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Basic Bankruptcy. Is filing bankruptcy the best solution? If so, Chapter 7 or Chapter 13? When should case be filed? Pre-bankruptcy planning How to file a case. How a bankruptcy affects other cases. Purposes of Bankruptcy Code. Fresh start For the honest but unfortunate debtor

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Basic bankruptcy l.jpg
Basic Bankruptcy

  • Is filing bankruptcy the best solution?

  • If so, Chapter 7 or Chapter 13?

  • When should case be filed?

    • Pre-bankruptcy planning

  • How to file a case.

  • How a bankruptcy affects other cases


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Purposes of Bankruptcy Code

  • Fresh start

    • For the honest but unfortunate debtor

      • Who can’t afford to pay debts – see “means test”

  • Reorganization (Chapters 11, 12, 13)

    • Plan to pay at least some debts

    • Individual debtor retains property

    • Business can continued to operate and save jobs


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Bankruptcy is for Creditors Too

  • Promotes fairness among creditors

  • Equal treatment of similarly situated creditors

  • Discourages race to the court house


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Key concepts

  • Automatic Stay

    • Protects debtor

    • Protects property of the estate

  • Property of the bankruptcy estate

    • Broad definition– all property rights & interests

  • Discharge

    • Injunction against collection of debts

    • Some debts may not be discharged


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Property of the estate

All legal or equitable interests of the debtor

  • Wherever located and by whomever held

  • Whether listed on bankruptcy schedules or not

  • Equitable vs. legal interest

    • If debtor has equitable interest but not legal title, this is property of the estate

  • Exception – does not include defined benefit pensions and spendthrift trusts


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    Exempt property

    • Debtor keeps exempt property

    • Property must be listed and claimed as exempt

    • Illinois has opted out of federal exemptions

    • Debtor can claim

      • Illinois exemptions

      • Non bankruptcy federal exemptions


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    Illinois exemptions735 ILCS 5/12-1001 & 12-1006

    • Necessary clothing

    • Child support reasonably necessary

      • In practice, 100%

    • Retirement plans or accounts – unlimited

    • Social security & public assistance

      • Includes earned income credit

    • Principal residence owned in tenancy by the entireties is exempt from unsecured debts owed only by one spouse

      • Except child support owed to former spouse?


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    Illinois Exemptions735 ILCS 5/12-901 & 5/12-1001

    • Homestead - $15,000 one; $30,000 two or more

    • Wild card any personal property - $4,000

    • One motor vehicle - $2,400

    • Can stack unused wild card onto motor vehicle exemption


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    Exemption issuesLimits on exemptions

    • Will not stop mortgage foreclosure

    • Purchase money security interests

    • Debts for child support or alimony

    • Non purchase money security interests

      • Can avoid liens on household goods, tools of the trade

    • Special rules if lived out-of-state in last 2 years


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    Discharge of debts

    • Purpose – fresh start for debtor

    • Discharge is injunction against collection attempts

      • Remedy for violation is contempt

    • Can only get Chapter 7 discharges once every 8 years; Chapter 13 discussed later

    • Doesn’t cover post-petition debts

    • Must complete debtor education


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    DischargeFresh start

    • Utility service

      • Cannot be denied because of dischargeable debt

      • Must pay deposit but not old bill

      • If stolen service, Chapter 13

    • Drivers license

      • Restored if suspended for nonpayment of tort debt

    • No discrimination by governmental units or employers


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    DischargeExceptions to discharge

    • Some debts are never discharged

      • Creditor can collect once automatic stay ends, does not need express permission from court

    • Debts which are discharged unless creditor takes timely action in bankruptcy court

    • Student loans are only discharged if debtor proves undue hardship in bankruptcy court

      • Alternatives – loan consolidation, deferrals


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    DischargeDebts that are never discharged

    • Child support and alimony

    • Criminal fines and restitution orders

    • Drunk driving resulting in personal injury

    • Trust fund taxes


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    DischargeDebts that may be discharged

    • Income taxes

      ~ > 3 years, 3 months & 15 days old, return filed

    • Debts where creditor fails to timely object

      • Fraud

      • Theft, embezzlement, breach of fiduciary duty

      • Willful and malicious injury


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    DischargeChapter 13 - enhanced discharge

