MICHAEL LYNN GABRIEL
ATTORNEY AT LAW
B.S.,J.D., M.S.M., DIP.(TAX). LL.M.(TAX)
TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1. COMMON BANKRUPTCY QUESTIONS . . . . . . . . . . . . . . . . . . . . . . . . . .4
2. WHAT A CHAPTER 7 BANKRUPTCY AND THIS BOOK CAN AND
CANNOT DO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
3. STEPS IN A BANKRUPTCY ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
4. PREPARATION OF THE PETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
5. THE EFFECTS OF BANKRUPTCY UPON THE DEBTOR'S HOME . . 176
6. THE EFFECT OF BANKRUPTCY ON THE DEBTOR'S PENSION . . . 189
7. EXEMPTIONS AVAILABLE TO THE DEBTOR . . . . . . . . . . . . . . . . . . 199
8. THE MEETING OF CREDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .294
9. LIEN AVOIDANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .301
10. REDEMPTION OF SECURED PROPERTY . . . . . . . . . . . . . . . . . . . . . 328
11. REAFFIRMATION OF A DEBT ON SECURED PROPERTY . . . . . . .344
12. AMENDMENT TO THE PETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . .355
13. CREDITOR'S ATTEMPT TO LIFT THE AUTOMATIC STAY . . . . . .363
14. DISCHARGE HEARING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366
15. LIFE AFTER BANKRUPTCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382
CHAPTER 7 BANKRUPTCY
This volume, one of a compendium, is freestanding, dealing with a specific legal discipline "Chapter 7 Bankruptcy." This volume was written, as were the other works, to help the user better understand this area of the law. The concept behind this series was to develop a set of specialized books designed to serve as a practical guide to specific disciplines in the law.
This volume deals with Chapter 7 bankruptcy. It was written to give an attorney or business person all the information needed to begin the bankruptcy process. The book contains the appropriate filing forms for Chapter 7 bankruptcy with detailed instructions and examples for their completion. The law on bankruptcy is covered as it now relates to exemptions and dischargeable debts. Issues that may require consultation with an attorney who specializes in bankruptcy are stated so that the user can verify current law. In many cases this book can be used with no more outside assistance than verification that exemptions have not changed.
This volume explains Chapter 7 bankruptcy procedure and includes sample motions for special relief (such as lien avoidance) redemption, ratification or reopening the estate. After reading this book a few times and following the guidelines contained herein to verify current exemptions under state law, the reader shouldhave no difficulty in applying this book to bankruptcy action.
The book is user-friendly as possible. In addition, the bankruptcy court has as its stated objective the goal of helping debtors begin anew. There are no honest mistakes that are not correctable before the final discharge in the case.
COMMON BANKRUPTCY QUESTIONS
Bankruptcy was once considered a disgrace, a sign of utter failure. A generation ago people committed suicide rather than live with the stigma of a bankruptcy. This stigma regarding bankruptcy no longer exists. Bankruptcy filings have increased astronomically with nearly a million bankruptcies per year being filed.
The bankruptcy law was enacted to give debtors hope that they could start over. When the United States Congress enacted the bankruptcy code it saw how other countries dealt with their insolvent debtors. Both Great Britain and France had debtors' prisons and penal colonies where they jailed people for no other reason than that they could not pay their debts. In one of the great advances for personal dignity, the United States created the bankruptcy code to permit debtors to start over again.
An illustration of how bankruptcy can be a very sad affair. The client was an elderly widower who had retired from the Federal Aviation Administration. His wife of 30 years had died after a long painful struggle with cancer. His wife's medical bills had wiped out their entire life savings. The client even sold their house to pay for his wife's treatment. After his wife's death, the client still owed over $100,000 in debts. Bankruptcy was the only alternative.
This book does not deal with the entire bankruptcy code.Instead, it deals only with Chapter 7 Bankruptcy. This is the most common individual bankruptcy filing and is often called "liquidation." After a Chapter 7 bankruptcy becomes final, the debtor is discharged from the obligation of paying any discharged debts.
This chapter demystifies the bankruptcy process. The question-and- answer format presents most of the general information about a Chapter 7 bankruptcy. This chapter answers common questions asked by everyone considering bankruptcy. The reader should have a better understanding of the bankruptcy process and his rights under the law after reading this chapter.
1. WHAT IS CHAPTER 7 BANKRUPTCY?
Chapter 7 bankruptcy is also called "straight bankruptcy" or "liquidation." It is the simplest and easiest form of bankruptcy proceeding. Bankruptcy per se is a federal statutory proceeding whereby qualified individuals may surrender their nonexempt property for division among their creditors. To the extent that their nonexempt property does not pay their debts the debts are discharged (forgiven).
Chapter 7 bankruptcy takes between 100 and 180 days. The filing fees for a Chapter 7 bankruptcy are about $120. The creditor has to appear only once in court: at the meeting of creditors.
Once a discharge is given by the bankruptcy court, the debtor's dischargeable debts are forgiven. The debtor will still be obligated to pay debts the bankruptcy court determines should not be discharged for equitable reasons or are not dischargeable underfederal law.
2. WHAT IS A BANKRUPTCY TRUSTEE?
The bankruptcy court appoints a person called a "trustee" to handle the normal administration and management affairs of debtor's estate. It is the trustee's responsibility to take possession and control of the bankruptcy estate and to develop a plan whereby creditors are paid from nonexempt property of the debtor to the extent possible. The trustee also has the power to bring and defend lawsuits on behalf of the bankruptcy estate.
The trustee calls and oversees the creditors' meeting where the creditors examine the debtor to discover the location of assets. After the meeting of creditors, the trustee will assemble the assets of the bankruptcy estate and prepare a plan for diving the assets among the creditors.
Once the trustee's plan for division of the bankruptcy estate is approved by the bankruptcy court, it is implemented and a discharge is granted for the debtor's remaining unpaid dischargeable debts. The Chapter 7 bankruptcy is complete when the discharge is granted.
3. WHAT IS CHAPTER 13 BANKRUPTCY?
Chapter 13 is another type of bankruptcy proceeding. Unlike Chapter 7 bankruptcy, a Chapter 13 is not a liquidation of the debtor's property; it is a reorganization of his debts.
In a Chapter 13 bankruptcy, the debtor creates a plan to pay most or all of the debts over a three to five year period. To the extent that dischargeable debts are not to be paid under the plan,the unpaid portion of the debts are forgiven.
There is no time limitation for filing a Chapter 13 petition. It can be filed immediately upon the conclusion of a Chapter 7 proceeding if the debtor wishes. A Chapter 13 plan is not final and can be modified by the court whenever the debtor shows good cause (such as a reduction in earnings). The debtor can convert a Chapter 13 petition to a Chapter 7 liquidation at any time as long as the debtor did not file a previous Chapter 7 petition within the last six years. The debtor may dismiss the Chapter 13 at any time prior to completion of the plan and be treated as though the bankruptcy had never been filed.
4. WHEN MAY A CHAPTER 7 BANKRUPTCY BE FILED?
A Chapter 7 bankruptcy petition cannot be filed if the debtor:
1. Obtained a Chapter 7 discharge within the previous six years, or
2. Began a Chapter 13 proceeding within the previous six years.
The six year period starts to run from the date of filing the earlier bankruptcy petition, not the date that the discharge was granted.
A Chapter 7 petition cannot be filed within 180 days of a dismissal of an earlier Chapter 7 petition that had been dismissed because:
1. The debtor violated a court order;
2. The debtor requested dismissal after a creditor relief from the automatic stay.
There are no such restrictions for filing a Chapter 13 bankruptcy. If a Chapter 7 petition cannot be filed, a debtor can still file a Chapter 13 petition.
5. HOW DOES BANKRUPTCY AFFECT CHILD OR SPOUSE SUPPORT?
Alimony and child support obligations are not dischargeable in bankruptcy. The bankruptcy will not suspend or stop the requirement to make current court ordered payments.
The automatic stay of the bankruptcy proceeding will temporarily halt proceedings to collect back unpaid child or spouse support. The bankruptcy court will usually permit collection to go forward if the spouse or the guardian of the child requests it.
The Bankruptcy Act of 1994 amended Section 362 to provide that efforts to collect spouse or child support payments from property that is not estate property is not subject to the automatic stay. The 1994 Act also prohibited the automatic stay from blocking commencement or continuation of proceedings to enforce alimony and child support during the bankruptcy case.
