter 13 bankruptcy, the debtor creates a plan to pay most or all of the debts over a three to five year period. To the extent that dischargeable debts are not to be paid under the plan,the unpaid portion of the debts are forgiven.
There is no time limitation for filing a Chapter 13 petition. It can be filed immediately upon the conclusion of a Chapter 7 proceeding if the debtor wishes. A Chapter 13 plan is not final and can be modified by the court whenever the debtor shows good cause (such as a reduction in earnings). The debtor can convert a Chapter 13 petition to a Chapter 7 liquidation at any time as long as the debtor did not file a previous Chapter 7 petition within the last six years. The debtor may dismiss the Chapter 13 at any time prior to completion of the plan and be treated as though the bankruptcy had never been filed.
4. WHEN MAY A CHAPTER 7 BANKRUPTCY BE FILED?
A Chapter 7 bankruptcy petition cannot be filed if the debtor:
1. Obtained a Chapter 7 discharge within the previous six years, or
2. Began a Chapter 13 proceeding within the previous six years.
The six year period starts to run from the date of filing the earlier bankruptcy petition, not the date that the discharge was granted.
A Chapter 7 petition cannot be filed within 180 days of a dismissal of an earlier Chapter 7 petition that had been dismissed because:
1. The debtor violated a court order;
2. The debtor requested dismissal after a creditor relief from the automatic stay.
There are no such restrictions for filing a Chapter 13 bankruptcy. If a Chapter 7 petition cannot be filed, a debtor can still file a Chapter 13 petition.
5. HOW DOES BANKRUPTCY AFFECT CHILD OR SPOUSE SUPPORT?
Alimony and child support obligations are not dischargeable in bankruptcy. The bankruptcy will not suspend or stop the requirement to make current court ordered payments.
The automatic stay of the bankruptcy proceeding will temporarily halt proceedings to collect back unpaid child or spouse support. The bankruptcy court will usually permit collection to go forward if the spouse or the guardian of the child requests it.
The Bankruptcy Act of 1994 amended Section 362 to provide that efforts to collect spouse or child support payments from property that is not estate property is not subject to the automatic stay. The 1994 Act also prohibited the automatic stay from blocking commencement or continuation of proceedings to enforce alimony and child support during the bankruptcy case.
In a Chapter 13 case property acquired during the life of the Chapter 13 Plan is considered property of the estate. Under the Bankruptcy Act of 1994, child and spouse support claims now have priority over and are to be paid before general unsecured claims and tax claims. In addition, the Bankruptcy Act of 1994 prohibits both trustee and debtor from recovering any property transferred to spouse or a child in connection with a divorce or separation made within one year of the filing of the bankruptcy petition. Before this amendment, the trustee and the debtor were permitted toavoid payments made within a year of the bankruptcy filing as a creditor preference or a payment not supported by reasonable equivalent consideration. Section 522 of the Bankruptcy Code was amended under the 1994 Bankruptcy Act to prohibit a debtor avoiding a judgment lien on otherwise exempt property for child or support payments. Regardless if the debts are collected during the bankruptcy, the child support obligation survives the bankruptcy and the debtor must still pay it in full.
6. WHAT TYPES OF DEBTS ARE NOT DISCHARGEABLE BY LAW?
There are several types of debts that, under the bankruptcy law, cannot be discharged. Most important of the nondischargeable debts are:
1. Recent taxes (within three years). Under section 523(a)(14), debts incurred to pay U.S. taxes are not deductible if the taxes themselves are not deductible.
2. Back child or spousal support.
3. Court-ordered restitution.
4. Recent student loans.
5. Court judgments for damages caused in drunk driving.
The main exceptions to the general dischargeability of debts are discussed in the questions that follow. Some debts which are not dischargeable under Chapter 7 petition (such as court-ordered restitution) are nevertheless dischargeable in a Chapter 13 bankruptcy petition.
7. CAN A BANKRUPTCY COURT REFUSE TO DISCHARGE A
DEBT THAT IS OTHERWISE DISCHARGEABLE?
A bankruptcy judge may refuse to grant a discharge for a debt that is otherwise a dischargeable debt when it determines that:
1. It is a credit debt obtained by filing a false credit application.
2. The debtor committed fraud or misrepresentation to obtain the property or services for which the debt derives.
3. The debt derives from an intentional injury caused to another.
4. Property was obtained by theft, robbery or embezzlement.
5. The debtor obtained property without having any intention to pay for it.
As a rule of thumb, if 50% or more of the person's debts are dischargeable, filing a Chapter 7 bankruptcy is usually more beneficial than not filing.
8. WHAT IS AN UNSECURED DEBT?
In a bankruptcy, debts are divided into secured and unsecured debts. An unsecured debt is a promise or obligation to pay to another a certain amount of money which is unsecured by any collateral. Failure to pay the debt will not entitle the creditor to an immediate right to repossess real or personal property to satisfy the obligation. Most debts are unsecured. Examples of unsecured debts are credit cards, utility bills, medical bills, legal bills, rent.
In a bankruptcy, after all the debts having priority are paid, the unsecured debts are totaled. If the estate is large enough, unsecured debts are paid in full. If there are not enough assets topay the unsecured debts, they are paid in proportion to their percentage of the amount of money available. To the extent that there are not enough assets to pay all of the unsecured debts, the portion not paid is forgiven and discharged. Example: Unsecured debts are $200,000, but there are only enough assets to pay $40,000. Each unsecured creditor will be paid .20› on the dollar.
9. WHAT IS EXEMPT PROPERTY?
Under both state and federal law, a person is entitled to exclude certain property from bankruptcy. The individual may elect to take the federal exemptions or the particular state exemptions.
Both state and federal law have some of the same exemptions; although they vary in amounts. Both systems provide exemptions for:
1. Motor vehicles to a certain value.
2. Reasonable clothing.
3. Reasonable household furnishings and appliances.
4. Personal effects to a certain value.
5. Some public pensions.
6. A certain amount of equity in a home.
7. Tools of a trade or profession to a certain amount.
8. Public benefits such as social security, welfare, or disability payments.
There are additional exemptions under both state and federal law, but these are the common ones. Of the above exemptions, the homeowner's exemption for equity is often the most important. The proceeds from the sale of any exempt property is not attachable by the trustee or creditors to pay debts. An exception exists if theotherwise exempt property is secured as collateral for payment of a debt. The bankruptcy does not affect the rights of the unpaid creditor holding the security interest from repossessing the property after the bankruptcy discharge.
10. WHAT IS NONEXEMPT PROPERTY?
Nonexempt property is property that is not exempt from attachment to pay the debtor's obligations under federal or state law. Examples of nonexempt property in a bankruptcy are:
1. Cash, stocks, bonds and investments over a certain amount.
2. A second motor vehicle.
3. Second home.
4. Family heirlooms over a certain value.
5. Collections such as paintings, coins, stamps and others.
6. Expensive equipment for use in a trade or business.
If most of a debtor's estate consists of nonexempt property. Filing bankruptcy may not be wise: most of the debtor's estate will be taken by the trustee.
11. HOW IS PROPERTY THAT HAS NOT YET BEEN RECEIVED TREATED?
A debtor must to place into the bankruptcy estate any property that the debtor has a right to receive, even property not yet received. Examples of such property are:
1. Unpaid wages.
2. Debts owed to the debtor.
3. A tax refund due to the debtor.
4. Property that the debtor inherited but has not yetreceived.
5. Benefits from a trust established for the debtor.
6. Benefits from an insurance policy.
The trustee succeeds and replaces the debtor as the person entitled to receive the above property. The trustee places such property into the bankrupt estate.
12. IS PROPERTY ACQUIRED AFTER BANKRUPTCY INCLUDED IN THE ESTATE?
The general rule is that property acquired after filing a bankruptcy petition is not included in the bankruptcy estate. There are a few exceptions to this rule for certain property acquired within 180 days after filing bankruptcy. After acquired property subject to inclusion in the bankruptcy estate is:
1. Property inherited within 180 days of the filing regardless of whether or not it is actually distributed.
2. Property from a property settlement in a divorce or legal separation.
3. Death benefits or life insurance proceeds on another.
These properties have to be reported to the trustee even if the bankruptcy itself is over. The trustee may reopen the bankruptcy to distribute the new property.
13. SHOULD A MARRIED COUPLE FILE BANKRUPTCY TOGETHER?
Married couples are not required to file a joint bankruptcy petition. Each spouse may file separately. In addition, one spouse alone may file bankruptcy, and the other spouse may elect not to do so.
If a married couple intends to file bankruptcy, it is more advantageous for them to file a joint petition. The decision of the spouses as to how to file may be governed by the state in which they reside. The effect of state law on the classification of property (as either community or separate property) may make the filing of both spouses in bankruptcy necessary to protect their rights.
14. HOW IS COMMUNITY PROPERTY TREATED IN A BANKRUPTCY?
In a community property state, all community property is included in a debtor's estate; whether or not the debtor's spouse files a bankruptcy. Bankruptcy law states that all community property (not just the debtor's half interest) is included in the estate if the debtor's creditors can attach it under state law absent the bankruptcy.
For example, assume that a husband and wife own a piece of real property as community property. Under state law both spouses have equal management and control over the property as joint owners. When the husband files bankruptcy, the trustee will take all of the property and sell it to satisfy the husband's creditors even though the wife never filed. In a community property state, when one spouse files the other spouse usually files to protect their joint interest in the community property.
15. HOW IS SEPARATE PROPERTY TREATED IN A BANKRUPTCY?
The separate property of the nonfiling spouse cannot be attached to pay the debts of the spouse filing bankruptcy. Separate property in a community property state is property acquired by aspouse prior to a marriage or after marriage by gift, devise or bequest; but not property acquired through work.
Any state that is not a community property state is a separate property state. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. The drawback to community property: the community property interest of the married, non-filing spouse can be attached, in the other spouse's bankruptcy.
In a separate property state, the estate of a married debtor in bankruptcy consists of the debtor's separate property and only one-half of the jointly owned property. The separate property of the nonfiling spouse is not included in the filing spouse's bankruptcy estate.
16. HOW ARE EXEMPTIONS DETERMINED?
Exempt property is property that the debtor can keep regardless of the bankruptcy. Each state has its own set of laws that list what property is exempt in bankruptcy.
There is a federal set of exemptions that debtor may use in the following states and the District of Columbia: Connecticut, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Pennsylvania, Rhode Island, Texas, Washington, Wisconsin and Vermont. The debtor cannot use the federal exemptions in addition to the state exemptions and cannot mix or match them. The election is for one set of exemptions or the other.
In the states not listed above, debtors can only use their state's exemptions. Federal exemptions are not available.