    • Chapter 13 need not pay 100% of unsecured debts

    • Successful Chapter 13 discharges a few debts which would not be discharged in Chapter 7

      • Civil fines

      • Debts incurred to pay taxes

      • Property settlements and division of debts arising out of divorce


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    Discharge and secured debtOnly personal liability is discharged

    • Personal liability on a debt is discharged

      • Non filing co-obligors are still liable

    • But valid liens on property survive

    • Debtor not liable for any deficiency after repossession or foreclosure


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    Serial filings – waiting periods for getting another discharge

    • Filing a Chapter 7 now, must wait

      • 8 years since previous Chapter 7

      • 6 years since previous Chapter 13

        • Previous Chapter 13 with 70-100% payment

    • Filing Chapter 13 now, no discharge if

      • Chapter 7 within 4 years

      • Chapter 13 within 2 years

    • Measured from filing date to filing date


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    Repeat filings dischargeCan file even if no discharge

    • Can file even if debtor would not be eligible for discharge

      • Chapter 13 filed within 4 years of Chapter 7

      • Not eligible for discharge but

      • Can save property

        • by catching up on mortgage

        • or by paying secured debt in full


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    Automatic Stay dischargeAutomatic nature

    • Filing petition invokes stay

      • Exception if this is 3rd case pending during last 12 months

    • No court order is necessary

    • Actions in violation of stay are void


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    Automatic Stay dischargeBroad scope

    • Applies to acts against debtor

      • Lawsuits & other action to collect debts

      • Applies if debt nondischargeable unless DSO

    • Applies to acts against property

      • to recover property for pre-petition debts

      • to recover property of bankruptcy estate


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    Extension of time discharge

    • Trustee has up to 60 days to take action if the time for such action had not expired when the case was filed. 11 USC §108(b)

    • This can be used to get more time to redeem property taxes

    • Debtor may get more time by filing Chapter 13.


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    Automatic Stay dischargeNotable exceptions

    • Criminal and regulatory

    • Domestic relations (almost everything)

      • Establishing paternity

      • Establishing or modifying alimony or support

      • Collecting alimony or child support

        • Stay does apply to division of property

    • Post-petition debts


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    Automatic Stay dischargeRelief from automatic stay

    • Grounds

      • No adequate protection of creditor’s interest

      • Debtor has no equity in property AND not needed for effective reorganization

      • Other “cause”

    • Examples

      • Recover car which is not insured

      • Foreclose when debtor not making payments


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    Repeat filings dischargeLimits on automatic stay

    • If case filed within 1 year after previous case dismissed, stay expires after 30 days

    • Stay can be extended by court.

      • Motion must be filed and granted within 30 days. Must show clear and convincing evidence of changed circumstances. Stay may still apply to property of the estate

    • If 2 dismissals in previous year, no automatic stay

      • Must file motion to impose stay


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    Automatic Stay dischargeExpiration

    • When discharge granted (or denied)

    • When case dismissed or closed


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    Sources of law – jurisdiction, dischargevenue & substance

    • Jurisdiction & venue in Title 28, U.S. Code Judiciary & Judicial Procedure

    • Substance - Bankruptcy Code, Title 11

      • “means test” use IRS collection standards and Census Bureau statistics

    • Property rights based on state law and nonbankruptcy federal law


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    Sources of law - procedure discharge

    • Procedure –

      • Bankruptcy Rules

        • Incorporates some sections of Federal Rules of Civil Procedure

      • Bankruptcy code has some procedural rules

        • Administrative office of US Courts

      • N.D. Illinois local rules & general orders

        • mandatory electronic case filing (ECF)

      • Individual judges standing orders –

        • Web site www.ilnb.uscourts.gov – “judges” tab


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    Bankruptcy players discharge

    • Case Trustee

      • Chapter 7 – panel trustee

      • Chapter 13 – standing trustee

    • United States Trustee

      *************

    • Auditors

    • United States Attorney


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    Bankruptcy events discharge

    • Creditors meeting (341 meeting) – all cases

    • Confirmation hearing – Chapter 13

    • No asset report by trustee - Chapter 7

    • Discharge (no hearing required)

      • Reaffirmation hearing when presumption of undue hardship

    • Closing of case

    • Dismissal of case,


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    Discovery & mandatory disclosures discharge