In a Chapter 13 case property acquired during the life of the Chapter 13 Plan is considered property of the estate. Under the Bankruptcy Act of 1994, child and spouse support claims now have priority over and are to be paid before general unsecured claims and tax claims. In addition, the Bankruptcy Act of 1994 prohibits both trustee and debtor from recovering any property transferred to spouse or a child in connection with a divorce or separation made within one year of the filing of the bankruptcy petition. Before this amendment, the trustee and the debtor were permitted toavoid payments made within a year of the bankruptcy filing as a creditor preference or a payment not supported by reasonable equivalent consideration. Section 522 of the Bankruptcy Code was amended under the 1994 Bankruptcy Act to prohibit a debtor avoiding a judgment lien on otherwise exempt property for child or support payments. Regardless if the debts are collected during the bankruptcy, the child support obligation survives the bankruptcy and the debtor must still pay it in full.
6. WHAT TYPES OF DEBTS ARE NOT DISCHARGEABLE BY LAW?
There are several types of debts that, under the bankruptcy law, cannot be discharged. Most important of the nondischargeable debts are:
1. Recent taxes (within three years). Under section 523(a)(14), debts incurred to pay U.S. taxes are not deductible if the taxes themselves are not deductible.
2. Back child or spousal support.
3. Court-ordered restitution.
4. Recent student loans.
5. Court judgments for damages caused in drunk driving.
The main exceptions to the general dischargeability of debts are discussed in the questions that follow. Some debts which are not dischargeable under Chapter 7 petition (such as court-ordered restitution) are nevertheless dischargeable in a Chapter 13 bankruptcy petition.
7. CAN A BANKRUPTCY COURT REFUSE TO DISCHARGE A
DEBT THAT IS OTHERWISE DISCHARGEABLE?
A bankruptcy judge may refuse to grant a discharge for a debt that is otherwise a dischargeable debt when it determines that:
1. It is a credit debt obtained by filing a false credit application.
2. The debtor committed fraud or misrepresentation to obtain the property or services for which the debt derives.
3. The debt derives from an intentional injury caused to another.
4. Property was obtained by theft, robbery or embezzlement.
5. The debtor obtained property without having any intention to pay for it.
As a rule of thumb, if 50% or more of the person's debts are dischargeable, filing a Chapter 7 bankruptcy is usually more beneficial than not filing.
8. WHAT IS AN UNSECURED DEBT?
In a bankruptcy, debts are divided into secured and unsecured debts. An unsecured debt is a promise or obligation to pay to another a certain amount of money which is unsecured by any collateral. Failure to pay the debt will not entitle the creditor to an immediate right to repossess real or personal property to satisfy the obligation. Most debts are unsecured. Examples of unsecured debts are credit cards, utility bills, medical bills, legal bills, rent.
In a bankruptcy, after all the debts having priority are paid, the unsecured debts are totaled. If the estate is large enough, unsecured debts are paid in full. If there are not enough assets topay the unsecured debts, they are paid in proportion to their percentage of the amount of money available. To the extent that there are not enough assets to pay all of the unsecured debts, the portion not paid is forgiven and discharged. Example: Unsecured debts are $200,000, but there are only enough assets to pay $40,000. Each unsecured creditor will be paid .20› on the dollar.
9. WHAT IS EXEMPT PROPERTY?
Under both state and federal law, a person is entitled to exclude certain property from bankruptcy. The individual may elect to take the federal exemptions or the particular state exemptions.
Both state and federal law have some of the same exemptions; although they vary in amounts. Both systems provide exemptions for:
1. Motor vehicles to a certain value.
2. Reasonable clothing.
3. Reasonable household furnishings and appliances.
4. Personal effects to a certain value.
5. Some public pensions.
6. A certain amount of equity in a home.
7. Tools of a trade or profession to a certain amount.
8. Public benefits such as social security, welfare, or disability payments.
There are additional exemptions under both state and federal law, but these are the common ones. Of the above exemptions, the homeowner's exemption for equity is often the most important. The proceeds from the sale of any exempt property is not attachable by the trustee or creditors to pay debts. An exception exists if theotherwise exempt property is secured as collateral for payment of a debt. The bankruptcy does not affect the rights of the unpaid creditor holding the security interest from repossessing the property after the bankruptcy discharge.
10. WHAT IS NONEXEMPT PROPERTY?
Nonexempt property is property that is not exempt from attachment to pay the debtor's obligations under federal or state law. Examples of nonexempt property in a bankruptcy are:
1. Cash, stocks, bonds and investments over a certain amount.
2. A second motor vehicle.
3. Second home.
4. Family heirlooms over a certain value.
5. Collections such as paintings, coins, stamps and others.
6. Expensive equipment for use in a trade or business.
If most of a debtor's estate consists of nonexempt property. Filing bankruptcy may not be wise: most of the debtor's estate will be taken by the trustee.
11. HOW IS PROPERTY THAT HAS NOT YET BEEN RECEIVED TREATED?
A debtor must to place into the bankruptcy estate any property that the debtor has a right to receive, even property not yet received. Examples of such property are:
1. Unpaid wages.
2. Debts owed to the debtor.
3. A tax refund due to the debtor.
4. Property that the debtor inherited but has not yetreceived.
5. Benefits from a trust established for the debtor.
6. Benefits from an insurance policy.
The trustee succeeds and replaces the debtor as the person entitled to receive the above property. The trustee places such property into the bankrupt estate.
12. IS PROPERTY ACQUIRED AFTER BANKRUPTCY INCLUDED IN THE ESTATE?
The general rule is that property acquired after filing a bankruptcy petition is not included in the bankruptcy estate. There are a few exceptions to this rule for certain property acquired within 180 days after filing bankruptcy. After acquired property subject to inclusion in the bankruptcy estate is:
1. Property inherited within 180 days of the filing regardless of whether or not it is actually distributed.
2. Property from a property settlement in a divorce or legal separation.
3. Death benefits or life insurance proceeds on another.
These properties have to be reported to the trustee even if the bankruptcy itself is over. The trustee may reopen the bankruptcy to distribute the new property.
13. SHOULD A MARRIED COUPLE FILE BANKRUPTCY TOGETHER?
Married couples are not required to file a joint bankruptcy petition. Each spouse may file separately. In addition, one spouse alone may file bankruptcy, and the other spouse may elect not to do so.
If a married couple intends to file bankruptcy, it is more advantageous for them to file a joint petition. The decision of the spouses as to how to file may be governed by the state in which they reside. The effect of state law on the classification of property (as either community or separate property) may make the filing of both spouses in bankruptcy necessary to protect their rights.
14. HOW IS COMMUNITY PROPERTY TREATED IN A BANKRUPTCY?
In a community property state, all community property is included in a debtor's estate; whether or not the debtor's spouse files a bankruptcy. Bankruptcy law states that all community property (not just the debtor's half interest) is included in the estate if the debtor's creditors can attach it under state law absent the bankruptcy.
For example, assume that a husband and wife own a piece of real property as community property. Under state law both spouses have equal management and control over the property as joint owners. When the husband files bankruptcy, the trustee will take all of the property and sell it to satisfy the husband's creditors even though the wife never filed. In a community property state, when one spouse files the other spouse usually files to protect their joint interest in the community property.
15. HOW IS SEPARATE PROPERTY TREATED IN A BANKRUPTCY?
The separate property of the nonfiling spouse cannot be attached to pay the debts of the spouse filing bankruptcy. Separate property in a community property state is property acquired by aspouse prior to a marriage or after marriage by gift, devise or bequest; but not property acquired through work.
Any state that is not a community property state is a separate property state. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. The drawback to community property: the community property interest of the married, non-filing spouse can be attached, in the other spouse's bankruptcy.
In a separate property state, the estate of a married debtor in bankruptcy consists of the debtor's separate property and only one-half of the jointly owned property. The separate property of the nonfiling spouse is not included in the filing spouse's bankruptcy estate.
16. HOW ARE EXEMPTIONS DETERMINED?
Exempt property is property that the debtor can keep regardless of the bankruptcy. Each state has its own set of laws that list what property is exempt in bankruptcy.
There is a federal set of exemptions that debtor may use in the following states and the District of Columbia: Connecticut, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Pennsylvania, Rhode Island, Texas, Washington, Wisconsin and Vermont. The debtor cannot use the federal exemptions in addition to the state exemptions and cannot mix or match them. The election is for one set of exemptions or the other.
In the states not listed above, debtors can only use their state's exemptions. Federal exemptions are not available.
17. WHAT IS THE GENERAL EXEMPTION?
Most states provide a general exemption that a debtor can apply toward any type of property or split among properties. In the following states the general exemption is: California $400, Georgia $400, Kentucky $1,000, Maine $400, Maryland $2,500, Missouri $1,250, Ohio $400, Pennsylvania $300, Vermont $400, West Virginia $400.
Other states also have general exemptions but restrict their application to personal property, not real property. A federal general exemption also exists for $400.
