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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
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
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
bankruptcy is for creditors too
Bankruptcy is for Creditors Too
  • Promotes fairness among creditors
  • Equal treatment of similarly situated creditors
  • Discourages race to the court house
key concepts
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
property of the estate
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
exempt property
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
illinois exemptions 735 ilcs 5 12 1001 12 1006
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?
illinois exemptions 735 ilcs 5 12 901 5 12 1001
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
exemption issues limits on exemptions
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
discharge of debts
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
discharge fresh start
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
discharge exceptions to discharge
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
discharge debts that are never discharged
DischargeDebts that are never discharged
  • Child support and alimony
  • Criminal fines and restitution orders
  • Drunk driving resulting in personal injury
  • Trust fund taxes
discharge debts that may be discharged
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
discharge chapter 13 enhanced discharge
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
discharge and secured debt only personal liability is discharged
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
serial filings waiting periods for getting another discharge
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
repeat filings can file even if no discharge
Repeat filingsCan 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
automatic stay automatic nature
Automatic StayAutomatic 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
automatic stay broad scope
Automatic StayBroad 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
extension of time
Extension of time
  • Trustee has up to 60 days to take action if the time for such action had not expired when the case was filed. 11 USC §108(b)
  • This can be used to get more time to redeem property taxes
  • Debtor may get more time by filing Chapter 13.
automatic stay notable exceptions
Automatic StayNotable 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
automatic stay relief from automatic stay
Automatic StayRelief 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
repeat filings limits on automatic stay
Repeat filingsLimits 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
automatic stay expiration
Automatic StayExpiration
  • When discharge granted (or denied)
  • When case dismissed or closed
sources of law jurisdiction venue substance
Sources of law – jurisdiction, venue & substance
  • Jurisdiction & venue in Title 28, U.S. Code Judiciary & Judicial Procedure
  • Substance - Bankruptcy Code, Title 11
    • “means test” use IRS collection standards and Census Bureau statistics
  • Property rights based on state law and nonbankruptcy federal law
sources of law procedure
Sources of law - procedure
  • 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
bankruptcy players
Bankruptcy players
  • Case Trustee
    • Chapter 7 – panel trustee
    • Chapter 13 – standing trustee
  • United States Trustee

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

  • Auditors
  • United States Attorney
bankruptcy events
Bankruptcy events
  • Creditors meeting (341 meeting) – all cases
  • Confirmation hearing – Chapter 13
  • No asset report by trustee - Chapter 7
  • Discharge (no hearing required)
    • Reaffirmation hearing when presumption of undue hardship
  • Closing of case
  • Dismissal of case,
discovery mandatory disclosures
Discovery & mandatory disclosures
  • Required documents – tax returns, pay advices, bank statements,
  • Debtor’s duty to cooperate with trustee (or auditor)
    • Failure to cooperate can lead to denial of discharge
  • Discovery – when there is a contested matter or an adversary proceeding
  • Rule 2004 exam. When discovery not available
litigation
Litigation
  • Contested matters – within bankruptcy case
  • Adversary proceedings – separate case
    • More like normal litigation
practice procedure important differences
Practice & procedure Important differences
  • Motions must be served on represented debtor in addition to debtor’s attorney
    • Motion filed by debtor’s attorney to withdraw or for approval of fees must be served on debtor
  • US Trustee and/or case trustee must be served
important differences cont
Important differences, cont.
  • Notice required - 5 business days, unless
    • Service by ECF- 3 business days
    • Personal delivery - 2 business days
    • Rules require longer period
    • Emergency - attorney must file Rule 9011 certification, give as much notice as possible
important differences cont35
Important differences, cont.
  • Time to file motion to vacate or for “reconsideration” is only 10 days
  • Time to appeal is only 10 days
  • Jury trials rare;
    • by filing bankruptcy, debtor has waived jury
    • filing claim waives jury
case analysis alternatives chapter 7 or 13 cost
Case analysisAlternatives; 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
access to credit
Access to credit
  • Bankruptcy stays on credit record for 10 years
  • Effect on credit score
    • Paradoxically, can improve after bankruptcy
    • Usually 2 years before qualified for mortgage
  • Beware of post-discharge vultures
  • Credit during Chapter 13?
    • Requires court authorization
secured debts chapter 7 approved ways to retain property
Secured debtsChapter 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
secured debts chapter 7 other ways to retain property
Secured debtsChapter 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
Secured debtChapter 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
Secured debtChapter 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
Case analysisChapter 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
case analysis chapter 743
Case analysisChapter 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
case analysis chapter 13
Case analysisChapter 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
case analysis chapter 1345
Case analysisChapter 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)
when to file reasons to file sooner
When to FileReasons 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
when to file reasons to wait
When to fileReasons 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
who can should file
Who can/should file ?