    • Required documents – tax returns, pay advices, bank statements,

    • Debtor’s duty to cooperate with trustee (or auditor)

      • Failure to cooperate can lead to denial of discharge

    • Discovery – when there is a contested matter or an adversary proceeding

    • Rule 2004 exam. When discovery not available


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    Litigation discharge

    • Contested matters – within bankruptcy case

    • Adversary proceedings – separate case

      • More like normal litigation


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    Practice & procedure dischargeImportant differences

    • Motions must be served on represented debtor in addition to debtor’s attorney

      • Motion filed by debtor’s attorney to withdraw or for approval of fees must be served on debtor

    • US Trustee and/or case trustee must be served


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    Important differences, cont. discharge

    • Notice required - 5 business days, unless

      • Service by ECF- 3 business days

      • Personal delivery - 2 business days

      • Rules require longer period

      • Emergency - attorney must file Rule 9011 certification, give as much notice as possible


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    Important differences, cont. discharge

    • Time to file motion to vacate or for “reconsideration” is only 10 days

    • Time to appeal is only 10 days

    • Jury trials rare;

      • by filing bankruptcy, debtor has waived jury

      • filing claim waives jury


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    Case analysis dischargeAlternatives; Chapter 7 or 13; cost

    • Doing “nothing”

      • “Judgment proof” client;

      • claiming exemptions, preserving exempt property

    • Negotiating workouts, refinancing

    • State court litigation, Fair Debt Collection Practices Act, etc.

    • Chapter 7 or Chapter 13

    • Costs – filing fee; opportunity cost; reduced access to credit


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    Access to credit discharge

    • Bankruptcy stays on credit record for 10 years

    • Effect on credit score

      • Paradoxically, can improve after bankruptcy

      • Usually 2 years before qualified for mortgage

    • Beware of post-discharge vultures

    • Credit during Chapter 13?

      • Requires court authorization


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    Secured debts dischargeChapter 7 – approved ways to retain property

    • Lien avoidance, exempt property

      • Judicial liens that impair exemptions

      • Non purchase money liens on household goods

    • Redemption (redemption lenders for cars)

      • Has to be at retail value, not wholesale

    • Reaffirmation on original terms

      • As if bankruptcy never happened for this debt

    • Must perform choice stated on Form 8 (statement of intentions) within specified time


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    Secured debts dischargeChapter 7 – other ways to retain property

    • Other options, not mentioned in Code

    • Reaffirmation on better terms than original contact?

      • Will creditor act in its own best interests?

    • Making all payments without reaffirmation?

      • Can lead to repossession of vehicles even if current


    Secured debt chapter 13 strategies l.jpg
    Secured debt dischargeChapter 13 strategies

    • “Cram down”

      • If creditor is “under secured”

      • Pay value of collateral, not amount of debt

      • Plus interest – prime rate is starting point

    • Can’t cram down home mortgages

      • Unless creditor takes additional security

    • “Strip off”

      • Wholly unsecured junior lien (e.g. 2nd or 3rd mortgage) can be “stripped off”


    Secured debt chapter 13 strategies limits l.jpg
    Secured debt dischargeChapter 13 strategies – limits

    • Can’t cram down

      • cars bought within 910 days of filing

      • personal property bought w/in 365 days

    • Will have to pay contract amount even though collateral worth much less

      • Can lower interest rate


    Case analysis chapter 7 l.jpg
    Case analysis dischargeChapter 7

    • Liquidation analysis

      • Is there non exempt property?

    • Dischargeability analysis

      • Debts that can never be discharged

      • Debts that could be discharged in Chapter 13

    • Secured debts, leases

      • What property can debtor keep? At what cost?

      • Could debtor keep property in Chapter 13 at less cost?