17. WHAT IS THE GENERAL EXEMPTION?
Most states provide a general exemption that a debtor can apply toward any type of property or split among properties. In the following states the general exemption is: California $400, Georgia $400, Kentucky $1,000, Maine $400, Maryland $2,500, Missouri $1,250, Ohio $400, Pennsylvania $300, Vermont $400, West Virginia $400.
Other states also have general exemptions but restrict their application to personal property, not real property. A federal general exemption also exists for $400.
18. HOW IS TENANCY-BY-THE-ENTIRETIES HANDLED IN BANKRUPTCY?
Tenancy-by-the-entireties is a special form of ownership of property between married persons where the surviving spouse receives all of the property under a right of survivorship.
Sixteen states treat tenancy-by-the-entireties property in a different fashion from either separate property or joint property. These states will exempt all tenancy-by-the-entireties property from inclusion in a debtor's bankruptcy estate if:
1. Only one spouse files bankruptcy, and
2. The debts discharged were those owed solely by the filing spouse.
If a debtor tries to discharge joint debts in the bankruptcy, the tenancy-by-the-entireties exemption is lost.
19. CAN DEBTS BE PAID BEFORE FILING BANKRUPTCY?
Under the bankruptcy law, payments made within 90 days of filing a bankruptcy petition are considered preferential paymentsto creditors, and the trustee can set aside the payments and require that the creditor return the payments to the bankruptcy estate.
Payments on debts owed to a debtor's relative, friend or a company in which the debtor is an officer may be recovered by the trustee if the payments were made within one year of filing for bankruptcy protection.
Payments of debts that are secured by exempt property can be a good planning tool. Paying debts on exempt property with moneys that would be lost otherwise in the bankruptcy can assure that the debtor will receive the exempt property.
20. CAN NONEXEMPT PROPERTY BE CHANGED INTO EXEMPT
PROPERTY PRIOR TO FILING BANKRUPTCY?
It is possible for a debtor to sell nonexempt property prior to filing bankruptcy and purchase property with the proceeds that will be exempt upon the filing.
Whether or not the bankruptcy court will exempt the newly purchased property depends on:
1. The debtor's motive. If the motive is to acquire assets to start over and be able to earn a living, the court will usually approve the change. Example: Debtor sells a boat to buy equipment to earn a living. On the other hand, sale of nonexempt property for extravagant or needless purchases might be set aside even though the purchased property might be exempt under the law. Example: Debtor sells a boat to buy exempt jewelry.
2. The amount of nonexempt property converted into exempt property. If the debtor converts a large amount of nonexempt property into exempt property, leaving the unsecured creditors largely unpaid, the court might refuse to exempt the newly acquired property.
If the purpose and effect of the conversion violates the intent of the bankruptcy act to provide the debtor a reasonable opportunity to start over again, exemption of the converted property will be set aside.
21. WHERE IS THE BANKRUPTCY PETITION FILED?
Every state has at least one bankruptcy court to handle bankruptcy filings for the state. Larger states are divided into judicial districts with each district having its own bankruptcy court. In California, for example, there are 4 district bankruptcy courts: Northern, Southern, Eastern and Central Districts.
A debtor is required to file the bankruptcy petition in the bankruptcy court that covers the debtor's district. The address of the court can usually be found in the phone book under Federal Government.
The forms used in the bankruptcy court are provided by the clerk of the bankruptcy court and some stationary stores. Only approved bankruptcy court forms may be used. Every few years, the bankruptcy forms are updated which makes earlier forms obsolete.
22. WHAT IS A NO-ASSET BANKRUPTCY?
Most people do not have enough nonexempt property that can be sold to raise cash to pay creditors. A bankruptcy estate in thiscondition is said to be a "no-asset case." A bankruptcy that has enough nonexempt assets that can be sold to produce cash for payment of creditors is called an "asset case."
The trustee notifies the debtor's creditors whether the case is an asset or no-asset case, and whether or not they should file claims. In no- asset cases, the creditors do not have to file claims because there are no assets to distribute to the creditors. If assets are later discovered, the trustee will notify the creditors to file their claims at that time. After determining if the case is an asset or no-asset case, the trustee sets the date for the first meeting of creditors.
23. WHAT IS THE AUTOMATIC STAY?
Once a debtor files for bankruptcy relief, all lawsuits and legal actions against the debtor, both public and private and including foreclosures on real property, immediately stop. No state court can thereafter issue a valid civil judgment against a debtor during the pendency of the bankruptcy proceeding without first obtaining the trustee's or bankruptcy court's permission.
Harassment of a debtor by a creditor regarding collection of a debt listed in the bankruptcy is against the law. Anyone harassing a debtor over a debt covered in the bankruptcy petition may be found in contempt of federal court.
24. MAY A CREDITOR ASK THE COURT TO LIFT THE AUTOMATIC STAY?
The automatic stay lasts throughout the term of the bankruptcy unless the bankruptcy court lifts it at the request of a creditor. The stay must be lifted in order for a creditor to proceed with aforeclosure on any of the debtor's property or to resume any state judicial proceeding (lawsuit) against the debtor. In order to lift a stay, a creditor must file a motion with the bankruptcy court. The motion must state the reasons behind the request to lift the stay, and a hearing on the merits is held by the court. If the automatic stay is lifted, state court actions once stayed will continue from the point where they had been stopped. Once the stay is lifted, state actions are treated as though the bankruptcy had not been filed.
25. WHAT ARE THE GROUNDS FOR LIFTING AN AUTOMATIC STAY?
The automatic stay is the prime tool in a bankruptcy. Without the automatic stay, a debtor's assets might not be kept together long enough for the trustee to accomplish the purposes of the bankruptcy. The bankruptcy court views very carefully all motions to lift the automatic stay. The main reasons a court will lift the automatic stay are:
1. The issue to be tried does not affect the debtor's property, such as child custody.
2. The action stayed will ultimately occur anyway because the bankruptcy will not help the debtor on that matter. The most common stay involves the foreclosure on real property. If there is no way that the debt against the property can ever be repaid, the court is likely to lift the stay. This allows the creditor to acquire the property and reduce his related losses.
3. The creditor has a security interest in property that isbeing harmed by the stay. For example, in the real estate rental situation, payments are not being made on rental equipment.
4. The debtor really does not have an ownership interest in the property. If the debtor owes more on property than it is worth, the court may lift the stay because there is no point in protecting the property. Once the court lifts the stay, the creditor can pursue state remedies against the debtor. The creditor must be aware, however, that any monetary judgment will be treated as an asset of the estate; and the creditor's claim becomes an unsecured debt against the estate.
26. HOW CAN A REQUEST TO LIFT AN AUTOMATIC STAY BE OPPOSED?
The bankruptcy court will not lift an automatic stay if the debtor proves that the stay is needed to preserve the debtor's general economic conditions. If lifting the stay will harm the debtor more than it would if the stay remained to the end of the bankruptcy, the court will usually refuse to lift it.
The most common arguments against lifting an automatic stay on property for a secured creditor are:
1. The fair market value of the property is greater than the amount owed. Thus the creditor is ultimately assured of being paid, whether or not the stay is lifted.
2. The debtor is willing to post a bond or cash security to offset any diminution of value in the property.
The creditor has the burden to prove to the bankruptcy court thatlifting the stay will not impede or hinder the goal of the bankruptcy code of permitting the debtor to start over again.
27. CAN A BANKRUPTCY FILING STOP AN EVICTION?
A bankruptcy filing will temporarily stop the debtor's eviction from real property. The operative word is "temporarily." Filing bankruptcy petitions to thwart evictions have become commonplace, and most bankruptcy courts will lift the automatic stay and permit the eviction to proceed.
An important exception exists when the debtor is involved in a long term lease or very favorable rent control. The debtor can argue that the obligation to pay back rent is discharged and the future term of the lease is a valuable asset the debtor wishes to affirm. If the court agrees, it will not lift the stay and will keep the lease in effect as long as the debtor pays the new rent as it becomes due.
28. CAN A CREDITOR OBJECT TO A DISCHARGE?
A creditor may object to a discharge of some or all of the debts of the debtor. The creditor must file the objections to the discharge of particular debts within 60 days of the meeting of creditors. The creditor's objections are filed in a form called a "Complaint to Determine Dischargeability of Debt." The complaint must be served (delivered) to the debtor and the trustee.
A creditor may challenge in court a discharge of any of the following debts:
1. Debts occurring as a result of a willful or malicious act (civil tort) that caused personal or property damage.
2. Debts that were incurred as a result of fraud (usually obtaining credit while intending to file for bankruptcy).
3. Debts arising from theft. No one is ever permitted to keep property obtained illegally.
The debtor must defend any objection to a discharge by filing a responsive pleading "an answer" to the allegations in the complaint. A hearing is held, and the court rules on the appropriateness of granting a discharge.
29. CAN A CREDITOR BE FORCED TO RETURN EXEMPT PROPERTY?
If, before a bankruptcy petition is filed, a creditor has seized or foreclosed on property that would be considered exempt if in the possession of the debtor, the creditor may be forced to return that property if:
1. The property was seized within one year of the debtor's filing for bankruptcy protection,
2. The property can be claimed as exempt, and
3. No attempt was made to conceal the property from the creditor before it was seized.
A complaint has to be filed in the bankruptcy court against the creditor. After service of the complaint on the creditor and the trustee, the court will hold a hearing to determine if the property should be returned to the debtor. Unless the property is valuable, the process for getting it returned may be too time consuming and bothersome to be worth it.
END OF PREVIEW OF CHAPTER
CHAPTER 2
WHAT A CHAPTER 7 BANKRUPTCY AND THIS BOOK
CAN AND CANNOT DO
I. INTRODUCTION
Before anyone seeks bankruptcy protection, he must first be satisfied that the bankruptcy will accomplish the desired results of discharging debts and keeping exempt property. Chapter 7 bankruptcy is commonly considered a "liquidation" which is a misnomer. A Chapter 7 proceeding is a partial liquidation of the debtor's estate. In a Chapter 7 proceeding, the debtor's estate (discussed in Chapter 7) will be sold (liquidated) to the extent of its nonexempt property and the proceeds paid the debtor's creditors. To the extent that the debtor's creditors remain unpaid, their nondischargeable debts are discharged and forgiven the debtor will not have to pay them. There are certain debts that Congress has made nondischargeable in bankruptcy as a matter of public policy. There are other debts that are non-dischargeable only in the event that the creditor objects. A person who is considering filing for bankruptcy protection should determine what debts are dischargeable and what debts are nondischargeable. A Chapter 7 petition may be of little assistance if most of a debtor's debts are nondischargeable. This chapter identifies and explains debts that are nondischargeable under the Bankruptcy Code.