18. HOW IS TENANCY-BY-THE-ENTIRETIES HANDLED IN BANKRUPTCY?
Tenancy-by-the-entireties is a special form of ownership of property between married persons where the surviving spouse receives all of the property under a right of survivorship.
Sixteen states treat tenancy-by-the-entireties property in a different fashion from either separate property or joint property. These states will exempt all tenancy-by-the-entireties property from inclusion in a debtor's bankruptcy estate if:
1. Only one spouse files bankruptcy, and
2. The debts discharged were those owed solely by the filing spouse.
If a debtor tries to discharge joint debts in the bankruptcy, the tenancy-by-the-entireties exemption is lost.
19. CAN DEBTS BE PAID BEFORE FILING BANKRUPTCY?
Under the bankruptcy law, payments made within 90 days of filing a bankruptcy petition are considered preferential paymentsto creditors, and the trustee can set aside the payments and require that the creditor return the payments to the bankruptcy estate.
Payments on debts owed to a debtor's relative, friend or a company in which the debtor is an officer may be recovered by the trustee if the payments were made within one year of filing for bankruptcy protection.
Payments of debts that are secured by exempt property can be a good planning tool. Paying debts on exempt property with moneys that would be lost otherwise in the bankruptcy can assure that the debtor will receive the exempt property.
20. CAN NONEXEMPT PROPERTY BE CHANGED INTO EXEMPT
PROPERTY PRIOR TO FILING BANKRUPTCY?
It is possible for a debtor to sell nonexempt property prior to filing bankruptcy and purchase property with the proceeds that will be exempt upon the filing.
Whether or not the bankruptcy court will exempt the newly purchased property depends on:
1. The debtor's motive. If the motive is to acquire assets to start over and be able to earn a living, the court will usually approve the change. Example: Debtor sells a boat to buy equipment to earn a living. On the other hand, sale of nonexempt property for extravagant or needless purchases might be set aside even though the purchased property might be exempt under the law. Example: Debtor sells a boat to buy exempt jewelry.
2. The amount of nonexempt property converted into exempt property. If the debtor converts a large amount of nonexempt property into exempt property, leaving the unsecured creditors largely unpaid, the court might refuse to exempt the newly acquired property.
If the purpose and effect of the conversion violates the intent of the bankruptcy act to provide the debtor a reasonable opportunity to start over again, exemption of the converted property will be set aside.
21. WHERE IS THE BANKRUPTCY PETITION FILED?
Every state has at least one bankruptcy court to handle bankruptcy filings for the state. Larger states are divided into judicial districts with each district having its own bankruptcy court. In California, for example, there are 4 district bankruptcy courts: Northern, Southern, Eastern and Central Districts.
A debtor is required to file the bankruptcy petition in the bankruptcy court that covers the debtor's district. The address of the court can usually be found in the phone book under Federal Government.
The forms used in the bankruptcy court are provided by the clerk of the bankruptcy court and some stationary stores. Only approved bankruptcy court forms may be used. Every few years, the bankruptcy forms are updated which makes earlier forms obsolete.
22. WHAT IS A NO-ASSET BANKRUPTCY?
Most people do not have enough nonexempt property that can be sold to raise cash to pay creditors. A bankruptcy estate in thiscondition is said to be a "no-asset case." A bankruptcy that has enough nonexempt assets that can be sold to produce cash for payment of creditors is called an "asset case."
The trustee notifies the debtor's creditors whether the case is an asset or no-asset case, and whether or not they should file claims. In no- asset cases, the creditors do not have to file claims because there are no assets to distribute to the creditors. If assets are later discovered, the trustee will notify the creditors to file their claims at that time. After determining if the case is an asset or no-asset case, the trustee sets the date for the first meeting of creditors.
23. WHAT IS THE AUTOMATIC STAY?
Once a debtor files for bankruptcy relief, all lawsuits and legal actions against the debtor, both public and private and including foreclosures on real property, immediately stop. No state court can thereafter issue a valid civil judgment against a debtor during the pendency of the bankruptcy proceeding without first obtaining the trustee's or bankruptcy court's permission.
Harassment of a debtor by a creditor regarding collection of a debt listed in the bankruptcy is against the law. Anyone harassing a debtor over a debt covered in the bankruptcy petition may be found in contempt of federal court.
24. MAY A CREDITOR ASK THE COURT TO LIFT THE AUTOMATIC STAY?
The automatic stay lasts throughout the term of the bankruptcy unless the bankruptcy court lifts it at the request of a creditor. The stay must be lifted in order for a creditor to proceed with aforeclosure on any of the debtor's property or to resume any state judicial proceeding (lawsuit) against the debtor. In order to lift a stay, a creditor must file a motion with the bankruptcy court. The motion must state the reasons behind the request to lift the stay, and a hearing on the merits is held by the court. If the automatic stay is lifted, state court actions once stayed will continue from the point where they had been stopped. Once the stay is lifted, state actions are treated as though the bankruptcy had not been filed.
25. WHAT ARE THE GROUNDS FOR LIFTING AN AUTOMATIC STAY?
The automatic stay is the prime tool in a bankruptcy. Without the automatic stay, a debtor's assets might not be kept together long enough for the trustee to accomplish the purposes of the bankruptcy. The bankruptcy court views very carefully all motions to lift the automatic stay. The main reasons a court will lift the automatic stay are:
1. The issue to be tried does not affect the debtor's property, such as child custody.
2. The action stayed will ultimately occur anyway because the bankruptcy will not help the debtor on that matter. The most common stay involves the foreclosure on real property. If there is no way that the debt against the property can ever be repaid, the court is likely to lift the stay. This allows the creditor to acquire the property and reduce his related losses.
3. The creditor has a security interest in property that isbeing harmed by the stay. For example, in the real estate rental situation, payments are not being made on rental equipment.
4. The debtor really does not have an ownership interest in the property. If the debtor owes more on property than it is worth, the court may lift the stay because there is no point in protecting the property. Once the court lifts the stay, the creditor can pursue state remedies against the debtor. The creditor must be aware, however, that any monetary judgment will be treated as an asset of the estate; and the creditor's claim becomes an unsecured debt against the estate.
26. HOW CAN A REQUEST TO LIFT AN AUTOMATIC STAY BE OPPOSED?
The bankruptcy court will not lift an automatic stay if the debtor proves that the stay is needed to preserve the debtor's general economic conditions. If lifting the stay will harm the debtor more than it would if the stay remained to the end of the bankruptcy, the court will usually refuse to lift it.
The most common arguments against lifting an automatic stay on property for a secured creditor are:
1. The fair market value of the property is greater than the amount owed. Thus the creditor is ultimately assured of being paid, whether or not the stay is lifted.
2. The debtor is willing to post a bond or cash security to offset any diminution of value in the property.
The creditor has the burden to prove to the bankruptcy court thatlifting the stay will not impede or hinder the goal of the bankruptcy code of permitting the debtor to start over again.
27. CAN A BANKRUPTCY FILING STOP AN EVICTION?
A bankruptcy filing will temporarily stop the debtor's eviction from real property. The operative word is "temporarily." Filing bankruptcy petitions to thwart evictions have become commonplace, and most bankruptcy courts will lift the automatic stay and permit the eviction to proceed.
An important exception exists when the debtor is involved in a long term lease or very favorable rent control. The debtor can argue that the obligation to pay back rent is discharged and the future term of the lease is a valuable asset the debtor wishes to affirm. If the court agrees, it will not lift the stay and will keep the lease in effect as long as the debtor pays the new rent as it becomes due.
28. CAN A CREDITOR OBJECT TO A DISCHARGE?
A creditor may object to a discharge of some or all of the debts of the debtor. The creditor must file the objections to the discharge of particular debts within 60 days of the meeting of creditors. The creditor's objections are filed in a form called a "Complaint to Determine Dischargeability of Debt." The complaint must be served (delivered) to the debtor and the trustee.
A creditor may challenge in court a discharge of any of the following debts:
1. Debts occurring as a result of a willful or malicious act (civil tort) that caused personal or property damage.
2. Debts that were incurred as a result of fraud (usually obtaining credit while intending to file for bankruptcy).
3. Debts arising from theft. No one is ever permitted to keep property obtained illegally.
The debtor must defend any objection to a discharge by filing a responsive pleading "an answer" to the allegations in the complaint. A hearing is held, and the court rules on the appropriateness of granting a discharge.