    • Disposable income analysis


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    Case analysis dischargeChapter 7

    • Disposable income – means test

    • If “current monthly income” > state median, debtor must pass means test or no Chapter 7

      • Based on 6 month average;

      • Even low-income must fill out part of form

    • If “current monthly income” < state median, disposable income should not matter


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    Case analysis dischargeChapter 13

    • Best interests of creditors (cf. liquidation)

    • What debts will be discharged

      • Ch 13 discharges a few more debts than Ch 7

    • Secured debt options

      • Cure, cram down, strip off

    • Best efforts

      • Must pay all disposable income for 3 years


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    Case analysis dischargeChapter 13

    • Debtor may want to file Chapter 13 even if no discharge, to save property

    • Unsecured debt that can be paid 100% even when other debts are paid less

      • Rent arrears if lease being assumed

      • Utility service obtained by fraud or theft (only the nondischargeable portion)

      • Long term debts not in default (student loans)


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    When to File dischargeReasons to file sooner

    • Losing or about to lose property

      • Foreclosure sale

      • Tax deed

      • Garnishment/ offset of benefits [tax intercept]

      • Repossession / sale

      • Eviction – 5/10/14 day notice for rent

    • Utility shutoff/ restoration

    • Involuntary transfer <90 days/ 2 yrs / 4 yrs


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    When to file dischargeReasons to wait

    • Expenses still exceed income

    • No health insurance

    • Recent credit card charges

      • over $500 for luxury goods within 90 days

      • Over $750 for cash advances within70 days

    • Recent voluntary transfers

    • Exemption planning

    • Tax refund

    • Income taxes owed will be dischargeable


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    Who can/should file ? discharge

    • Husband and wife can file joint petition

      • Joint filing fee same as for individual

      • Ch 13 codebtor stay protects non filing spouse

      • If only one files, non filing spouse will still owe joint debt, but can file own case later

    • Heirs

      • Debtor who owns property but didn’t sign mortgage can file Chapter 13 to save property


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    How to file dischargeWhat to file - paperwork

    • Forms require full financial disclosure

    • Credit counseling certificate

    • “Emergency” filing – can be done same day

      • If represented, electronic filing required

    • 15 days to file the rest

      • (can move for more time)


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    Credit counseling discharge

    • Has to be from approved agency

      • Provided without regard to ability to pay.

    • Within 180 days before filing case

      • But not on same day?

    • Limited exception

      • can file petition if exigent circumstances & attempted to get counseling at least 5 days before. But Judge has discretion.


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    Credit counseling dischargeAvoiding Potential problems

    • LAF clients get automatic fee waivers from preferred providers

    • Can get certificate by email

    • Language problems

      • Hearing impaired

      • LEP – not Spanish


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    How to file dischargeFees

    • Filing fee

      • Chapter 13 - $274

      • Chapter 7 - $299

      • Pay in installments – any chapter

    • If can’t pay in installments, waiver of fee?

      • Fee waiver only in Chapter 7 case

      • Income less than 150% of poverty guidelines


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    How to file dischargeThorough investigation

    • Schedules must be complete & accurate

      • Can’t choose who to file bankruptcy against

    • Interviewing client

      • Client pre-conceptions

      • Use your common sense and experience

    • Benefits counseling

    • Reviewing public records

      • Lawsuits, previous filings, property records

    • Credit reports


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    Ethical issues discharge

    • Attorney client privilege is different in bankruptcy

    • LAF etc are not “debt relief agencies”

    • Attorney must certify that debtor has been informed of all options

    • Duty to conduct reasonable inquiry

      • In Chapter 7 only, signature on petition is certification that after “an inquiry” attorney has no knowledge that information in schedules is incorrect


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    How to file dischargeReasonable inquiry

    • Procedures

    • Some things are easily done and should be done in all cases

    • Other steps should be taken if

      • client is not giving you accurate information

      • you haven’t filed many bankruptcies

      • your gut tells you that you should


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    How to file dischargeListing all debts

    Credit reports

    www.annualcreditreport.com

    Lawsuits – Cook County Clerk’s web site

    Liens & judgments

    Cook County Recorder of Deeds

    http://www.ccrd.info/CCRD/il031/index.jsp


    How to file listing all assets l.jpg
    How to file dischargeListing all assets

    • Can’t exempt property unless listed. Trustee owns all unlisted property even after case closed

    • Broad definition of assets

      • Real property – cook county recorder

      • Personal property

        • Cars – secretary of state

        • Lawsuits – client as plaintiff


    Pre bankruptcy planning when is it proper l.jpg
    Pre-bankruptcy planning dischargeWhen is it proper?