  • 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
how to file what to file paperwork
How to file What to file - paperwork
  • Forms require full financial disclosure
  • Credit counseling certificate
  • “Emergency” filing – can be done same day
    • If represented, electronic filing required
  • 15 days to file the rest
    • (can move for more time)
credit counseling
Credit counseling
  • Has to be from approved agency
    • Provided without regard to ability to pay.
  • Within 180 days before filing case
    • But not on same day?
  • Limited exception
    • can file petition if exigent circumstances & attempted to get counseling at least 5 days before. But Judge has discretion.
credit counseling avoiding potential problems
Credit counselingAvoiding Potential problems
  • LAF clients get automatic fee waivers from preferred providers
  • Can get certificate by email
  • Language problems
    • Hearing impaired
    • LEP – not Spanish
how to file fees
How to file Fees
  • 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
how to file thorough investigation
How to fileThorough 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
ethical issues
Ethical issues
  • Attorney client privilege is different in bankruptcy
  • LAF etc are not “debt relief agencies”
  • Attorney must certify that debtor has been informed of all options
  • Duty to conduct reasonable inquiry
    • In Chapter 7 only, signature on petition is certification that after “an inquiry” attorney has no knowledge that information in schedules is incorrect
how to file reasonable inquiry
How to fileReasonable 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
how to file listing all debts
How to fileListing 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
How to fileListing 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
Pre-bankruptcy planningWhen 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
dismissal of case
Dismissal of case
  • Dismissal of case
    • Grounds, Ch 7 or 13: failure to file schedules and other required documents; failure to attend creditors meeting; failure to provide required documents to trustee; failure to pay filing fee
  • No absolute right to dismiss Chapter 7 case
    • Problem if trustee trying to sell assets
  • Chapter 13 – if payments not made or plan never approved
denial of discharge and other sanctions
Denial of discharge andother 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
safety privacy issues
Safety & privacy issues
  • Domestic violence
    • Bankruptcy filings are public records/ on internet
    • Sealing records/ protective orders – ex parte motion
    • Creditors meetings (§ 341 meetings) open to the public
  • Privacy
    • Protecting sensitive information in tax returns
debtor s post filing duties
Debtor’s post-filing duties
  • File all tax returns that come due
  • Chapter 13 debtors must file 4 years worth of returns.
  • Chapter 13 debtors must be current in post-petition child support
  • Take debtor education course, or else no discharge.
post filing financial education
Post-filing financial education
  • In addition to pre-filing credit counseling
  • Case will be closed without discharge if course not completed
    • Costs $260 to reopen case; to avoid this, file motion for more time
  • When?
    • Chapter 7 – 45 days after 341 meeting
    • Chapter 13 – before last plan payment
when you are not the attorney filing the bankruptcy case
When You Are Not the Attorney Filing the Bankruptcy Case
  • Why you need to know if your client has already filed bankruptcy
  • What should you do if an adverse party
    • Has filed bankruptcy?
    • Is a threat to file bankruptcy?
  • Your client may be filing bankruptcy
    • What you can do to preserve client’s ability to file bankruptcy
how a previous bankruptcy may affect current case
How a previous bankruptcy may affect current case
  • You may not be able to proceed with the lawsuit
  • Who owns the lawsuit?
  • Can the other side use judicial estoppel against your client?
client is creditor of adverse party who has filed bankruptcy
Client is creditor of adverse party who has filed bankruptcy
  • How does the automatic stay affect your case?
  • Can/should you stop adverse party
    • From getting a discharge at all?
    • From discharging your client’s claim?
  • Can your client get any money from the bankruptcy case?
traps for the advocate
Traps for the advocate
  • Don’t violate the automatic stay
  • Make sure client understands deadlines to
    • object to exemptions (341 mtg + 30 days)
    • object to discharge/dischargeability (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
representing creditors strategies
Representing creditorsStrategies
  • 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
anticipating a bankruptcy
Anticipating a bankruptcy
  • Get and record judgments ASAP
  • Domestic relations negotiations
    • Get alimony and child support, not property settlement or agreement to pay debts
    • Get a property interest now, not an unsecured promise to pay out of a future sale
    • Which marital debts can be discharged by bankruptcy of one or both?
    • Can property awarded in divorce be saved through bankruptcy (probably Chapter 13)
your client may file bankruptcy
Your client may file bankruptcy
  • Resolve lawsuit to preserve dischargeability
    • Collateral estoppel rules –same as in state court
    • Avoid damaging admissions
  • Identify timing issues
  • Avoid loss of exempt property
  • Minimize nondischargeable debt