29. CAN A CREDITOR BE FORCED TO RETURN EXEMPT PROPERTY?
If, before a bankruptcy petition is filed, a creditor has seized or foreclosed on property that would be considered exempt if in the possession of the debtor, the creditor may be forced to return that property if:
1. The property was seized within one year of the debtor's filing for bankruptcy protection,
2. The property can be claimed as exempt, and
3. No attempt was made to conceal the property from the creditor before it was seized.
A complaint has to be filed in the bankruptcy court against the creditor. After service of the complaint on the creditor and the trustee, the court will hold a hearing to determine if the property should be returned to the debtor. Unless the property is valuable, the process for getting it returned may be too time consuming and bothersome to be worth it.
END OF PREVIEW OF CHAPTER
WHAT A CHAPTER 7 BANKRUPTCY AND THIS BOOK
CAN AND CANNOT DO
Before anyone seeks bankruptcy protection, he must first be satisfied that the bankruptcy will accomplish the desired results of discharging debts and keeping exempt property. Chapter 7 bankruptcy is commonly considered a "liquidation" which is a misnomer. A Chapter 7 proceeding is a partial liquidation of the debtor's estate. In a Chapter 7 proceeding, the debtor's estate (discussed in Chapter 7) will be sold (liquidated) to the extent of its nonexempt property and the proceeds paid the debtor's creditors. To the extent that the debtor's creditors remain unpaid, their nondischargeable debts are discharged and forgiven the debtor will not have to pay them. There are certain debts that Congress has made nondischargeable in bankruptcy as a matter of public policy. There are other debts that are non-dischargeable only in the event that the creditor objects. A person who is considering filing for bankruptcy protection should determine what debts are dischargeable and what debts are nondischargeable. A Chapter 7 petition may be of little assistance if most of a debtor's debts are nondischargeable. This chapter identifies and explains debts that are nondischargeable under the Bankruptcy Code.
THE PURPOSE OF THIS BOOK AND WHO SHOULD USE IT
This book was written to fill a void in legal books about Chapter 7 bankruptcy. It was written to be used by an attorney and by individuals engaged in a small service or retail business with few assets or inventory. This book can be used by married couples and in the vast majority of cases a joint filing by married couples provides the following advantages:
1. In many states, the spouses are permitted to double (claim twice the state's permitted exemption amount) the exemption for specified exemptions.
2. The cost is less than separate filings.
3. The court decision is usually quicker for joint petition than for two separate petitions.
There can be situations where filing jointly may not be best. Before filing a joint petition, the couple should consult a bankruptcy attorney for recent changes in the exemption law when:
1. The couple own property in tenancy by the entireties. Such title will be reflected in the deed of title document in the form Jane Doe and John Doe, husband and wife as tenants by the entireties. In a few states (see Chapter 5 for a fuller discussion) property held as tenants in common will not be included in the estate of a spouse filing separately if the other spouse is not liable for the debt. This can be important if the couple has such property. A consultation on this issue may cost $250, but it could save tens of thousands of dollars inexempt property.
2. The couple have ERISA qualified pensions. The United States Supreme Court has made several rulings in recent years that seriously affect the exemption for ERISA pensions. These exemptions are discussed in Chapter 6. In some circumstances it might be beneficial for a couple to move to another state to the federal pension exemption and the federal homestead exemption.
This book does not cover nor should it be used for the following matters:
1. CHAPTER 11 REORGANIZATION. A business reorganization of debts is governed by Chapter 11 of the Bankruptcy Code. This type of bankruptcy uses an entirely different set of procedures. The business is allowed to continue operating while restructuring its debt.
2. CHAPTER 12 FARM REORGANIZATION. Chapter 12 of the Bankruptcy Code is special reorganization that exists only for use by farmers. As with all reorganizations some debts are discharged while the payments schedules of others are altered. A farmer considering bankruptcy should consult a bankruptcy attorney to determine if a Chapter 7 or Chapter 12 petition is best.
3. CHAPTER 13 REORGANIZATION. A Chapter 13 petition is a reorganization of debts for individuals. The debtor creates a plan that must be approved by the court. Someof the debts are discharged in whole or in part and the remaining debts are paid over a period of time (usually three to five years). This book does not discuss Chapter 13 petitions except in the area of foreclosure on a home (see Chapter 5). Generally, the only reason for choosing a Chapter 13 Reorganization is to keep appreciating property that would be lost in the Chapter 7 proceeding.
4.CREDITOR ENGAGED IN BUSINESS. Where the debtor is engaged in business and more than 35% of the total debts are attributable to the business, he should consult a bankruptcy attorney. This book is not geared to addressing the problems and accounting procedures necessary for a debtor with substantial business debts. It should not be used if the debtor's business is a partnership or is engaged in manufacturing or large inventory sales. This type of debtor needs a bankruptcy attorney.
II. NONDISCHARGEABLE DEBTS
Congress made 10 categories of debts nondischargeable. Of the 10 categories, seven of them represent debts that cannot be discharged unless they fall into narrow exceptions. The remaining three categories of debts are dischargeable unless a creditor files objections to their discharge in a timely manner. This chapter will discuss both the types of nondischargeable debts.
A. DEBTS NOT DISCHARGEABLE UNLESS AN EXCEPTION EXISTS
Under section 523(a), a debt is not discharged if it is:
"(1) For a tax or customs duty:
(a) of the kind and for the periods specified in section 507(a)(2) of this title, whether or not a claim for such tax was filed or allowed;
(b) with respect to which a return, if required,
(i) was not filed, or
(ii) was filed after the date on which such return was last due under applicable law or under any extension, and after two years before the date of the filing of the petition, or
(c) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax."
a. INCOME TAXES
Income taxes can be discharged provided the following conditions are met:
1. The taxes are over three years old.
2. The assessment for the taxes was made over eight months prior to filing of the bankruptcy petition.
3. The tax return was timely filed (for taxes relating to a late return, the tax debt is not excepted unless the required return was due, after any extensions, within two years of the filing), and
4. The debtor did not file a fraudulent return or attempt willfully to avoid paying the taxes.
Under the Bankruptcy Code, tax assessments made against a debtor within eight months of filing a bankruptcy petition are nondischargeable even if the taxes are over three years old. The debtor must wait more than eight months after any tax assessment to be able to discharge those back taxes even if the other requirements for a valid discharge are met.
When all of the above conditions are met, the back taxes may be discharged. Penalties assessed for late filing or nonpayment are dischargeable if the taxes to which they relate are dischargeable. If the taxes are not dischargeable, neither are the penalties.
b. PROPERTY TAXES
Property taxes that are less than one year old are not dischargeable. Property taxes are assessed against the property and not the owner. The taxing agency usually imposes a statutory tax lien against the property to secure payment of the lien (see Chapter 9). Property taxes are not dischargeable; they must be paid if the debtor wishes to keep the taxed property.
2. UNLISTED DEBTS
A creditor's debt will not be discharged pursuant to section 523(a)(3) unless the creditor was either duly listed as a creditor with the court or had actual notice of the bankruptcy filing. It is the clerk of the bankruptcy court who sends the notice of the bankruptcy filing to the creditors. If a creditor is not properlylisted that creditor will not receive notice of the bankruptcy action and be unable to protect his interest.
The purpose of this exception to a discharge is obvious. There is an affirmative duty on the part of the debtor to notify the creditors of the bankruptcy. The bankruptcy system will not function as intended if debtors are permitted to exclude creditors and not offer to them an opportunity to participate in the proceeding. The discharge of any unnoticed creditor would probably be unconstitutional as a violation of due process.
If the creditor never had knowledge of the debtor's bankruptcy, the creditor's debt is not discharged. The debtor remains liable for repayment of the debt even though the debtor's other debts have been discharged. In the case of an omitted creditor, the debtor may petition the court to list the creditor. Reopening the case is rare; the procedure is covered in Chapter 15. Absent reopening of the case, the debtor remains liable for repayment of the debts of any creditor who was omitted on the petition and had no knowledge of the action.
3. SPOUSE AND CHILD SUPPORT
Under section 523(a)(5), court-ordered payments for the support of a child or former spouse are nondischargeable. There are variations on this subject that a debtor must investigate.
If back child support is at issue, the debtor should consult a bankruptcy attorney. To not have paid it might be a criminal act quite apart from the bankruptcy law. Once a court orders a parentto make child support payments, the obligation to make those payments then becomes nondischargeable (In re Horol 33 B.R. 989, 1983). The obligation to make court-ordered child support payments is not discharged even if, assigned to a state or governmental agency. If a county or state agency provides benefits to a family because of the debtor's failure to make court-ordered support payments, the state or other governmental agency is assigned the right to receive reimbursement. That right to receive reimbursement for payments made by the state for the support of debtor's child cannot be discharged (as it once was) by the debtor's subsequent bankruptcy.
