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?
7
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
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Exemption issues
Limits on exemptions
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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
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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
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Discharge
Debts that are never discharged
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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 3rd 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
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Bankruptcy events
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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
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Important differences, cont.
• Notice required - 5 business days, unless
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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.
• 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
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
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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
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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
• 15 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 5 days
before. But Judge has discretion.
50
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
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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
56
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
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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 postpetition child support
• Take debtor education course, or else no
discharge.
62
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
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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?
65
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?
66
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
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