THE PURPOSE OF THIS BOOK AND WHO SHOULD USE IT
This book was written to fill a void in legal books about Chapter 7 bankruptcy. It was written to be used by an attorney and by individuals engaged in a small service or retail business with few assets or inventory. This book can be used by married couples and in the vast majority of cases a joint filing by married couples provides the following advantages:
1. In many states, the spouses are permitted to double (claim twice the state's permitted exemption amount) the exemption for specified exemptions.
2. The cost is less than separate filings.
3. The court decision is usually quicker for joint petition than for two separate petitions.
There can be situations where filing jointly may not be best. Before filing a joint petition, the couple should consult a bankruptcy attorney for recent changes in the exemption law when:
1. The couple own property in tenancy by the entireties. Such title will be reflected in the deed of title document in the form Jane Doe and John Doe, husband and wife as tenants by the entireties. In a few states (see Chapter 5 for a fuller discussion) property held as tenants in common will not be included in the estate of a spouse filing separately if the other spouse is not liable for the debt. This can be important if the couple has such property. A consultation on this issue may cost $250, but it could save tens of thousands of dollars inexempt property.
2. The couple have ERISA qualified pensions. The United States Supreme Court has made several rulings in recent years that seriously affect the exemption for ERISA pensions. These exemptions are discussed in Chapter 6. In some circumstances it might be beneficial for a couple to move to another state to the federal pension exemption and the federal homestead exemption.
This book does not cover nor should it be used for the following matters:
1. CHAPTER 11 REORGANIZATION. A business reorganization of debts is governed by Chapter 11 of the Bankruptcy Code. This type of bankruptcy uses an entirely different set of procedures. The business is allowed to continue operating while restructuring its debt.
2. CHAPTER 12 FARM REORGANIZATION. Chapter 12 of the Bankruptcy Code is special reorganization that exists only for use by farmers. As with all reorganizations some debts are discharged while the payments schedules of others are altered. A farmer considering bankruptcy should consult a bankruptcy attorney to determine if a Chapter 7 or Chapter 12 petition is best.
3. CHAPTER 13 REORGANIZATION. A Chapter 13 petition is a reorganization of debts for individuals. The debtor creates a plan that must be approved by the court. Someof the debts are discharged in whole or in part and the remaining debts are paid over a period of time (usually three to five years). This book does not discuss Chapter 13 petitions except in the area of foreclosure on a home (see Chapter 5). Generally, the only reason for choosing a Chapter 13 Reorganization is to keep appreciating property that would be lost in the Chapter 7 proceeding.
4.CREDITOR ENGAGED IN BUSINESS. Where the debtor is engaged in business and more than 35% of the total debts are attributable to the business, he should consult a bankruptcy attorney. This book is not geared to addressing the problems and accounting procedures necessary for a debtor with substantial business debts. It should not be used if the debtor's business is a partnership or is engaged in manufacturing or large inventory sales. This type of debtor needs a bankruptcy attorney.
II. NONDISCHARGEABLE DEBTS
Congress made 10 categories of debts nondischargeable. Of the 10 categories, seven of them represent debts that cannot be discharged unless they fall into narrow exceptions. The remaining three categories of debts are dischargeable unless a creditor files objections to their discharge in a timely manner. This chapter will discuss both the types of nondischargeable debts.
A. DEBTS NOT DISCHARGEABLE UNLESS AN EXCEPTION EXISTS
1. TAXES
Under section 523(a), a debt is not discharged if it is:
"(1) For a tax or customs duty:
(a) of the kind and for the periods specified in section 507(a)(2) of this title, whether or not a claim for such tax was filed or allowed;
(b) with respect to which a return, if required,
(i) was not filed, or
(ii) was filed after the date on which such return was last due under applicable law or under any extension, and after two years before the date of the filing of the petition, or
(c) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax."
a. INCOME TAXES
Income taxes can be discharged provided the following conditions are met:
1. The taxes are over three years old.
2. The assessment for the taxes was made over eight months prior to filing of the bankruptcy petition.
3. The tax return was timely filed (for taxes relating to a late return, the tax debt is not excepted unless the required return was due, after any extensions, within two years of the filing), and
4. The debtor did not file a fraudulent return or attempt willfully to avoid paying the taxes.
Under the Bankruptcy Code, tax assessments made against a debtor within eight months of filing a bankruptcy petition are nondischargeable even if the taxes are over three years old. The debtor must wait more than eight months after any tax assessment to be able to discharge those back taxes even if the other requirements for a valid discharge are met.
When all of the above conditions are met, the back taxes may be discharged. Penalties assessed for late filing or nonpayment are dischargeable if the taxes to which they relate are dischargeable. If the taxes are not dischargeable, neither are the penalties.
b. PROPERTY TAXES
Property taxes that are less than one year old are not dischargeable. Property taxes are assessed against the property and not the owner. The taxing agency usually imposes a statutory tax lien against the property to secure payment of the lien (see Chapter 9). Property taxes are not dischargeable; they must be paid if the debtor wishes to keep the taxed property.
2. UNLISTED DEBTS
A creditor's debt will not be discharged pursuant to section 523(a)(3) unless the creditor was either duly listed as a creditor with the court or had actual notice of the bankruptcy filing. It is the clerk of the bankruptcy court who sends the notice of the bankruptcy filing to the creditors. If a creditor is not properlylisted that creditor will not receive notice of the bankruptcy action and be unable to protect his interest.
The purpose of this exception to a discharge is obvious. There is an affirmative duty on the part of the debtor to notify the creditors of the bankruptcy. The bankruptcy system will not function as intended if debtors are permitted to exclude creditors and not offer to them an opportunity to participate in the proceeding. The discharge of any unnoticed creditor would probably be unconstitutional as a violation of due process.
If the creditor never had knowledge of the debtor's bankruptcy, the creditor's debt is not discharged. The debtor remains liable for repayment of the debt even though the debtor's other debts have been discharged. In the case of an omitted creditor, the debtor may petition the court to list the creditor. Reopening the case is rare; the procedure is covered in Chapter 15. Absent reopening of the case, the debtor remains liable for repayment of the debts of any creditor who was omitted on the petition and had no knowledge of the action.
3. SPOUSE AND CHILD SUPPORT
Under section 523(a)(5), court-ordered payments for the support of a child or former spouse are nondischargeable. There are variations on this subject that a debtor must investigate.
If back child support is at issue, the debtor should consult a bankruptcy attorney. To not have paid it might be a criminal act quite apart from the bankruptcy law. Once a court orders a parentto make child support payments, the obligation to make those payments then becomes nondischargeable (In re Horol 33 B.R. 989, 1983). The obligation to make court-ordered child support payments is not discharged even if, assigned to a state or governmental agency. If a county or state agency provides benefits to a family because of the debtor's failure to make court-ordered support payments, the state or other governmental agency is assigned the right to receive reimbursement. That right to receive reimbursement for payments made by the state for the support of debtor's child cannot be discharged (as it once was) by the debtor's subsequent bankruptcy.
The general rule is that claims of third parties for property or services provided for a child's support are dischargeable by a parent (In re Lo Grasso, 23 F.Supp. 340). Case law which holds that if a parent deserts or neglects the children, the debts for the property or services provided by third parties are not dischargeable (In re Meyers 12 F.2d 938).
There must be a court order requiring support payments to be made if a debt for child support is to be nondischargeable. All states have laws that impose on a parent the duty to support a child. The parent can be sued for the value of child support provided by third parties. These debts are dischargeable unless reduced to a judgment prior to the debtor-parent filing for bankruptcy protection. For example, assume that a mother deserted her children, and the father raised them. The father is entitled toreimbursement from the mother for her share of the child support. If the mother files for bankruptcy relief before the father gets a judgment for reimbursement, the obligation to reimburse the father for the back child support is discharged. If the father obtained a court order requiring the mother to reimburse the father for the back support, the debt for back support is not dischargeable.
Spouse support (alimony) requires a court order or an agreement obligating the debtor to make support payments to the spouse. This order or agreement ensures the obligation to make the payments will not be dischargeable. The debtor may agree to make spousal support payments through a marital agreement or a property settlement agreement; such support payments are nondischargeable. Without a court judgment ordering a debtor to make spouse support payments (or an agreement requiring them to be made) the debtor's obligation to make support payments can be terminated in a bankruptcy. If parties are not married the debtor may be discharged from any obligation to make support payments unless the relationship qualifies as a common law marriage.
The Bankruptcy Act of 1994 amended the automatic stay of section 362. The Act now provides that collection of spouse or child support payments from property that is not property of the estate is not subject to the Automatic Stay. The 1994 Act also prohibited the Automatic Stay from blocking commencement or continuation of proceedings to enforce alimony and child support during the bankruptcy case. Property acquired during the life ofa Chapter 13 Plan is considered property of the estate. Under the Bankruptcy Act of 1994, child and spouse support claims now have priority over and are to be paid before general unsecured claims and tax claims. The Bankruptcy Act of 1994 prohibits the trustee and the debtor from the recovery of any property transferred to spouse or child in connection with a divorce or separation occurring within 1 year of the filing of the bankruptcy petition. Before this amendment the trustee and the debtor were each permitted to avoid such payments made within a year of the bankruptcy filing as a creditor preference or a payment not supported by reasonable equivalent consideration. Section 522 of the Bankruptcy Code was amended under the 1994 Bankruptcy Act to prohibit a debtor from avoiding child support payments required by a judgment lien on otherwise exempt property.
Whether or not the debts are collected or are incurred during the bankruptcy, the obligation survives the bankruptcy, and the debtor must pay in full.
4. FINES, PENALTIES AND FORFEITURES
Section 523(a)(7) exempts from discharge those debts incurred as fines or penalties from the debtor's violation of the law. This exception from discharge is firmly based on the belief that approving the discharge of the above would be an implicit approval of criminal or civil misbehavior. All governmental sanctions, whether by a court or an agency, for a violation of any rule, statute or law are not dischargeable.
The only penalties not completely excepted from discharge under this chapter are tax penalties if the tax itself can be discharged under section 523(a)(1) as discussed above. Some additional tax penalties can be discharged even if the tax is not dischargeable: those involving a transaction giving rise to a tax occurring three or more years prior to the filing of the bankruptcy petition.
5. STUDENT LOANS
Under section 523(a)(8) student loans made or guaranteed by a governmental agency (just about all of them are) are not dischargeable unless:
1. The payments on the loan became due more than seven years before the debtor filed for bankruptcy relief, or
2. Not discharging the student loan debt would impose an undue hardship on the debtor.
If the bankruptcy petition is filed more than seven years after the student loan matured (became payable), there is no requirement for the debtor to prove undue hardship in order to have the student loan debt discharged. The seven year period is intended to keep students from discharging the loans prior to starting their careers.