The general rule is that claims of third parties for property or services provided for a child's support are dischargeable by a parent (In re Lo Grasso, 23 F.Supp. 340). Case law which holds that if a parent deserts or neglects the children, the debts for the property or services provided by third parties are not dischargeable (In re Meyers 12 F.2d 938).
There must be a court order requiring support payments to be made if a debt for child support is to be nondischargeable. All states have laws that impose on a parent the duty to support a child. The parent can be sued for the value of child support provided by third parties. These debts are dischargeable unless reduced to a judgment prior to the debtor-parent filing for bankruptcy protection. For example, assume that a mother deserted her children, and the father raised them. The father is entitled toreimbursement from the mother for her share of the child support. If the mother files for bankruptcy relief before the father gets a judgment for reimbursement, the obligation to reimburse the father for the back child support is discharged. If the father obtained a court order requiring the mother to reimburse the father for the back support, the debt for back support is not dischargeable.
Spouse support (alimony) requires a court order or an agreement obligating the debtor to make support payments to the spouse. This order or agreement ensures the obligation to make the payments will not be dischargeable. The debtor may agree to make spousal support payments through a marital agreement or a property settlement agreement; such support payments are nondischargeable. Without a court judgment ordering a debtor to make spouse support payments (or an agreement requiring them to be made) the debtor's obligation to make support payments can be terminated in a bankruptcy. If parties are not married the debtor may be discharged from any obligation to make support payments unless the relationship qualifies as a common law marriage.
The Bankruptcy Act of 1994 amended the automatic stay of section 362. The Act now provides that collection of spouse or child support payments from property that is not property of the estate is not subject to the Automatic Stay. The 1994 Act also prohibited the Automatic Stay from blocking commencement or continuation of proceedings to enforce alimony and child support during the bankruptcy case. Property acquired during the life ofa Chapter 13 Plan is considered property of the estate. Under the Bankruptcy Act of 1994, child and spouse support claims now have priority over and are to be paid before general unsecured claims and tax claims. The Bankruptcy Act of 1994 prohibits the trustee and the debtor from the recovery of any property transferred to spouse or child in connection with a divorce or separation occurring within 1 year of the filing of the bankruptcy petition. Before this amendment the trustee and the debtor were each permitted to avoid such payments made within a year of the bankruptcy filing as a creditor preference or a payment not supported by reasonable equivalent consideration. Section 522 of the Bankruptcy Code was amended under the 1994 Bankruptcy Act to prohibit a debtor from avoiding child support payments required by a judgment lien on otherwise exempt property.
Whether or not the debts are collected or are incurred during the bankruptcy, the obligation survives the bankruptcy, and the debtor must pay in full.
4. FINES, PENALTIES AND FORFEITURES
Section 523(a)(7) exempts from discharge those debts incurred as fines or penalties from the debtor's violation of the law. This exception from discharge is firmly based on the belief that approving the discharge of the above would be an implicit approval of criminal or civil misbehavior. All governmental sanctions, whether by a court or an agency, for a violation of any rule, statute or law are not dischargeable.
The only penalties not completely excepted from discharge under this chapter are tax penalties if the tax itself can be discharged under section 523(a)(1) as discussed above. Some additional tax penalties can be discharged even if the tax is not dischargeable: those involving a transaction giving rise to a tax occurring three or more years prior to the filing of the bankruptcy petition.
5. STUDENT LOANS
Under section 523(a)(8) student loans made or guaranteed by a governmental agency (just about all of them are) are not dischargeable unless:
1. The payments on the loan became due more than seven years before the debtor filed for bankruptcy relief, or
2. Not discharging the student loan debt would impose an undue hardship on the debtor.
If the bankruptcy petition is filed more than seven years after the student loan matured (became payable), there is no requirement for the debtor to prove undue hardship in order to have the student loan debt discharged. The seven year period is intended to keep students from discharging the loans prior to starting their careers.
Most courts will allow the debtor to discharge the entire student loan if it became due more than seven years earlier. Some courts will only discharge those delinquent payments over seven years old (see the California case In re Steiner 55 B.R. 1 ,1983). If a debtor is considering discharging student loans over seven years old, the debtor should consult a bankruptcy attorney to determine how they are handled in that state. If the bankruptcy court of that state will only discharge the payments over seven years old, it might be advantageous for the debtor to move to another state that has a bankruptcy court that will discharge the entire amount.
To get a discharge for student loans less than seven years old, the debtor must convince the court that the debtor will suffer undue hardship from being required to make the payments on the student loan (In re Rice 4 C.B.C.2d 134, 1981). The second Circuit Court of Appeals in Brunner vs. New York State Higher Educational Service Corp. 831 F.2d 385,1987 stated that the debtor can prove undue hardship prevents repayment of student loans by showing:
1. The debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if forced to repay the loans.
2. Additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment, and
3. The debtor has made a good faith effort to repay the student loans.
When the court is granting a discharge for undue hardship, the court may grant only a partial discharge of the student loans. It is rare that a court will grant a complete discharge based on unduehardship.
A special type of student loan is the Health Education Assistance Loan for those obtaining a medical education. This type of student loan is held not to be dischargeable unless the debtor can show a greater burden than an undue hardship will occur if he must repay the loan (In re Hines 15 C.B.C.2d 959 and Columbus College vs. Shore 707 F2d. 1337, 1983). Such loans should be considered and treated by a debtor as nondischargeable except in the most extreme cases.
6. DEBTS INCURRED FROM DRIVING WHILE INTOXICATED
Section 523 (a)(9) states that debts incurred as a result of an episode of intoxicated driving are not dischargeable. This means that a debtor driving while intoxicated and causing an accident can no longer avoid the liability of paying the damages by filing a bankruptcy petition. Prior to the enactment of this section, debts arising from damages caused by intoxicated driving were dischargeable unless the debtor had been driving in such a reckless manner as to make the conduct willful and thus nondischargeable under section 523(a)(6).
Now the damages caused by a person's intoxicated driving will not be discharged if:
1. The debt arose from a court decree or judgment against the debtor for damages from the debtor's intoxicated driving,
2. The court found the debtor to be legally intoxicated, and
3. The court rendering the judgment was a court in the state where the damage caused by the debtor's intoxicated driving occurred.
A court for the state where the accident or damages occurred must find the debtor legally drunk or under the influence of drugs and order the debtor to pay compensatory damages to the injured parties (fines payable to a state as punishment are already nondischargeable under paragraph 4 above).
"Intoxication" means that at the time of the incident the debtor was operating the vehicle under the influence of alcohol or drugs to such an extent as to be unable to operate it safely. Many states have enacted laws that specifically make it a crime for a person to operate a vehicle with a blood alcohol level above a certain level. California law prohibits a person with a blood alcohol level above .08% from operating a motor vehicle. A person involved in an accident while having a blood alcohol level over the legal level is guilty of driving while intoxicated, and the damages resulting are not dischargeable.
If a debtor files for bankruptcy relief prior to a state court issuing its judgment, the debtor's debts are discharged, but some courts will not discharge drunk driving debts (In re Thomas 51 B.R. 187, 1985). The Ninth Circuit Court of Appeals in its decision In re Hudson 859 F.2d 1418 denied a debtor's discharge for a drunk driving debt stating:
"Since enactment of Section 523(a)(9) bankruptcy courts haveconsistently held and litigants relying on those opinions have assumed that language includes claims against drunk driver bankrupts reduced to judgment after commencement of the case. We are not inclined to disturb the consistent body of law which Congress apparently acquiesces."
A person with drunk driving debts that have not been reduced to a judgment should consult a bankruptcy attorney. It might be possible to avoid payment of the intoxication debts by filing for bankruptcy relief prior to a state court judgment being rendered. This might mean moving to a state whose federal bankruptcy court disagrees with and is not governed by the above Ninth Circuit Court's case.
END OF PREVIEW OF CHAPTER
STEPS IN A BANKRUPTCY ACTION
A Chapter 7 bankruptcy proceeding is methodical, procedural and entirely predictable. The steps begin with finding the correct court and proceed to receipt of the final discharge. Throughout, the case is a logical progression. Once these progressive steps are reviewed, the reader will appreciate the orderly nature of the bankruptcy procedure and be more at ease.
1. SELECTING THE PROPER BANKRUPTCY COURT
Every state has at least one bankruptcy court. Some states are divided into judicial districts, each with its own bankruptcy court. The debtor is required to file the bankruptcy petition with the bankruptcy court in the debtor's home jurisdiction. If there is more than one bankruptcy, the debtor must file with the court in where he has lived the most in the last six months.
Where there is more than one bankruptcy court in a state, the bankruptcy court closest to the debtor's home is probably the one where the debtor should file. The debtor can ask the court and clerk if the debtor's home is covered by that bankruptcy court.