    • Preventing or undoing client mistakes

      • Sanctions for improper actions are harsh

        • None of the benefits of bankruptcy, all of the burdens

    • Keep exempt & non exempt assets separate

    • Exemption planning is allowed (be reasonable)

      • Defrauding or hindering creditors is not

    • What are preferences, why does it matter?

    • Pay on nondischargeable debts first if possible

    • Don’t pay federal taxes with a credit card

    • File required tax returns


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    Dismissal of case discharge

    • Dismissal of case

      • Grounds, Ch 7 or 13: failure to file schedules and other required documents; failure to attend creditors meeting; failure to provide required documents to trustee; failure to pay filing fee

    • No absolute right to dismiss Chapter 7 case

      • Problem if trustee trying to sell assets

    • Chapter 13 – if payments not made or plan never approved


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    Denial of discharge and dischargeother sanctions

    • Denial of discharge

      • Sanction for hiding assets, destroying records, and other misconduct in the bankruptcy case

      • Can’t discharge any debts in later Chapter 7

    • Bar to refiling another case

      • 180 day bar if case voluntarily dismissed after creditor files motion to lift automatic stay

      • Court can bar refiling for debtor abuse


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    Safety & privacy issues discharge

    • Domestic violence

      • Bankruptcy filings are public records/ on internet

      • Sealing records/ protective orders – ex parte motion

      • Creditors meetings (§ 341 meetings) open to the public

    • Privacy

      • Protecting sensitive information in tax returns


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    Debtor’s post-filing duties discharge

    • File all tax returns that come due

    • Chapter 13 debtors must file 4 years worth of returns.

    • Chapter 13 debtors must be current in post-petition child support

    • Take debtor education course, or else no discharge.


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    Post-filing financial education discharge

    • In addition to pre-filing credit counseling

    • Case will be closed without discharge if course not completed

      • Costs $260 to reopen case; to avoid this, file motion for more time

    • When?

      • Chapter 7 – 45 days after 341 meeting

      • Chapter 13 – before last plan payment


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    When You Are Not the Attorney Filing the Bankruptcy Case discharge

    • Why you need to know if your client has already filed bankruptcy

    • What should you do if an adverse party

      • Has filed bankruptcy?

      • Is a threat to file bankruptcy?

    • Your client may be filing bankruptcy

      • What you can do to preserve client’s ability to file bankruptcy


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    How a previous bankruptcy may affect current case discharge

    • You may not be able to proceed with the lawsuit

    • Who owns the lawsuit?

    • Can the other side use judicial estoppel against your client?


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    Client is creditor of adverse party who has filed bankruptcy discharge

    • How does the automatic stay affect your case?

    • Can/should you stop adverse party

      • From getting a discharge at all?

      • From discharging your client’s claim?

    • Can your client get any money from the bankruptcy case?


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    Traps for the advocate discharge

    • Don’t violate the automatic stay

    • Make sure client understands deadlines to

      • object to exemptions (341 mtg + 30 days)

      • object to discharge/dischargeability (341 +60)

      • file proof of claim (341 mtg +90)

        • CAUTION: filing a claim waives right to jury trial

    • If you know bankruptcy was filed, you are on notice, even if not officially listed


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    Representing creditors dischargeStrategies

    • If debtor has assets, file a proof of claim

      • (1) secured (2) priority (3) general unsecured

      • unpaid wages, child support, alimony are priority debts

    • Object to incorrect exemptions

    • Get relief from automatic stay?

      • No fee for child support creditor otherwise $150

    • Chapter 7 & 13 - excepting debt from discharge

      • Requires adversary proceeding, $250 fee;

    • Chapter 13 – objections to plan


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    Anticipating a bankruptcy discharge

    • Get and record judgments ASAP

    • Domestic relations negotiations

      • Get alimony and child support, not property settlement or agreement to pay debts

      • Get a property interest now, not an unsecured promise to pay out of a future sale

      • Which marital debts can be discharged by bankruptcy of one or both?

      • Can property awarded in divorce be saved through bankruptcy (probably Chapter 13)


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    Your client may file bankruptcy discharge

    • Resolve lawsuit to preserve dischargeability

      • Collateral estoppel rules –same as in state court

      • Avoid damaging admissions

    • Identify timing issues

    • Avoid loss of exempt property

    • Minimize nondischargeable debt


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