Most courts will allow the debtor to discharge the entire student loan if it became due more than seven years earlier. Some courts will only discharge those delinquent payments over seven years old (see the California case In re Steiner 55 B.R. 1 ,1983). If a debtor is considering discharging student loans over seven years old, the debtor should consult a bankruptcy attorney to determine how they are handled in that state. If the bankruptcy court of that state will only discharge the payments over seven years old, it might be advantageous for the debtor to move to another state that has a bankruptcy court that will discharge the entire amount.
To get a discharge for student loans less than seven years old, the debtor must convince the court that the debtor will suffer undue hardship from being required to make the payments on the student loan (In re Rice 4 C.B.C.2d 134, 1981). The second Circuit Court of Appeals in Brunner vs. New York State Higher Educational Service Corp. 831 F.2d 385,1987 stated that the debtor can prove undue hardship prevents repayment of student loans by showing:
1. The debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if forced to repay the loans.
2. Additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment, and
3. The debtor has made a good faith effort to repay the student loans.
When the court is granting a discharge for undue hardship, the court may grant only a partial discharge of the student loans. It is rare that a court will grant a complete discharge based on unduehardship.
A special type of student loan is the Health Education Assistance Loan for those obtaining a medical education. This type of student loan is held not to be dischargeable unless the debtor can show a greater burden than an undue hardship will occur if he must repay the loan (In re Hines 15 C.B.C.2d 959 and Columbus College vs. Shore 707 F2d. 1337, 1983). Such loans should be considered and treated by a debtor as nondischargeable except in the most extreme cases.
6. DEBTS INCURRED FROM DRIVING WHILE INTOXICATED
Section 523 (a)(9) states that debts incurred as a result of an episode of intoxicated driving are not dischargeable. This means that a debtor driving while intoxicated and causing an accident can no longer avoid the liability of paying the damages by filing a bankruptcy petition. Prior to the enactment of this section, debts arising from damages caused by intoxicated driving were dischargeable unless the debtor had been driving in such a reckless manner as to make the conduct willful and thus nondischargeable under section 523(a)(6).
Now the damages caused by a person's intoxicated driving will not be discharged if:
1. The debt arose from a court decree or judgment against the debtor for damages from the debtor's intoxicated driving,
2. The court found the debtor to be legally intoxicated, and
3. The court rendering the judgment was a court in the state where the damage caused by the debtor's intoxicated driving occurred.
A court for the state where the accident or damages occurred must find the debtor legally drunk or under the influence of drugs and order the debtor to pay compensatory damages to the injured parties (fines payable to a state as punishment are already nondischargeable under paragraph 4 above).
"Intoxication" means that at the time of the incident the debtor was operating the vehicle under the influence of alcohol or drugs to such an extent as to be unable to operate it safely. Many states have enacted laws that specifically make it a crime for a person to operate a vehicle with a blood alcohol level above a certain level. California law prohibits a person with a blood alcohol level above .08% from operating a motor vehicle. A person involved in an accident while having a blood alcohol level over the legal level is guilty of driving while intoxicated, and the damages resulting are not dischargeable.
If a debtor files for bankruptcy relief prior to a state court issuing its judgment, the debtor's debts are discharged, but some courts will not discharge drunk driving debts (In re Thomas 51 B.R. 187, 1985). The Ninth Circuit Court of Appeals in its decision In re Hudson 859 F.2d 1418 denied a debtor's discharge for a drunk driving debt stating:
"Since enactment of Section 523(a)(9) bankruptcy courts haveconsistently held and litigants relying on those opinions have assumed that language includes claims against drunk driver bankrupts reduced to judgment after commencement of the case. We are not inclined to disturb the consistent body of law which Congress apparently acquiesces."
A person with drunk driving debts that have not been reduced to a judgment should consult a bankruptcy attorney. It might be possible to avoid payment of the intoxication debts by filing for bankruptcy relief prior to a state court judgment being rendered. This might mean moving to a state whose federal bankruptcy court disagrees with and is not governed by the above Ninth Circuit Court's case.
END OF PREVIEW OF CHAPTER
CHAPTER 3
STEPS IN A BANKRUPTCY ACTION
A Chapter 7 bankruptcy proceeding is methodical, procedural and entirely predictable. The steps begin with finding the correct court and proceed to receipt of the final discharge. Throughout, the case is a logical progression. Once these progressive steps are reviewed, the reader will appreciate the orderly nature of the bankruptcy procedure and be more at ease.
1. SELECTING THE PROPER BANKRUPTCY COURT
Every state has at least one bankruptcy court. Some states are divided into judicial districts, each with its own bankruptcy court. The debtor is required to file the bankruptcy petition with the bankruptcy court in the debtor's home jurisdiction. If there is more than one bankruptcy, the debtor must file with the court in where he has lived the most in the last six months.
Where there is more than one bankruptcy court in a state, the bankruptcy court closest to the debtor's home is probably the one where the debtor should file. The debtor can ask the court and clerk if the debtor's home is covered by that bankruptcy court.
The easiest way to locate the proper bankruptcy court is for the debtor through the phone book. Virtually all phone books list the bankruptcy court which covers the same geographical area of the phone book. A debtor will merely open the phone book for his home
town and find the address and phone number of the nearest federal bankruptcy court, which is usually under a title of "FEDERAL GOVERNMENT". Then a quick call to the court to be sure that the court does, in fact, cover the debtor's home town is all that is necessary to be absolutely certain.
2. GETTING THE RULES AND FORMS
Once the proper court has been determined, the debtor should ask the clerk and:
1. Ask the clerk if upon receiving a check and a large self-addressed envelope he would send the following:
a. Local rules of court,
b. Fee schedule for all court filings, and
c. Copies of all local forms required by the court.
2. Ask the clerk whether the court requires blue backing on the pleading and what must be typed on it. This information is also included in the local rules. Some courts, in order to make the petition more recognizable in a file cabinet, require that the petition be stapled to a stiff blue sheet of paper (obtainable from any office supply or art store) an inch longer than the petition. On the inch that overlaps the court requires that the name of the case be typed. Most courts don't require a backing.
3. Ask the clerk whether the court uses the standard creditor matrix (the form with the many blocks). If not,the debtor will have to request the court's creditor matrix in his letter to the clerk.
The forms contained in this book are current in 1996 and are based on the Official Bankruptcy Forms as prescribed by the Judicial Conference of the United States. These forms will remain valid for upcoming years even if there are changes made to them. Under the Bankruptcy Rules, as long as a form contains the basic information required on the Official Form, it can be used even though it has been superseded by another form. To be certain that the forms will be accepted the clerk can be asked if the court will accept the 1995 revised form (the one in this book). If the answer is "no," you will have to purchase the new official form from the court or a stationary or office supply store for about $20.
The Bankruptcy Code requires that the bankruptcy forms have two pre-punched holes in them before they can be filed. Theforms in this book are not pre-punched but virtaully all libraries have two hole punches that can be borrowed for this task.
Calculate the amount of money this will require and send a check in that amount to the clerk in a self-addressed envelope. All courts are overworked. Do not be surprised if the clerk will not answer your questions (they don't have to do it). The only alternative is to drive to the courthouse and get this information in person. A goodideais to send a check with no amount filledin but instead with a note “Good for up to $250.00". Thereby the clek can fillin the correct amount and there is no fear that the petitionwill be returned for because the check is not enough.
Each court can adopt its own rules of procedure within the confines of the Bankruptcy Code as passed by Congress and the Bankruptcy Rules adopted by the Supreme Court. Anyone filing a bankruptcy petition must comply with all rules and procedures adopted by the court where the petition is filed. The debtor must get a copy of the local rules. The local rules are no more than a statement of the general bankruptcy rules. The advice in this book must comply with the general rules and complies with most local rules.
2. EMERGENCY FILINGS
Occasionally there are circumstances when the debtor does not have the time to complete the full petition before some type of foreclosure by a creditor occurs. Under Bankruptcy Rule 1007 (c), it is possible to file just the petition along with the list of creditors to get the Automatic Stay.
The debtor then has 15 days to file the missing schedules and statements. If the omitted schedules are not filed within the 15 days, the court will dismiss the petition unless the debtor obtains an extension. If the petition is dismissed, the debtor can refile again but will lose the $175 filing fee already paid.
The emergency filing requires the debtor to file at least:
1. The Voluntary Chapter 7 Petition, and
2. The list of all creditors as known by the debtor (the creditor whose collection is forcing the emergency filingmust certainly be listed).
The list of creditors must be put in the form approved by the local rules of court. Not all courts used the creditor matrix (the sheet with blocks for the typed names of creditors). Whatever form to list creditors is used by that court is the form that the debtor must used.
3. THE PREPARATION AND FILING OF THE PETITION
Once all the appropriate forms are obtained, the debtor then determines the size, manner and type of the debts in the estate. To help organize the estate, there is a worksheet following this chapter for the debtor to list the assets and liabilities of the estate.
After completing the worksheet, the debtor will use it to determine which debts are nondischargeable and which debts are dischargeable.
Once the debts have been divided into the various categories, the debtor will then decide which secured debts will be ratified, redeemed or have the lien avoided (see Chapters 9, 10, and 11). Once these decisions are made the debtor is now ready to complete the schedules, the statement of intention and the summary of debts and property.
The remaining acts required prior to filing are completions of the creditor matrix, statements of the debtor engaged or not engaged in business and cover sheets of the petition. When everything is complete, the debtor is ready to file the petition(see Chapter 4).
The filing fee is $175 dollars, which includes a $30 administrative fee that is payable in full at filing. It may seem strange that someone bankrupt must find $175 to seek relief under the bankruptcy code. Bankruptcy Rule 1006(b)(1) permits a debtor to pay the $175 filing fee (but not the $30 administrative fee) in installments over four months if the court approved form Application to Pay Filing Fee in Installments is filed with the petition. No installment plan will be given to a debtor who has previously paid an attorney for consultation or assistance in preparing the bankruptcy petition.
4. MEETING OF CREDITORS
Soon after the petition for bankruptcy is filed with the court, the clerk of the court will schedule a meeting of creditors. The clerk will send notice of the hearing to all of the creditors named in the petition. Even though the court will notify the creditors of the bankruptcy, the debtor should send a letter immediately to the creditors informing them of the bankruptcy petition, the court where it was filed and the case number.
The purpose behind the debtor giving this notice is simply to avoid possible hassles. Once the debtor files the bankruptcy petition there is an Automatic Stay on debt collection and foreclosure proceedings against the debtor. Unless a creditor knows of the bankruptcy, collection proceedings may go forward, and, although they will be subsequently set aside, there's noreason to go through the bother when a quick letter from the debtor early in the case will prevent all this.