The easiest way to locate the proper bankruptcy court is for the debtor through the phone book. Virtually all phone books list the bankruptcy court which covers the same geographical area of the phone book. A debtor will merely open the phone book for his home
town and find the address and phone number of the nearest federal bankruptcy court, which is usually under a title of "FEDERAL GOVERNMENT". Then a quick call to the court to be sure that the court does, in fact, cover the debtor's home town is all that is necessary to be absolutely certain.
2. GETTING THE RULES AND FORMS
Once the proper court has been determined, the debtor should ask the clerk and:
1. Ask the clerk if upon receiving a check and a large self-addressed envelope he would send the following:
a. Local rules of court,
b. Fee schedule for all court filings, and
c. Copies of all local forms required by the court.
2. Ask the clerk whether the court requires blue backing on the pleading and what must be typed on it. This information is also included in the local rules. Some courts, in order to make the petition more recognizable in a file cabinet, require that the petition be stapled to a stiff blue sheet of paper (obtainable from any office supply or art store) an inch longer than the petition. On the inch that overlaps the court requires that the name of the case be typed. Most courts don't require a backing.
3. Ask the clerk whether the court uses the standard creditor matrix (the form with the many blocks). If not,the debtor will have to request the court's creditor matrix in his letter to the clerk.
The forms contained in this book are current in 1996 and are based on the Official Bankruptcy Forms as prescribed by the Judicial Conference of the United States. These forms will remain valid for upcoming years even if there are changes made to them. Under the Bankruptcy Rules, as long as a form contains the basic information required on the Official Form, it can be used even though it has been superseded by another form. To be certain that the forms will be accepted the clerk can be asked if the court will accept the 1995 revised form (the one in this book). If the answer is "no," you will have to purchase the new official form from the court or a stationary or office supply store for about $20.
The Bankruptcy Code requires that the bankruptcy forms have two pre-punched holes in them before they can be filed. Theforms in this book are not pre-punched but virtaully all libraries have two hole punches that can be borrowed for this task.
Calculate the amount of money this will require and send a check in that amount to the clerk in a self-addressed envelope. All courts are overworked. Do not be surprised if the clerk will not answer your questions (they don't have to do it). The only alternative is to drive to the courthouse and get this information in person. A goodideais to send a check with no amount filledin but instead with a note “Good for up to $250.00". Thereby the clek can fillin the correct amount and there is no fear that the petitionwill be returned for because the check is not enough.
Each court can adopt its own rules of procedure within the confines of the Bankruptcy Code as passed by Congress and the Bankruptcy Rules adopted by the Supreme Court. Anyone filing a bankruptcy petition must comply with all rules and procedures adopted by the court where the petition is filed. The debtor must get a copy of the local rules. The local rules are no more than a statement of the general bankruptcy rules. The advice in this book must comply with the general rules and complies with most local rules.
2. EMERGENCY FILINGS
Occasionally there are circumstances when the debtor does not have the time to complete the full petition before some type of foreclosure by a creditor occurs. Under Bankruptcy Rule 1007 (c), it is possible to file just the petition along with the list of creditors to get the Automatic Stay.
The debtor then has 15 days to file the missing schedules and statements. If the omitted schedules are not filed within the 15 days, the court will dismiss the petition unless the debtor obtains an extension. If the petition is dismissed, the debtor can refile again but will lose the $175 filing fee already paid.
The emergency filing requires the debtor to file at least:
1. The Voluntary Chapter 7 Petition, and
2. The list of all creditors as known by the debtor (the creditor whose collection is forcing the emergency filingmust certainly be listed).
The list of creditors must be put in the form approved by the local rules of court. Not all courts used the creditor matrix (the sheet with blocks for the typed names of creditors). Whatever form to list creditors is used by that court is the form that the debtor must used.
3. THE PREPARATION AND FILING OF THE PETITION
Once all the appropriate forms are obtained, the debtor then determines the size, manner and type of the debts in the estate. To help organize the estate, there is a worksheet following this chapter for the debtor to list the assets and liabilities of the estate.
After completing the worksheet, the debtor will use it to determine which debts are nondischargeable and which debts are dischargeable.
Once the debts have been divided into the various categories, the debtor will then decide which secured debts will be ratified, redeemed or have the lien avoided (see Chapters 9, 10, and 11). Once these decisions are made the debtor is now ready to complete the schedules, the statement of intention and the summary of debts and property.
The remaining acts required prior to filing are completions of the creditor matrix, statements of the debtor engaged or not engaged in business and cover sheets of the petition. When everything is complete, the debtor is ready to file the petition(see Chapter 4).
The filing fee is $175 dollars, which includes a $30 administrative fee that is payable in full at filing. It may seem strange that someone bankrupt must find $175 to seek relief under the bankruptcy code. Bankruptcy Rule 1006(b)(1) permits a debtor to pay the $175 filing fee (but not the $30 administrative fee) in installments over four months if the court approved form Application to Pay Filing Fee in Installments is filed with the petition. No installment plan will be given to a debtor who has previously paid an attorney for consultation or assistance in preparing the bankruptcy petition.
4. MEETING OF CREDITORS
Soon after the petition for bankruptcy is filed with the court, the clerk of the court will schedule a meeting of creditors. The clerk will send notice of the hearing to all of the creditors named in the petition. Even though the court will notify the creditors of the bankruptcy, the debtor should send a letter immediately to the creditors informing them of the bankruptcy petition, the court where it was filed and the case number.
The purpose behind the debtor giving this notice is simply to avoid possible hassles. Once the debtor files the bankruptcy petition there is an Automatic Stay on debt collection and foreclosure proceedings against the debtor. Unless a creditor knows of the bankruptcy, collection proceedings may go forward, and, although they will be subsequently set aside, there's noreason to go through the bother when a quick letter from the debtor early in the case will prevent all this.
Shortly after the petition is filed, the court appoints the trustee to handle the case. The trustee will review the petition and determine what property is available for payment to the creditors. If the case is a no-asset case, the trustee will notify the creditors that they do not have to appear at the creditor meeting because no assets exist to pay them. He will also tell them that another creditor's meeting will be scheduled if assets are subsequently discovered.
If assets are present the trustee will hold the creditor meeting. The trustee will preside over the creditor meeting. The judge will not be there. The trustee and the creditors will question the debtor about the location of the property in the estate and the debtor's intent to ratify, redeem or set aside the lien on secured property.
5. TRUSTEE'S MANAGEMENT OF THE ESTATE
After the creditor's meeting the trustee takes possession of the nonexempt property that will yield proceeds after the property is sold and costs of sale and any liens on the property are deducted. For example, assume that a debtor owned a nonexempt truck that was sold for $2,000. Only $500 was owed on it, and the cost of sale was $200. The trustee has $1,300 left to distribute.
Remaining proceeds are used to pay any cash exemptions permitted to the debtor under the law. The remaining amount isspread among the unsecured creditors of the debtor. The debtor has the right to purchase nonexempt property from the trustee for cash or trade exempt property for it.
6. MOTION TO REDEEM SECURED PROPERTY
Following the meeting of creditors, the debtor may move to purchase at fair market value from a secured creditor exempt property that is collateral for a secured debt. If the creditor agrees to the sale, there is no reason to have a motion for approval filed wit the court. A written agreement between the debtor and creditor is sufficient to bind each.
When creditor and debtor have agreed on a fair market price and installment payments, the debtor must move for a court order requiring the creditor to take the purchase price in installments (See chapter 10). If the entire purchase price cannot be paid within 45 days of the order permitting the redemption the creditor can repossess the property and return the payments made up to that point. Many bankruptcy courts will not force a creditor to take the payments in installments.
7. MOTION TO SET ASIDE A LIEN
The Bankruptcy Code gives the debtor the right to set aside judicial (judgment) liens against exempt property. The procedure for setting aside a judicial lien calls for the debtor to file a motion with the court with notice being given to the creditor possessing the lien.
A judicial lien is a lien placed against exempt property fora monetary judgment resulting from a lawsuit against the debtor. A judicial lien is quite different from a statutory lien created by operation of law. A statutory lien cannot be avoided by a debtor although it might be avoided by the trustee if it does not benefit the debtor. The procedure for avoiding a judicial lien is discussed in chapter 9.
8. CREDITOR'S MOTION TO SET ASIDE THE AUTOMATIC STAY
Once a debtor files for bankruptcy relief there is an automatic stay on all proceedings against the debtor's estate. All lawsuits (including collection and repossession proceedings against the debtor) are automatically stayed for the duration of the bankruptcy case. The automatic stay remains in effect against all of the debtor's creditors although it can be lifted on request by individual creditors under certain circumstances.
