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 1

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 2

Bankruptcy is for Creditors Too

• Promotes fairness among creditors • Equal treatment of similarly situated creditors • Discourages race to the court house 3

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 4

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 5

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 6

Illinois exemptions

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

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Illinois Exemptions

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

Exemption issues

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

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 10

Discharge

Fresh 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 11

Discharge

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

Discharge

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

Discharge

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

Discharge

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

Discharge and secured debt

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

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 17

Repeat filings Can file even if no discharge

• Can file even if debtor would not be eligible for discharge – Chapter 13 filed within 4 years of Chapter 7 – Not eligible for discharge but – Can save property • by catching up on mortgage • or by paying secured debt in full 18

Automatic Stay

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

Automatic Stay

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

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. 21

Automatic Stay

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

Automatic Stay

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

Repeat filings

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

Automatic Stay

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

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 26

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 27

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Bankruptcy players

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

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, 30

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 31

Litigation

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

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 33

Important differences, cont.

• Notice required - 7 calendar days, unless – Service by ECF- 3 business days – Personal or fax delivery - 3 business days – Rules require longer period – Emergency - attorney must file Rule 9011 certification, give as much notice as possible 34

Important differences, cont.

• Time to file motion to vacate or for “reconsideration” is only 14 days • Time to appeal is only 14 days • Jury trials rare; – by filing bankruptcy, debtor has waived jury – filing claim waives jury 35

Case analysis

Alternatives; Chapter 7 or 13; cost • Doing “nothing” – “Judgment proof” client; – claiming exemptions, preserving exempt property • Negotiating workouts, refinancing • State court litigation, Fair Debt Collection Practices Act, etc.

• Chapter 7 or Chapter 13 • Costs – filing fee; opportunity cost; reduced access to credit 36

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 37

Secured debts

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

Secured debts

Chapter 7 – other ways to retain property • Other options, not mentioned in Code • Reaffirmation on better terms than original contact? – Will creditor act in its own best interests?

• Making all payments without reaffirmation?

– Can lead to repossession of vehicles even if current 39

Secured debt

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

Secured debt

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

Case analysis

Chapter 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 42

Case analysis

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

Case analysis

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

Case analysis

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

When to File

Reasons to file sooner • Losing or about to lose property – Foreclosure sale – Tax deed – Garnishment/ offset of benefits [

tax intercept

] – Repossession / sale – Eviction – 5/10/14 day notice for rent • Utility shutoff/ restoration • Involuntary transfer <90 days/ 2 yrs / 4 yrs 46

When to file

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

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 48

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 • 14 days to file the rest – (can move for more time) 49

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 7 days before. But Judge has discretion.

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Credit counseling

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

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 52

How to file

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

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 54

How to file

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

How to file

Listing 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

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How to file

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

Pre-bankruptcy planning

When is it proper?

• Preventing or undoing client mistakes – Sanctions for improper actions are harsh • None of the benefits of bankruptcy, all of the burdens • Keep exempt & non exempt assets separate • Exemption planning is allowed (be reasonable) – Defrauding or hindering creditors is not • What are preferences, why does it matter?

• Pay on nondischargeable debts first if possible • Don’t pay federal taxes with a credit card • File required tax returns 58

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 59

Denial of discharge and other 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 60

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 61

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.

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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 63

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 64

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?

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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?

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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 67

Representing creditors

Strategies • If debtor has assets, file a proof of claim – (1) secured (2) priority (3) general unsecured – unpaid wages, child support, alimony are priority debts • Object to incorrect exemptions • Get relief from automatic stay?

– No fee for child support creditor otherwise $150 • Chapter 7 & 13 - excepting debt from discharge – Requires adversary proceeding, $250 fee; • Chapter 13 – objections to plan 68

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) 69

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 70