Shortly after the petition is filed, the court appoints the trustee to handle the case. The trustee will review the petition and determine what property is available for payment to the creditors. If the case is a no-asset case, the trustee will notify the creditors that they do not have to appear at the creditor meeting because no assets exist to pay them. He will also tell them that another creditor's meeting will be scheduled if assets are subsequently discovered.
If assets are present the trustee will hold the creditor meeting. The trustee will preside over the creditor meeting. The judge will not be there. The trustee and the creditors will question the debtor about the location of the property in the estate and the debtor's intent to ratify, redeem or set aside the lien on secured property.
5. TRUSTEE'S MANAGEMENT OF THE ESTATE
After the creditor's meeting the trustee takes possession of the nonexempt property that will yield proceeds after the property is sold and costs of sale and any liens on the property are deducted. For example, assume that a debtor owned a nonexempt truck that was sold for $2,000. Only $500 was owed on it, and the cost of sale was $200. The trustee has $1,300 left to distribute.
Remaining proceeds are used to pay any cash exemptions permitted to the debtor under the law. The remaining amount isspread among the unsecured creditors of the debtor. The debtor has the right to purchase nonexempt property from the trustee for cash or trade exempt property for it.
6. MOTION TO REDEEM SECURED PROPERTY
Following the meeting of creditors, the debtor may move to purchase at fair market value from a secured creditor exempt property that is collateral for a secured debt. If the creditor agrees to the sale, there is no reason to have a motion for approval filed wit the court. A written agreement between the debtor and creditor is sufficient to bind each.
When creditor and debtor have agreed on a fair market price and installment payments, the debtor must move for a court order requiring the creditor to take the purchase price in installments (See chapter 10). If the entire purchase price cannot be paid within 45 days of the order permitting the redemption the creditor can repossess the property and return the payments made up to that point. Many bankruptcy courts will not force a creditor to take the payments in installments.
7. MOTION TO SET ASIDE A LIEN
The Bankruptcy Code gives the debtor the right to set aside judicial (judgment) liens against exempt property. The procedure for setting aside a judicial lien calls for the debtor to file a motion with the court with notice being given to the creditor possessing the lien.
A judicial lien is a lien placed against exempt property fora monetary judgment resulting from a lawsuit against the debtor. A judicial lien is quite different from a statutory lien created by operation of law. A statutory lien cannot be avoided by a debtor although it might be avoided by the trustee if it does not benefit the debtor. The procedure for avoiding a judicial lien is discussed in chapter 9.
8. CREDITOR'S MOTION TO SET ASIDE THE AUTOMATIC STAY
Once a debtor files for bankruptcy relief there is an automatic stay on all proceedings against the debtor's estate. All lawsuits (including collection and repossession proceedings against the debtor) are automatically stayed for the duration of the bankruptcy case. The automatic stay remains in effect against all of the debtor's creditors although it can be lifted on request by individual creditors under certain circumstances.
To get the automatic stay lifted, the creditor must file a complaint to lift the automatic stay and serve it on the trustee and the debtor. The debtor is not required to file a response to the complaint unless local rules require it. The creditor is compelled to convince the court the automatic stay should be lifted as to that particular creditor. The debtor, whether a response is filed or not, must appear and explain to the court why the stay should not be lifted or else it will be granted.
After hearing both sides, the court will decide whether to lift the stay and permit a creditor to foreclose against secured property or maintain a lawsuit for damages against the debtor.
9. RATIFICATION AGREEMENT AND DISCHARGE HEARING
The debtor has the right to reaffirm debts on nonexempt property to prevent the property being repossessed by the creditors. If the debtor is seeking to reaffirm a debt, the court is required to hold a discharge hearing. The purpose of requiring court approval is to make sure the debtor does not by mistake or fraud reaffirm a debt against his best interest.
No ratification agreement will be valid unless it meets the following requirements:
1. The agreement must have been made prior to the granting of the discharge.
2. The agreement must clearly state that the debtor can rescind it at any time prior to the discharge and for 60 days thereafter.
3. The agreement must have been approved by the court.
The court will approve a ratification agreement if it finds that the ratification will not impose an undue hardship on the debtor or the debtor's dependents and is in the debtor's best interest. The judge will ask sufficient questions to be assured about these requirements.
Once the court is satisfied that the reaffirmation of the debt should occur, it will approve the ratification agreement and issue the final discharge. At this point, unless something happens that requires the case to be reopened (such as newly discovered property, an omitted creditor or a complaint to set aside thedischarge for fraud), the case is closed and the debtor is free to continue his life without fear of the discharged creditors.
If the debtor does not seek to reaffirm a debt, most courts will not hold a discharge hearing. The debtor is mailed an order stating that the final discharge is granted. The case is over.
10. DEBTOR'S REOPENING OF THE ESTATE
The bankruptcy court has full discretion to reopen a case when good cause is shown. Any interested party, creditor, debtor or trustee, may ask the court to reopen the case for cause. There is no definition of cause. It is left to the court to decide when the circumstances of the case are such that the court feels its sense of justice requires the case to be reopened.
There is no express time limitation for making a motion to reopen an estate for cause. The motion must state those facts giving rise for the reopening of the case. The court will hear the arguments, both pro and con, for reopening the case. After the hearing on the motion, the court will render its order. If the motion is granted, the order cannot be attacked in a collateral action. The reopening does not automatically reinstate the trustee. If the reopening of the case is to enter the discharge of an earlier unnamed creditor or to change an exemption, no purpose is gained by appointing a trustee. The judge simply enters the appropriate order and closes the estate again.
Usually, a debtor will seek to reopen a case for one of two reasons. The first is that a creditor has been mistakenly omitted,and it is necessary to have that creditor's debt discharged. The second reason is that the debtor wishes to amend the exemptions in the original petition (usually because of after-acquired property).
Once the court determines that the equities of the case justify reopening, the newly added creditors whose interests are affected are given an opportunity to present their opposition. After presentation of the motion, the court decides whether or not the debtor's requested relief is proper.
It is difficult for a debtor to convince a court to reopen a case. The debtor must do everything possible to assure that all creditors and property are duly listed the first time.
END OF PREVIEW OF CHAPTER
CHAPTER 4
PREPARATION OF THE PETITION
I. INTRODUCTION
A bankruptcy case starts with the filing of the petition seeking bankruptcy relief. The entire petition consists of many schedules, statements and forms that must be filed. Even though some of the forms may not be applicable for a particular petition they must be completed, even if it means writing "N/A," "not applicable" or "none" where appropriate.
An emergency filing can be done through the use of Rule 1007(c). The petition and list of creditors are filed without the accompanying schedules. The schedules must be filed within 15 days or the debtor's bankruptcy petition will be dismissed. The debtor can refile again, but that will mean paying a new filing fee. An emergency filing is only necessary where a creditor is about to sell debtor's property that is security for a debt or has been attached for payment of a court judgment.
Before the forms are prepared the debtor should complete the worksheet contained in this book and read the book, paying particular detail to the discussions on exemptions, nondischargeable debts, lien avoidance, redemption and ratification, pensions and homestead. He can then make the following determinations:
1. What schedule of exemptions will be used.
2. What property will be claimed as exempt.
3. What debts will be discharged.
4. What debts on exempt property will be redeemed.
5. What debts on exempt property will be avoided.
6. What debts on nonexempt property will be ratified.
Once the determinations have been made, the debtor can complete the forms. A bankruptcy proceeding is technical, but there are instances where a judge has discretion. If the proper forms are filed, no one objects and debts are not nondischargeable by law, the court must grant the final discharge. The function of the bankruptcy court is to hold the debtor, not the creditor. By remembering that the purpose of the court is to help a person begin a new life, a debtor should not be apprehensive about the process.
There are no mistakes before the final discharge that cannot be corrected. Nor will the debtor be punished for an innocent mistake. The biggest fear that a person has in a bankruptcy hearing is that some mistake will be made that will irreparably harm the case. Such a mistake cannot happen. The case is always under the management of the trustee and overseen by the court. Any mistakes that a debtor honestly makes can be corrected by filing amendments of the petition with the court before the final discharge. Mistakes uncovered after the final discharge can also be addressed through a motion to the court to reopen the case.
The entire petition consists of the following forms:
1. The Voluntary Petition. This form specifically asks that the court grant the debtor a bankruptcy. It is little more than a cover sheet and the signature page for the petition.
2. The Application to Pay The Filing Fee in Installments. This form can only be used if the debtor has not paid a typing service for typing or an attorney for advice.
3. The Statement of Financial Affairs. This form simply gives the court the debtor's background to better understand the financial situation afflicting the debtor.
4. Schedule A is a list of the debtor's real property and any liens on it.
5. Schedule B is a list of the debtor's personal property and its current market value.
6. Schedule C is a list of the property claimed as exempt by the debtor.
7. Schedule D is a list of the creditors holding secured claims.
8. Schedule E is a list of the creditors holding unsecured priority claims.
9. Schedule F is a list of the creditors holding unsecured nonpriority claims.
10. Schedule G "Executory Contracts and Unexpired Leases." This form is used to report all unexpired leases oneither real or personal property.
11. Schedule H "Co-debtors" is a list of all persons who share liability with the debtor for the debts listed in the schedules.
12. Schedule I is a list of the current income of the debtor.
13. Schedule J is a list of the current expenditures of the debtor.
14. Summary of Schedules is, as the name implies, a summary of the foregoing schedules.
15. The list of creditors. In many bankruptcy courts, the mailing matrix (the sheet of blocks) is used. Some courts use a different form for listing creditors. The debtor must ask the clerk or read the local rules to determine how the list of creditors is handled.
16. Any special local forms. Each court has the authority to create any additional forms it feels help in administering a case. The debtor should consult the local rules or speak with a clerk to determine what special forms are employed by the court.
IMPORTANT NOTE: THE BANKRUPTCY CODE REQUIRES THAT ALL DOCUMENTS TO BE FILED WITH THE COURT MUST HAVE STANDARD DOUBLE HOLES PUNCHED AT THE TOP FOR INSERTION INTO FILES. Documents without the pre-punched holes will no longer be accepted. The forms in this book have not had the double holes pre-punched into thembecause of the practical difficulty in doing so. A double hole punch can be purchased, inexpensively, at any stationary store. Also, most public libraries will have double hole punches and will allow their use for the few pages of forms that must be punched.
