What You Need to Know About Bankruptcy

• 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

• You may not be able to proceed with the lawsuit • Who owns the lawsuit?

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

Previous bankruptcy means client can’t play the bankruptcy card • Can’t file bankruptcy if you lose this case • Received discharge “recently” – Waiting period may be 2, 4, 6 or 8 years • Was denied bankruptcy discharge and debt is before prior case was filed • Wouldn’t get discharge because of unrelated fraudulent conveyance

Client being sued in someone else’s bankruptcy case

• Your client may have done nothing wrong • Innocent recipient of preferential payments – fraudulent conveyance – actual or constructive • Trustee wants to sell your client’s house • Debtor/trustee wants to evict your client – right to jury trial if not waived. Seventh Amen.

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

• Don’t violate the automatic stay • Make sure client understands the deadlines – to object to exemptions – to object to discharge/ dischargeability – to file proof of claim • CAUTION: filing a claim waives right to jury trial • If you know bankruptcy was filed, you are on notice, even if not officially listed

Beware of the Automatic Stay Automatic nature • Filing petition invokes stay • No court order is necessary • Actions in violation of stay are void, even if no actual notice • Willful violations of stay – Contempt, actual and punitive damages

Automatic Stay

Broad scope • Applies to acts against debtor – Lawsuits – Any other action to collect debts • Applies to acts against property – Acts to recover property for pre-petition debts – Acts to recover property of bankruptcy estate • Co-debtor stay in Chapter 13 cases

Automatic Stay

Notable exceptions • Criminal cases • Child support or alimony (DSO) – Establishing, modifying or collecting • Establishing paternity • Post-petition debts – If collected from debtor

Waiting out the automatic stay

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

Automatic stay Multiple filings by debtor • If 2 nd case within 12 months, stay expires after 30 days, • Even if 30 days have expired, be careful • Stay can be extended – Even if no extension, stay of actions to recover property of the bankruptcy estate may continue

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 – Get judgment so that you can collect from insurance

Relief from automatic stay Procedure • Bankruptcy court has exclusive jurisdiction to grant relief from stay • File motion in bankruptcy court. – $150 filing fee, – No fee for child support creditors – Others may get fee waived by motion • Mandatory electronic case filing

Preventing discharge

• Denial of discharge vs.

• Excluding debt from discharge • Procedure – – Short statute of limitations – Adversary proceeding, $250 filing fee; waivable!?

• Dismissal of case – Can you get case trustee or US trustee to move to dismiss case?

Discharge

When do you need to act? • Some debts are never discharged – Creditor can collect once automatic stay ends, does not need express permission from court • Some debts are discharged unless creditor takes timely action in bankruptcy court

Discharge

Debts that are never discharged • Child support and alimony • Criminal restitution orders • Drunk driving resulting in personal injury

Discharge

Debts that may be discharged • Debts discharged if no timely objection – Property settlements (chapter 13 only) – Fraud – Theft, embezzlement, breach of fiduciary duty – Willful and malicious injury to persons or property (Chapter 7) – Willful or malicious injury resulting in personal injury or death (Chapter 13)

Getting money from bankruptcy case Don’t miss claims bar date • Timely proof of claim required – No fee to file proof of claim – Types (1) secured* (2) priority (3) general unsecured – unpaid wages, child support, alimony have priority • Chapter 7. Usually don’t need to file a proof of claim until notice of potential assets • Chapter 13. – There is always a (short) claims deadline – Objections to plan to try to get more money sooner

What if debtor has property?

• Don’t miss deadline to object to exemptions • Your client may know of property that is left off schedules. Do you tell the trustee?

– Even unlisted property is property of the debtor’s estate • Exempt property is taken out of bankruptcy estate – Debtor loses exemption as against DSO

Tenancy by entireties property

• Principal residence owned in tenancy by the entireties is exempt from unsecured debts owed only by one spouse – Is child support an exception under Illinois law?

• Entireties property can be liquidated to pay child support if parent files bankruptcy

Monitoring a Chapter 13 case

• Debtor’s new post-filing duties gives creditors information and leverage • Debtor must file all tax returns that come due. • Creditors can ask for yearly statements of current income and expenses

Collecting DSOs after Chapter 13

• Chapter 13 debtors must be current in post petition child support to get discharge • If debtor gets Chapter 13 discharge, trustee to notify child support creditor of last known address of debtor

Anticipating a bankruptcy

• Get and record judgments, perfect security interests 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

Your client may file bankruptcy

• Don’t foreclose or limit discharge in possible future case • Plan with possible bankruptcy of your client in mind • Identify timing issues now

Preclusion issues

• Judgment res judicata as to amount of debt – Client may be filing Chapter 13 • Collateral estoppel as to dischargeability of a debt – Same rules as in state court • Admissions

Help clients avoid mistakes Assets • Don’t lose exemptions – by commingling exempt and non-exempt assets – or spending exempt assets first • Don’t throw good money after bad Don’t cash out exempt assets, such as retirement accounts, when bankruptcy is inevitable • Exemption planning is allowed – Defrauding or hindering creditors is not. Pigs/hogs

Help clients avoid mistakes Debts • Paying dischargeable debts before nondischargeable debts • Actions that create nondischargeable debts – Paying taxes by credit card – Failing to file tax return

Other client mistakes (trying to outsmart the system) • Sanctions are harsh – None of the benefits, all of the burdens • Examples – Giving away property before filing – Selling property cheap to friends/relatives – Not listing, undervaluing, or actually hiding assets – Deliberately omitting creditors • Full disclosure is required

Timing the bankruptcy filing

Advise client that timing may be crucial • Don’t be late. Know the deadlines to stop – forced sale -mortgage, judgment, tax sale, UCC – eviction (leased property, installment purchase, condo, cooperative) • Don’t jump the gun. It may pay to wait – To remove taint of certain bad acts – So some debts are old enough to be discharged – To prevent trustee from pursuing preferences

Credit counseling Requirement strictly enforced • Has to be from approved agency • Within 180 days of filing case • Average fee - $50?

• Provided without regard to ability to pay.

• Can file petition if exigent circumstances & attempted to get counseling at least 5 days before.