To get the automatic stay lifted, the creditor must file a complaint to lift the automatic stay and serve it on the trustee and the debtor. The debtor is not required to file a response to the complaint unless local rules require it. The creditor is compelled to convince the court the automatic stay should be lifted as to that particular creditor. The debtor, whether a response is filed or not, must appear and explain to the court why the stay should not be lifted or else it will be granted.
After hearing both sides, the court will decide whether to lift the stay and permit a creditor to foreclose against secured property or maintain a lawsuit for damages against the debtor.
9. RATIFICATION AGREEMENT AND DISCHARGE HEARING
The debtor has the right to reaffirm debts on nonexempt property to prevent the property being repossessed by the creditors. If the debtor is seeking to reaffirm a debt, the court is required to hold a discharge hearing. The purpose of requiring court approval is to make sure the debtor does not by mistake or fraud reaffirm a debt against his best interest.
No ratification agreement will be valid unless it meets the following requirements:
1. The agreement must have been made prior to the granting of the discharge.
2. The agreement must clearly state that the debtor can rescind it at any time prior to the discharge and for 60 days thereafter.
3. The agreement must have been approved by the court.
The court will approve a ratification agreement if it finds that the ratification will not impose an undue hardship on the debtor or the debtor's dependents and is in the debtor's best interest. The judge will ask sufficient questions to be assured about these requirements.
Once the court is satisfied that the reaffirmation of the debt should occur, it will approve the ratification agreement and issue the final discharge. At this point, unless something happens that requires the case to be reopened (such as newly discovered property, an omitted creditor or a complaint to set aside thedischarge for fraud), the case is closed and the debtor is free to continue his life without fear of the discharged creditors.
If the debtor does not seek to reaffirm a debt, most courts will not hold a discharge hearing. The debtor is mailed an order stating that the final discharge is granted. The case is over.
10. DEBTOR'S REOPENING OF THE ESTATE
The bankruptcy court has full discretion to reopen a case when good cause is shown. Any interested party, creditor, debtor or trustee, may ask the court to reopen the case for cause. There is no definition of cause. It is left to the court to decide when the circumstances of the case are such that the court feels its sense of justice requires the case to be reopened.
There is no express time limitation for making a motion to reopen an estate for cause. The motion must state those facts giving rise for the reopening of the case. The court will hear the arguments, both pro and con, for reopening the case. After the hearing on the motion, the court will render its order. If the motion is granted, the order cannot be attacked in a collateral action. The reopening does not automatically reinstate the trustee. If the reopening of the case is to enter the discharge of an earlier unnamed creditor or to change an exemption, no purpose is gained by appointing a trustee. The judge simply enters the appropriate order and closes the estate again.
Usually, a debtor will seek to reopen a case for one of two reasons. The first is that a creditor has been mistakenly omitted,and it is necessary to have that creditor's debt discharged. The second reason is that the debtor wishes to amend the exemptions in the original petition (usually because of after-acquired property).
Once the court determines that the equities of the case justify reopening, the newly added creditors whose interests are affected are given an opportunity to present their opposition. After presentation of the motion, the court decides whether or not the debtor's requested relief is proper.
It is difficult for a debtor to convince a court to reopen a case. The debtor must do everything possible to assure that all creditors and property are duly listed the first time.
END OF PREVIEW OF CHAPTER
PREPARATION OF THE PETITION
A bankruptcy case starts with the filing of the petition seeking bankruptcy relief. The entire petition consists of many schedules, statements and forms that must be filed. Even though some of the forms may not be applicable for a particular petition they must be completed, even if it means writing "N/A," "not applicable" or "none" where appropriate.
An emergency filing can be done through the use of Rule 1007(c). The petition and list of creditors are filed without the accompanying schedules. The schedules must be filed within 15 days or the debtor's bankruptcy petition will be dismissed. The debtor can refile again, but that will mean paying a new filing fee. An emergency filing is only necessary where a creditor is about to sell debtor's property that is security for a debt or has been attached for payment of a court judgment.
Before the forms are prepared the debtor should complete the worksheet contained in this book and read the book, paying particular detail to the discussions on exemptions, nondischargeable debts, lien avoidance, redemption and ratification, pensions and homestead. He can then make the following determinations:
1. What schedule of exemptions will be used.
2. What property will be claimed as exempt.
3. What debts will be discharged.
4. What debts on exempt property will be redeemed.
5. What debts on exempt property will be avoided.
6. What debts on nonexempt property will be ratified.
Once the determinations have been made, the debtor can complete the forms. A bankruptcy proceeding is technical, but there are instances where a judge has discretion. If the proper forms are filed, no one objects and debts are not nondischargeable by law, the court must grant the final discharge. The function of the bankruptcy court is to hold the debtor, not the creditor. By remembering that the purpose of the court is to help a person begin a new life, a debtor should not be apprehensive about the process.
There are no mistakes before the final discharge that cannot be corrected. Nor will the debtor be punished for an innocent mistake. The biggest fear that a person has in a bankruptcy hearing is that some mistake will be made that will irreparably harm the case. Such a mistake cannot happen. The case is always under the management of the trustee and overseen by the court. Any mistakes that a debtor honestly makes can be corrected by filing amendments of the petition with the court before the final discharge. Mistakes uncovered after the final discharge can also be addressed through a motion to the court to reopen the case.
The entire petition consists of the following forms:
1. The Voluntary Petition. This form specifically asks that the court grant the debtor a bankruptcy. It is little more than a cover sheet and the signature page for the petition.
2. The Application to Pay The Filing Fee in Installments. This form can only be used if the debtor has not paid a typing service for typing or an attorney for advice.
3. The Statement of Financial Affairs. This form simply gives the court the debtor's background to better understand the financial situation afflicting the debtor.
4. Schedule A is a list of the debtor's real property and any liens on it.
5. Schedule B is a list of the debtor's personal property and its current market value.
6. Schedule C is a list of the property claimed as exempt by the debtor.
7. Schedule D is a list of the creditors holding secured claims.
8. Schedule E is a list of the creditors holding unsecured priority claims.
9. Schedule F is a list of the creditors holding unsecured nonpriority claims.
10. Schedule G "Executory Contracts and Unexpired Leases." This form is used to report all unexpired leases oneither real or personal property.
11. Schedule H "Co-debtors" is a list of all persons who share liability with the debtor for the debts listed in the schedules.
12. Schedule I is a list of the current income of the debtor.
13. Schedule J is a list of the current expenditures of the debtor.
14. Summary of Schedules is, as the name implies, a summary of the foregoing schedules.
15. The list of creditors. In many bankruptcy courts, the mailing matrix (the sheet of blocks) is used. Some courts use a different form for listing creditors. The debtor must ask the clerk or read the local rules to determine how the list of creditors is handled.
16. Any special local forms. Each court has the authority to create any additional forms it feels help in administering a case. The debtor should consult the local rules or speak with a clerk to determine what special forms are employed by the court.
IMPORTANT NOTE: THE BANKRUPTCY CODE REQUIRES THAT ALL DOCUMENTS TO BE FILED WITH THE COURT MUST HAVE STANDARD DOUBLE HOLES PUNCHED AT THE TOP FOR INSERTION INTO FILES. Documents without the pre-punched holes will no longer be accepted. The forms in this book have not had the double holes pre-punched into thembecause of the practical difficulty in doing so. A double hole punch can be purchased, inexpensively, at any stationary store. Also, most public libraries will have double hole punches and will allow their use for the few pages of forms that must be punched.
When all of the above forms are completed, the petition is ready for filing. The bankruptcy proceeding begins once the petition is filed. The first thing that will happen is the automatic stay immediately starts to protect the estate of the debtor. Next the clerk will schedule the creditor's meeting. After the creditor's meeting the debtor will schedule any motions for lien avoidance or redemptions. If no creditor files an objection to discharge, and if the debtor seeks to reaffirm a debt a final discharge hearing will be scheduled. In the event a debtor does not seek to ratify a debt, a discharge will probably not be held. If after the discharge hearing, or if one is not held, the court grants the discharge (a court can only refuse a discharge based on cause). It will mail the order of final discharge for the dischargeable debts to the debtor within a few days. The whole bankruptcy process usually is completed within 5 months of the filing of the petition.
Several states recognize common law marriages. If a couple lives together as man and wife for a period of time (usually five years) continuously in these states, the couple is legally married. A couple married by common law can file a joint petition. Thejurisdictions permitting common law marriages are:
Alabama Colorado Idaho Kansas Montana Ohio Oklahoma Pennsylvania
Rhode Island South Carolina Texas District of Columbia
If a couple with no formal marriage license or certificate live together in a common law state and wish to file bankruptcy, they should check the law of the state to determine if they are legally married. If so, they can file jointly and usually save money and possibly increase their exemptions.