When all of the above forms are completed, the petition is ready for filing. The bankruptcy proceeding begins once the petition is filed. The first thing that will happen is the automatic stay immediately starts to protect the estate of the debtor. Next the clerk will schedule the creditor's meeting. After the creditor's meeting the debtor will schedule any motions for lien avoidance or redemptions. If no creditor files an objection to discharge, and if the debtor seeks to reaffirm a debt a final discharge hearing will be scheduled. In the event a debtor does not seek to ratify a debt, a discharge will probably not be held. If after the discharge hearing, or if one is not held, the court grants the discharge (a court can only refuse a discharge based on cause). It will mail the order of final discharge for the dischargeable debts to the debtor within a few days. The whole bankruptcy process usually is completed within 5 months of the filing of the petition.
Several states recognize common law marriages. If a couple lives together as man and wife for a period of time (usually five years) continuously in these states, the couple is legally married. A couple married by common law can file a joint petition. Thejurisdictions permitting common law marriages are:
Alabama Colorado Idaho Kansas Montana Ohio Oklahoma Pennsylvania
Rhode Island South Carolina Texas District of Columbia
If a couple with no formal marriage license or certificate live together in a common law state and wish to file bankruptcy, they should check the law of the state to determine if they are legally married. If so, they can file jointly and usually save money and possibly increase their exemptions.
II. PREPARATION OF THE VOLUNTARY PETITION
The voluntary petition is the easiest form to complete. For each debtor filing for bankruptcy relief, type the following information in the appropriate boxes:
1. Name of the debtor. If married and filing jointly, the names of both spouses are placed in the appropriate boxes.
2. Residence and mailing address of each debtor.
3. Social Security Number of each debtor.
4. The address where most of the property of the estate is located.
The debtors must check the following boxes as appropriate:
1. The type of debtor (whether individual, a married couple filing jointly, a corporation or a partnership). This book is directed toward individuals and married couplespetitioning bankruptcy; so one of those boxes should be checked.
2. The Chapter 7 box should be checked for the type of petition being filed.
3. If the debtor does not have an attorney representing, check the box stating debtor not represented by an attorney. The debtor should type N/A in the box entitled name and address of law firm or attorney.
4. The debtor must check the boxes estimating the amount of money that will remain for division to the creditors. The debtor must also check the appropriate boxes for the estimated value of the estate and the estimated amount of the debts owed (This information is obtained from the Summary Schedule that will be attached to the petition).
5. The debtor must check the venue stating that the debtor has resided in the judicial district of the court for over 90 days. This book is not directed toward petitions by a corporation or a general partner engaged in business; so the second box under the VENUE heading should not be checked.
6. If the debtor has filed a previous bankruptcy petition, even if later dismissed, it must be stated. Otherwise type N/A.
7. If a debtor's spouse or partner has a separate petitionpending, it must be stated. Otherwise type N/A.
8. Each debtor will sign twice. The debtors will each sign as an individual along with any joint debtor also seeking a discharge in this action (usually a spouse). In addition, a debtor with primarily consumer debts (to whom this book is addressed) is required to sign under the statement that the debtor is aware that relief under Chapters 7, 11, 12, and 13 might be available but is choosing to use Chapter 7. Signing here completes the Voluntary Petition.
A completed example for a bankruptcy under the laws of California is set forth for reference. This sample is good for any bankruptcy filing because the same form is used in all bankruptcy courts and the bankruptcy law covers the entire United States.
Sample Chapter 7 Petition
For Reference Consult State and Federal Law For Exemptions Available.
FORMS UNAVAILABLE FOR VIEW
III. STATEMENT OF FINANCIAL AFFAIRS
This form is required to be completed by all debtors. An individual debtor engaged in business as a sole proprietor (the only type of debtor engaged in business that this book addresses) must provide all of the information requested concerning the business as well as that concerning the debtor's personal affairs.
Each question must be answered. If the answer is "none" or the question is not applicable, it must be so stated. The questions are written in such a way that their answers will furnish information. Both the court and trustee will use this furnished information to evaluate the debtor's eligibility to receive a discharge of debts. If more space is needed to answer the questions, continuation sheets may be attached.
Questions 1 through 15 must be answered by all debtors. Questions 16 through 21 are only to be answered by those debtors who have been engaged in business. A debtor is considered to be "engaged in business" if the debtor has been a sole-proprietor or self-employed within the previous two years and thus will have to answer questions 16 through 21.
If the debtor has been an officer, director or managing executive of a corporation or a general partner of a business within the previous 2 years, the debtor must also answer questions 16 through 21. This book was not written for use by such a debtor. This book will not address the problems faced by such a debtor.This type of debtor should consult with a bankruptcy attorney.
QUESTION 1
Question 1 asks how much the debtor has earned from work (either employed or self-employed) within the previous two years. If more space is needed, the debtor can attach additional pages.
QUESTION 2
Question 2 asks what other sources of income other than business income the debtor has received during the previous two years. The income may be interest, dividends, inheritances, devises, etc. The purpose of this question is to make sure the debtor is not concealing assets.
QUESTION 3
Question 3 requires the debtor to identify all payments made to creditors within 90 days of the filing. The purpose for identifying these payments: the trustee may have the right to recover payments from the creditors. These recovered payments can be distributed among the debtor's unsecured creditors. This probably will not result in any more property being kept by the debtor.
QUESTION 4
Question 4 requires the debtor to list all lawsuits, executions and garnishments involving the debtor within the previous year. The reason: the trustee may be able to recover any property paid pursuant to a court order or judgment during theprevious year. This recovery will benefit unsecured creditors and will not result in any more property being kept by the debtor.
QUESTION 5
Question 5 requires all foreclosures, repossessions or voluntary surrenders of property involving the debtor within the previous year be reported. The reason: the trustee may be able to recover the property as an improper preference to creditors. This recovery will benefit unsecured creditors and not result in any more property being kept by the debtor.
QUESTION 6
Question 6 necessitates listing all assignments made to creditors within 120 days preceding the filing and all property that has been held by a custodian, receiver or court appointed officer within one year preceding the filing be reported. The reason: the trustee may be able to recover property as an improper preference to creditors. This recovery will benefit unsecured creditors and not result in any more property being kept by the debtor.
QUESTION 7
Question 7 requires the debtor to list all gifts made prior to the year of filing the bankruptcy petition that had greater value than the $200 per family member and $100 per charitable organization. The purpose: to ensure that the debtor has not dissipated the estate by making gifts to individuals (usuallyfamily members) who may later give it back.
QUESTION 8
Question 8 necessitates the debtor list all losses from theft and casualty within one year from the commencement of the case and after the commencement of the case. This question helps determine if the debtor is squandering the estate's assets or otherwise them by claiming they were stolen.
QUESTION 9
Question 9 relates to payments made for debt counseling including payments made to attorneys within one year of the filing. It might be possible for the trustee to recover such payments as estate assets and to use them to benefit of the unsecured creditors (which these people will become).
QUESTION 10
Question 10 requires the debtor to list any other transfer of property not previously listed, other than transfers in the ordinary course of business or as security within one year of the debtor's filing for bankruptcy relief. It might be possible for the trustee to recover such property to benefit unsecured creditors (which these people will become).
QUESTION 11
Question 11 obliges the debtor to disclose all bank accounts, brokerage accounts, credit union accounts, pension funds, and all other financial accounts. This simply ensures that no assets arehidden or omitted.
QUESTION 12
Question 12 requires listing safe deposit boxes and their contents held within 1 year of the bankruptcy. The purpose: ensure the debtor is not concealing assets.
QUESTION 13
Question 13 requires the debtor to list any setoffs that creditors have applied against debts owed to them. A setoff occurs when a creditor reduces a debt by applying property or money owed to the debt or against it. For example assume that George owes the bank $500, and the bank takes it from his checking account this is what is meant by a setoff. Under the bankruptcy law, setoffs made within 90 days of the debtor filing for bankruptcy relief may be recovered by the trustee. The trustee applies recovered property to pay the debts owed unsecured creditors.
QUESTION 14
Question 14 requires listing property held by another that the debtor owns or controls. The purpose: to prevent a debtor from giving property to another to hold or manage as directed by the debtor (such as a revocable trust) to remove it from the bankruptcy estate.
Such property is recovered by the trustee and placed in the bankruptcy estate to the extent it is not exempt.
QUESTION 15
Question 15. The debtor must list his prior addresses for the last two years. The purpose: simply background information for the trustee should he need to investigate the debtor.
QUESTIONS 16 THROUGH 21
Questions 16 through 21 are answered by a self-employed or a sole-proprietor within the previous two years. These answers also must be answered by debtors who have been general partners of a business, officers, directors, managing executives or owners of more than 5% of the securities of a corporation. This book does not address the particulars faced by such sophisticated debtors.
The trustee will use the answers to acquire more information to determine assets of the business that belong in the debtor's estate.
QUESTION 16
Question 16 requires the debtor to state the name, address and description of any business of the debtor as sole-proprietor or self-employed within the two previous years of the bankruptcy filing.
QUESTION 17
Question 17 requires the debtor to list all the bookkeepers and accountants of the business for the six years prior to the filing of the petition. The debtor is required to list anyone who has audited the books of the business within the two years prior to the filing of the petition. The debtor is also required to listevery person and entity to whom a financial statement was given within two years prior to filing for bankruptcy relief.
The debtor requests copies of the audits and financial statements from these named people and entities. The trustee compares the information in the financial statements and audits with the books and records of the business.
QUESTION 18
Question 18 deals with the inventories of the business. The debtor is required to list the dates and values of the last two inventories. The inventory of the business is an asset of the estate of the debtor who is self-employed or a sole-proprietor. The inventory is converted to benefit creditors by the trustee to the extent it is not exempt.
QUESTION 19
Question 19. The debtor must list each partner, officer or director of the business (if it is a corporation). For persons using this book, the answer should be no because no one who is a partner or shareholder of a corporation engaged in business should use this book. As seen by the questions asked so far, it should be clear that such businesses will have far more complicated problems than those of a self-employed person.
QUESTION 20
Question 20 requires the debtor to list each person who withdrew as a partner, officer or director of the business (if itis a corporation) within the year previous to the filing of the petition. For persons using this book, the answer should be "no" because no one who is a partner or shareholder of a corporation engaged in business should use this book. As seen by the questions asked so far, it should be clear that such businesses will have far more complicated problems than those of a self-employed person.
QUESTION 21
Question 21 requires debtor to list every withdrawal or distribution to any partner, officer or director of the business (if it is a corporation) within 1 year of the filing of the debtor's petition for relief. For persons using this book, the answer should be "no" because no one who is a partner or shareholder of a corporation engaged in business should use this book. As seen by the questions asked so far, it should be clear that such businesses will have far more complicated problems than those of a self-employed person.
A sample completed Statement of Financial Affairs is set forth for reference purposes.
RESERVED FOR EXHIBIT
IV. SCHEDULE A: REAL PROPERTY
Schedule A is simply a list of the real property in which the debtor has an interest. Leasehold interests of the debtor are not to be listed on this form. Leasehold interests are listed on Schedule G, Schedule of Executory Contracts and Unexpired Leases. The trustee will request the debtor furnish him copies of the deeds and other instruments that are necessary for the administration of the estate.
A description of the debtor's interest in the property is included in this form. Life estates as well as easements and covenants concerning land owned by another are listed. Real property in which the debtor has an interest are to be listed, showing the percentage of ownership. Another column is for use when a married couple files jointly; it offers space to show the owner of the property. If the property is owned by the husband a H is placed in the column, if it is owned by the wife a W is placed, if it is owned jointly a J is placed, or if owned as community property a C is placed in the column.
The debtor is also required to list the current fair market value of the property in one column and to list the value of any secured claim (loan, judgment lien or statutory lien) on the property in the last column. As an example, a completed Schedule A is set forth. All bankruptcy courts will use this form, and it will be completed in the same general manner as the example herewith.
V. SCHEDULE B: PERSONAL PROPERTY
Schedule B is used to report all of the debtor's interest in personal property leases and executory contracts that are listed in Schedule G, Schedule of Executory Contracts and Unexpired Leases. The trustee will request the debtor furnish copies of the deeds and other instruments that are necessary for the administration of the estate.
This form requires a description and location in the first column of the debtor's interest in the personal property. Another column is for a married couple file jointly so that the owner of the property will be listed. If the property is owned by the husband an H is placed in the column across from the property, if it is owned by the wife a W is placed, if it is owned jointly a J is placed, or if owned as community property a C is placed in the column.
The debtor is also required to list the current fair market value of the property in the last column. The debtor is not permitted to reduce the fair market value of the property by any lien on it.
A completed Schedule B is set forth as an example. All bankruptcy courts will use this form, and it will be completed in the same general manner as the example.
RESERVED FOR EXHIBIT
VI. SCHEDULE C: PROPERTY CLAIMED AS EXEMPT
The debtor is required to list that property the debtor claims as exempt under whatever set of exemptions the debtor uses. If the debtor uses the federal set, box 11, U.S.C. section 522(b)(1), should be checked. If state exemptions and federal nonbankruptcy exemptions are used, box 11, U.S.C. section 522 (b)(2), is checked.
The debtor should carefully read Chapter 7 before electing a set of exemptions. The debtor should calculate when an election is possible and which set is more beneficial and use that set. It might even be wise for a debtor to delay filing, move to another state, reside there three months, and use either that state's exemptions or the federal exemptions.
This form is easy to use. The debtor describes the property in the first column. In the second column is code section or case law justifying the exemption. In column 3 is placed the value of the exemption. In column 4 is placed the fair market value of the property. If the value in column 4 is higher than in column 3, the debtor may have to pay the difference to the trustee in order to keep the property. Otherwise, the trustee might sell the property. Proceeds equal to the value of the exemption will be given to the debtor and the remainder kept for payment to unsecured creditors.
A sample Schedule C is completed for reference.
RESERVED FOR EXHIBIT
VII. SCHEDULE D: CREDITORS HOLDING SECURED CLAIMS
Since a debtor files for bankruptcy relief to have debts discharged, it is important that the creditors be listed along with the extent of their claims.
This form requires the debtor to list all creditors holding any type of secured claim against the debtor's property. A secured claim includes the following: consumer loans, credit loans, judgment liens, statutory liens, mortgages, deeds of trust and other security interests. If additional sheets are necessary, continuation sheets may be attached.
In the first column is placed the creditor's name and address along with the account number.
In the second column, if there is a co-debtor (such as a co-signer on a loan or a co-defendant on a court judgment), place an X across from the debt. If a spouse is also liable for the debt but is not filing jointly, place the X there as well. For all co-debtors (other than a spouse filing jointly), the debtor must also complete Schedule H Co-debtors.
The third column is for use by a married couple. The debtor is to place an H if the debt is the husband's, a W if the debt is the wife's, J if held jointly or C if the debt is community property.
Unless the debtor agrees with the amount of the debt, the debtor is required to mark the debt as contingent, unliquidated or disputed as the case may be. A contingent debt is one that mightoccur if something happens. Example: Debtor had an auto accident, and the other party has filed a complaint. If Debtor loses the lawsuit, he could owe $50,000. The $50,000. is a contingent debt.
An unliquidated debt is one where the amount has not yet been calculated. The debtor knows that the creditor will be owed an amount of money but not how much. Example: Damages caused by an auto accident that have not yet been determined.
A disputed claim is one that either the liability or the amount is disputed. Example: In a lawsuit for an auto accident each party claims the other caused the accident. The amount of the debt and its validity are being disputed.
The amount of the debt is placed in the next to the last column. The value of the collateral does not affect the amount of the debt figure that is entered. In the last column place the amount of the claim that would be unsecured. If the value of the property is less than what is owed the balance is unsecured and placed in the last column.
A sample Schedule D is set forth for reference purposes.
VIII. SCHEDULE E: CREDITOR HOLDING UNSECURED PRIORITY CLAIM
An unsecured creditor is a person who is owed money but has no interest in any collateral to secure payment.
There are a few types of unsecured claims that are entitled to be paid before the other nonpriority unsecured claims.
These types of claims having priority are:
1. Claims deriving from extension of credit to a business in an involuntary case under 11 U.S.C. section 507(a)(2). This priority would not normally be of interest to anyone using this book. This book is not intended for use by someone who has a business in involuntary bankruptcy, but any credit obtained prior to appointment of the trustee is entitled to priority.
2. Wages, salaries and commissions owed to employees are entitled to priority equal to $2,000 per person earned within 90 days of the filing. Failure to pay wages may be a crime under state law that makes the debt nondischargeable.
3. Contributions owed to employee benefit plans are also entitled to priority.
4. Taxes and other debts owed to first the federal government and, second the state.
5. Debts owed to farmers for grain or for a grain storage operator are entitled to priority equal to $2,000 under 11 U.S.C. Section 507(a)(5).
6. Debts owed to fishermen for their fish equal to $2,000 are entitled to priority under 11 U.S.C. Section 507(a)(5)
7. Deposits up to $900 for the purchase, rental or lease of property that was not delivered or for personal servicesthat were not furnished prior to the debtor filing for bankruptcy relief under 11 U.S.C. Section 507(a)(6).
Listing these debts does not help the debtor; it merely helps the trustee disseminate estate assets to the correct recipients in the correct amounts.
The form is easy to understand and follow. In the first column is placed the creditor's name and mailing address.
In the second column, if there is a co-debtor such as a co-borrower on a loan or a co-defendant on a court judgment, place an X across from the debt. If a spouse is also liable for the debt but is not filing jointly place the X there as well. For all co-debtors (other than a spouse filing jointly), the debtor must also complete Schedule H-Co-debtors.
The third column is for use by a married couple. The debtor is to place an H if the debt is the husband's, a W if the debt is the wife's, J if held jointly or C if the debt is community property.
The debtor must file the date the claim was incurred in column 4 and what the consideration was.
Unless the debtor agrees with the amount of the debt, the debtor is required to mark the debt as contingent, unliquidated or disputed. A contingent debt is one that might occur if something happens. Example: Debtor is a defendant in a current lawsuit. The damages figure is established or approximated, but no decision of liability has been rendered.
An unliquidated debt is one where the amount has not yet beencalculated. The debtor knows that the creditor will be owed an amount of money but not how much at this time. Example: Damages caused by an auto accident that have not yet been calculated.
A disputed claim is one that either liability or amount is disputed Example: In a lawsuit for an auto accident, each party may claim the other caused the accident. Both the amount of the debt and its validity are being disputed by the debtor.
The amount of the debt is placed in the next to the last column. No deduction is made against the amount of the debt for the value of the collateral.
In the last column is placed the amount of the claim entitled to priority. If not all of the claim is entitled for priority, only that portion permitted for priority is placed here. Example: A debtor owes a person $3,000 in back wages. The total of the $3,000 claim is placed in the next to the last column. Since only $2,000 is entitled to priority, only that amount will be placed in the last column. The trustee will pay the $2,000 first as a priority unsecured claim and treat the remaining $1,000 as an unsecured claim without priority.
A sample Schedule E is set forth for reference purposes.
RESERVED FOR EXHIBIT
IX. SCHEDULE F: CREDITORS HOLDING UNSECURED
NONPRIORITY CLAIMS
An unsecured creditor is a person who owed money but has no interest in collateral to secure the payment.
On Schedule F are listed all unsecured creditors that have no portion of their claims entitled to priority.
As with Schedule E, listing these debts does not help the debtor. It assists the trustee in his dissemination of estate assets correctly in the proper amounts to the correct recipients.
The form is easy to understand and follow. In the first column place the creditor's name and mailing address.
In the second column, if there is a co-debtor (such as a co-borrower on a loan or a co-defendant on a court judgment), place an X across from the debt. If a spouse is also liable for the debt but is not filing jointly place the X there as well. For all co-debtors (other than a spouse filing jointly), the debtor must also complete Schedule H, Co-debtors.
The third column is for use by a married couple. The debtor is to place an H if the debt is the husband's, a W if the debt is the wife's, J if held jointly or C if the debt is community property.
The debtor must file when the claim was incurred in column 4 and what the consideration was for it.
Unless the debtor agrees with the amount of the debt, the debtor is required to mark the debt as contingent, unliquidated ordisputed. A contingent debt is one that might occur if something happens. Example: Debtor is defendant in a current lawsuit. The damages figure is established or approximated, but no decision has been rendered on liability.
An unliquidated debt is one where the amount has not yet been calculated. The debtor knows that the creditor will be owed an amount of money but not how much at this time. Example: Damages caused by an auto accident that have not yet been calculated.
A disputed claim is one that either liability or amount is disputed. Example: In a lawsuit for an auto accident, each party may claim the other caused the accident. Both the amount of the debt and its validity are in dispute.
The amount of the debt is placed in the next to the last column. For example, assume that George lost Bill's outboard motor while fishing; George owes Bill $500. Bill has no security for payment of the $500; he is an unsecured creditor. Since the debt is not one entitled to priority, Bill's claim is placed in Schedule F.
A sample Schedule F is set forth for reference purposes.
RESERVED FOR EXHIBIT
X. SCHEDULE G: EXECUTORY CONTRACTS AND UNEXPIRED LEASES
On Schedule G is listed every executory contract still involving the debtor. An executory contract is a contract still in effect that has not been fully performed.
The most common executory contracts are:
1. Leases for real or personal property.
2. Service contracts.
3. Sale contracts for real or personal property.
4. Franchises or licensing agreements.
5. Business contracts.
This is an information return for use by the trustee. The important information concerning property or debts of the estate is detailed in the other schedules. The main purpose of the form: to apprise the trustee of what the debtor owes to others what each owes to him.
The form is easy to complete. A description of the contract, respective rights of the parties, debts owed and addresses of the parties are listed. The debtor is required to disclose specific information needed by the trustee in identifying leases that must be assumed within 60 days after the order of relief or be deemed rejected under Section 365(d) of the Bankruptcy Code.
A completed Schedule G is set forth for reference purposes.
RESERVED FOR EXHIBIT
XI. SCHEDULE H: CO-DEBTORS
This is the one of the simplest schedules in the petition. When a person is liable with the debtor for a debt, he is to be listed here. The creditor of the debt is also listed.
If the debtor is married filing separately and there are debts for which the spouse is also liable, the spouse must be listed across from every creditor who is jointly owed the debt.
The complete schedule provides information regarding nondebtor parties, such as guarantors and nondebtor spouses that have an interest as tenants by the entireties.
A completed Schedule H is set forth as a reference sample.
RESERVED FOR EXHIBIT
XII. SCHEDULE I: CURRENT INCOME FOR INDIVIDUAL DEBTORS
The debtor is required to provide information regarding the household's income on Schedule I. This information is used for two purposes:
1. To determine the amount the debtor needs for support. This is important because many exemptions (such as ERISA pensions) are exempt equal only to the amount needed for support.
2. To determine if assets have been concealed. The circumstances involving a debtor who makes $1,000,000 per year and has no assets are suspicious.
This form is to be completed by the debtor. If a married couple is filing a joint petition, both spouses must complete the petition. The spouse first listed in the title of the action is the debtor, and the other debtor is the spouse.
The form has been greatly simplified. The introductory information is basic. An S for single or M for married is placed in the Marital Status box. The debtor's name, age, length of employment and employer's address are completed for each spouse.
If a married couple is filing jointly, both spouses complete the columns. If a married person if filing separately, the column for spouse does not need to be completed; it might be necessary to complete this column if the court makes exemption determinations based on need for support. Most states have laws requiring spousesto support each other. The court may require the information to be provided before it rules on any exemptions that are limited to the debtor's need for support.
If current income is expected to increase or decrease by more than 10% within a year, the debtor is required to attached a written explanation. The court may need this information to determine the debtor's need for support. The calculations of debtor's requirements relative to expected changes are based on this information.
If the debtor receives income from sources not listed on this schedule, those sources are to be listed under the title "Other Monthly Income." If more space is needed to list the other monthly income, the debtor can attach a continuation sheet.
A sample completed Schedule I is set forth for reference.
RESERVED FOR EXHIBIT
XIII. SCHEDULE J: CURRENT EXPENDITURES FOR INDIVIDUAL DEBTORS
The debtor is required to provide information regarding the household's expenses on Schedule J. This schedule contains information regarding the average monthly expenses of the debtor and the debtor's family. If a married couple is filing jointly but maintain separate households, each spouse must prepare a separate Schedule J.
The list of expenditures includes everything from alimony payments to tax payments. If there are some expenses not specifically listed, the debtor can list those expenses under the title "Other." If more space is needed, the debtor can attach a continuation sheet.
This form provides information the court needs to determine the level of support needed by the debtor. This determination is very important. Some exemptions are limited to the value needed for support. If the debtor does not need the property covered by such an exemption for support, the debtor will not get the property. The only way a court can determine if an exemption is needed for support is for the debtor to complete this form. All expenses should be listed by the debtor.
A sample Schedule J is completed for reference.
RESERVED FOR EXHIBIT
XIV. SUMMARY OF SCHEDULES
There is a column of schedules entitled "Name of Schedule." Each schedule is listed in the column. The attorney next column is entitled "Attached." The attorney debtor is required to state whether the schedule is attached or not. The third column requires the debtor to list the number of sheets in the schedule. Usually, there is only one sheet per schedule, but if continuation sheets are attached, the number will change. The next 3 columns are entitled as follows: "Assets," "Liabilities" and "Other" respectively. The totals from each column are placed in the appropriate boxes. To make it less confusing, where no information is to be entered, the box is blackened.
This schedule will be the one most used in the bankruptcy. Most amendments to the petition will result in this schedule also being amended.
A sample schedule is completed for reference.exhibit
XV. STATEMENT OF INTENTION
The Statement of Intention is important. Before completing this schedule, the debtor should read Chapters 9, 10 and 11.
The bankruptcy law requires that all property secured for payment of a debt that the debtor does not wish to keep must be surrendered. When property is surrendered, it is given to the creditor having creditor's interest for disposition. All secured property to be surrendered is listed on the statement of intention along with the creditor's name.
Under the bankruptcy laws, the only secured properties that a debtor can keep are:
1. Exempt property on which the lien has been avoided under 11 U.S.C. Section 522(f).
2. Exempt property that is redeemed by the payment of its fair market value under 11 U.S.C. section 722.
3. Nonexempt property on which the debtor ratifies the debt under 11 U.S.C. Section 524(c).
Under 11 U.S.C. Section 521(B), the debtor is required to complete the stated intentions within 45 days. This does not apply to debt ratifications that must be approved by the court at the final discharge hearing. If a creditor objects to lien avoidance or redemptions on the property, the debtor must file a motion with the court to compel creditor acceptance within that period of time.
In a joint case this form can be used if all of the debts arejointly held. Where the spouses have separate debts in a joint case, each spouse must file a separate schedule.
These schedules must be served on the trustee and all of the creditors under Rule 1007 (b)(2). The debtor should mail a copy of the schedule to each creditor listed in the schedule plus a copy of a completed proof of service (see Chapter 9 for form of proof of service). The original copy of the proof of service should be kept to prove that it was sent to the creditors in the event that they claim they did not receive it.
A sample Statement of Intention is completed for reference.
RESERVED FOR EXHIBIT
XVI. CREDITOR'S MATRIX
Many bankruptcy courts requires that the debtor list the creditors through the use of a mailing matrix. This matrix is a page that is divided into 30 blocks. The debtor is required to type the name and address of one creditor in each box. If there are more than 30 creditors, additional pages can be attached.
Some courts will have their own forms for listing creditors and for other special requirements. The debtor can determine through the clerk of the court or through the local rules of court if the enclosed mailing matrix will be accepted or if a special local form must be used. If a local form is required the debtor must get it from the clerk.
If the mailing matrix can be used, the debtor types the debtor's name, address and phone number in the top left hand corner. The debtor will list the creditors in alphabetical order, unless local rules require another method.
Particular care must be taken to assure that all creditors are listed. The debt of any creditor not listed will not be discharged. To get such a debt discharged later is a great deal of work that would require either filing an amendment and holding a new creditors' meeting or reopening the estate.
Following below, for reference only, are the local rules of the Bankruptcy Court for the Northern District of California that relate to the Creditor's Matrix. Each Bankruptcy Court promulgatesits own local rules so it is necessary to get from the court or from a law library the local rules for that Court. Examples of the two types of matrixes follow. In case of an emergency filing, a debtor might fill out both types of matrix and leave it to the clerk to select the appropriate one for filing with the court.block matrix sample
END OF PREVIEW OF CHAPTER
CHAPTER 5
THE EFFECTS OF BANKRUPTCY UPON THE DEBTOR'S HOME
I. INTRODUCTION
One of the prime concerns in any bankruptcy is the effect that it will have on the debtor's home. Will the home be lost? Will the debtor lose all of the equity in the home? Is the debt on the home loan dischargeable? What happens to judgment liens from lawsuits on the property? All of the above are questions that immediately leap into the mind of anyone considering bankruptcy.
There are additional considerations that are also present. The first is that a bankruptcy will not stop a foreclosure from occurring if the payments are not made. While a bankruptcy filing will delay the foreclosure for a few months, it will not bar it completely. To do so would result in simply giving the property debt-free to the debtor. This is just not done for secured real property. In place of simply giving the home to the debtor, under the federal and most state laws, there are exemptions for the debtor's equity in a home of a fixed amount. This exempted amount of the debtor's equity in the home is called the "Homestead exemption." In most bankruptcies the homestead exemption is the most important exemption in the entire estate. A few states do not permit a homestead exemption but most do. This chapter will deal in detail with it.
Many persons filing for bankruptcy relief are also married. Some states have special laws that exempt property held in joint tenancy or tenants by the entireties with a spouse under certaincircumstances. In these states the debtor's interest in the home, if held in joint tenancy or tenancy by the entireties with a spouse, may be exemptible whether the state has a homestead exemption or not. This chapter covers the laws of those states that permit such exemptions.
This chapter informs the reader on what is to be expected in the event of a foreclosure. The chapter also covers possible alternatives to maximize the debtor's recovery from any foreclosure.
Because of the importance of the homestead exemption and the possible exclusion of tenancy-by-the-entireties property from the debtor's bankruptcy, the debtor should review state law and consult a bankruptcy attorney for possible changes before filing the petition. The bankruptcy law is constantly being amended. New exemptions are added every few years and existing exemption amounts are sometimes increased. It only makes sense to review state law to make sure that the exemption amounts have not been raised. Example: If South Carolina raises it homestead exemption from $5,000 to $50,000 in the future, and the debtor does not know it, the debtor may lose the $45,000. The trustee will not inform the debtor of the exemptions that are available because the trustee wants as much money in the estate as possible to pay creditors. Chapter 7 in this book lists the state exemptions and their appropriate code section numbers. The debtor can simply go to a set of the state codes (sets are present in all law libraries and many public libraries) and study the particular code section for theexemption in question to see if the exemption has been changed. It is unlikely that an exemption will be revoked or reduced in amount. Usually the exemption is increased to the debtor's benefit and new ones might be added. All law libraries have books on bankruptcy such as Cowans Bankruptcy Law and Practice and Collier on Bankruptcy. Law libraries are in law schools, and every state capitol has one plus most county seats and large cities. All are open to the public. The debtor should also consider consulting a bankruptcy attorney. If a foreclosure is being undertaken by a creditor, the debtor must consult an attorney because of the complexity of the law in that area and the procedures that must be followed.
II. HOMESTEAD EXEMPTION ON THE DEBTOR'S HOME
Under both federal and most state laws a debtor is permitted to claim an exemption for his equity in the real or personal property that he uses as a residence. The exemption has a recorded fixed value. Some states also permit spouses who are filing bankruptcy, either separately or individually, to each claim the full amount of the homestead. Most states do not permit this "doubling" of the homestead exemption. The states that are known to permit or deny doubling are listed in Chapter 7. For the other state