II. PREPARATION OF THE VOLUNTARY PETITION
The voluntary petition is the easiest form to complete. For each debtor filing for bankruptcy relief, type the following information in the appropriate boxes:
1. Name of the debtor. If married and filing jointly, the names of both spouses are placed in the appropriate boxes.
2. Residence and mailing address of each debtor.
3. Social Security Number of each debtor.
4. The address where most of the property of the estate is located.
The debtors must check the following boxes as appropriate:
1. The type of debtor (whether individual, a married couple filing jointly, a corporation or a partnership). This book is directed toward individuals and married couplespetitioning bankruptcy; so one of those boxes should be checked.
2. The Chapter 7 box should be checked for the type of petition being filed.
3. If the debtor does not have an attorney representing, check the box stating debtor not represented by an attorney. The debtor should type N/A in the box entitled name and address of law firm or attorney.
4. The debtor must check the boxes estimating the amount of money that will remain for division to the creditors. The debtor must also check the appropriate boxes for the estimated value of the estate and the estimated amount of the debts owed (This information is obtained from the Summary Schedule that will be attached to the petition).
5. The debtor must check the venue stating that the debtor has resided in the judicial district of the court for over 90 days. This book is not directed toward petitions by a corporation or a general partner engaged in business; so the second box under the VENUE heading should not be checked.
6. If the debtor has filed a previous bankruptcy petition, even if later dismissed, it must be stated. Otherwise type N/A.
7. If a debtor's spouse or partner has a separate petitionpending, it must be stated. Otherwise type N/A.
8. Each debtor will sign twice. The debtors will each sign as an individual along with any joint debtor also seeking a discharge in this action (usually a spouse). In addition, a debtor with primarily consumer debts (to whom this book is addressed) is required to sign under the statement that the debtor is aware that relief under Chapters 7, 11, 12, and 13 might be available but is choosing to use Chapter 7. Signing here completes the Voluntary Petition.
A completed example for a bankruptcy under the laws of California is set forth for reference. This sample is good for any bankruptcy filing because the same form is used in all bankruptcy courts and the bankruptcy law covers the entire United States.
Sample Chapter 7 Petition
For Reference Consult State and Federal Law For Exemptions Available.
FORMS UNAVAILABLE FOR VIEW
III. STATEMENT OF FINANCIAL AFFAIRS
This form is required to be completed by all debtors. An individual debtor engaged in business as a sole proprietor (the only type of debtor engaged in business that this book addresses) must provide all of the information requested concerning the business as well as that concerning the debtor's personal affairs.
Each question must be answered. If the answer is "none" or the question is not applicable, it must be so stated. The questions are written in such a way that their answers will furnish information. Both the court and trustee will use this furnished information to evaluate the debtor's eligibility to receive a discharge of debts. If more space is needed to answer the questions, continuation sheets may be attached.
Questions 1 through 15 must be answered by all debtors. Questions 16 through 21 are only to be answered by those debtors who have been engaged in business. A debtor is considered to be "engaged in business" if the debtor has been a sole-proprietor or self-employed within the previous two years and thus will have to answer questions 16 through 21.
If the debtor has been an officer, director or managing executive of a corporation or a general partner of a business within the previous 2 years, the debtor must also answer questions 16 through 21. This book was not written for use by such a debtor. This book will not address the problems faced by such a debtor.This type of debtor should consult with a bankruptcy attorney.
Question 1 asks how much the debtor has earned from work (either employed or self-employed) within the previous two years. If more space is needed, the debtor can attach additional pages.
Question 2 asks what other sources of income other than business income the debtor has received during the previous two years. The income may be interest, dividends, inheritances, devises, etc. The purpose of this question is to make sure the debtor is not concealing assets.
Question 3 requires the debtor to identify all payments made to creditors within 90 days of the filing. The purpose for identifying these payments: the trustee may have the right to recover payments from the creditors. These recovered payments can be distributed among the debtor's unsecured creditors. This probably will not result in any more property being kept by the debtor.
Question 4 requires the debtor to list all lawsuits, executions and garnishments involving the debtor within the previous year. The reason: the trustee may be able to recover any property paid pursuant to a court order or judgment during theprevious year. This recovery will benefit unsecured creditors and will not result in any more property being kept by the debtor.
Question 5 requires all foreclosures, repossessions or voluntary surrenders of property involving the debtor within the previous year be reported. The reason: the trustee may be able to recover the property as an improper preference to creditors. This recovery will benefit unsecured creditors and not result in any more property being kept by the debtor.
Question 6 necessitates listing all assignments made to creditors within 120 days preceding the filing and all property that has been held by a custodian, receiver or court appointed officer within one year preceding the filing be reported. The reason: the trustee may be able to recover property as an improper preference to creditors. This recovery will benefit unsecured creditors and not result in any more property being kept by the debtor.
Question 7 requires the debtor to list all gifts made prior to the year of filing the bankruptcy petition that had greater value than the $200 per family member and $100 per charitable organization. The purpose: to ensure that the debtor has not dissipated the estate by making gifts to individuals (usuallyfamily members) who may later give it back.
Question 8 necessitates the debtor list all losses from theft and casualty within one year from the commencement of the case and after the commencement of the case. This question helps determine if the debtor is squandering the estate's assets or otherwise them by claiming they were stolen.
Question 9 relates to payments made for debt counseling including payments made to attorneys within one year of the filing. It might be possible for the trustee to recover such payments as estate assets and to use them to benefit of the unsecured creditors (which these people will become).
Question 10 requires the debtor to list any other transfer of property not previously listed, other than transfers in the ordinary course of business or as security within one year of the debtor's filing for bankruptcy relief. It might be possible for the trustee to recover such property to benefit unsecured creditors (which these people will become).
Question 11 obliges the debtor to disclose all bank accounts, brokerage accounts, credit union accounts, pension funds, and all other financial accounts. This simply ensures that no assets arehidden or omitted.
Question 12 requires listing safe deposit boxes and their contents held within 1 year of the bankruptcy. The purpose: ensure the debtor is not concealing assets.
Question 13 requires the debtor to list any setoffs that creditors have applied against debts owed to them. A setoff occurs when a creditor reduces a debt by applying property or money owed to the debt or against it. For example assume that George owes the bank $500, and the bank takes it from his checking account this is what is meant by a setoff. Under the bankruptcy law, setoffs made within 90 days of the debtor filing for bankruptcy relief may be recovered by the trustee. The trustee applies recovered property to pay the debts owed unsecured creditors.
Question 14 requires listing property held by another that the debtor owns or controls. The purpose: to prevent a debtor from giving property to another to hold or manage as directed by the debtor (such as a revocable trust) to remove it from the bankruptcy estate.
Such property is recovered by the trustee and placed in the bankruptcy estate to the extent it is not exempt.
Question 15. The debtor must list his prior addresses for the last two years. The purpose: simply background information for the trustee should he need to investigate the debtor.
QUESTIONS 16 THROUGH 21
Questions 16 through 21 are answered by a self-employed or a sole-proprietor within the previous two years. These answers also must be answered by debtors who have been general partners of a business, officers, directors, managing executives or owners of more than 5% of the securities of a corporation. This book does not address the particulars faced by such sophisticated debtors.
The trustee will use the answers to acquire more information to determine assets of the business that belong in the debtor's estate.
Question 16 requires the debtor to state the name, address and description of any business of the debtor as sole-proprietor or self-employed within the two previous years of the bankruptcy filing.
Question 17 requires the debtor to list all the bookkeepers and accountants of the business for the six years prior to the filing of the petition. The debtor is required to list anyone who has audited the books of the business within the two years prior to the filing of the petition. The debtor is also required to listevery person and entity to whom a financial statement was given within two years prior to filing for bankruptcy relief.
The debtor requests copies of the audits and financial statements from these named people and entities. The trustee compares the information in the financial statements and audits with the books and records of the business.
Question 18 deals with the inventories of the business. The debtor is required to list the dates and values of the last two inventories. The inventory of the business is an asset of the estate of the debtor who is self-employed or a sole-proprietor. The inventory is converted to benefit creditors by the trustee to the extent it is not exempt.
Question 19. The debtor must list each partner, officer or director of the business (if it is a corporation). For persons using this book, the answer should be no because no one who is a partner or shareholder of a corporation engaged in business should use this book. As seen by the questions asked so far, it should be clear that such businesses will have far more complicated problems than those of a self-employed person.
Question 20 requires the debtor to list each person who withdrew as a partner, officer or director of the business (if itis a corporation) within the year previous to the filing of the petition. For persons using this book, the answer should be "no" because no one who is a partner or shareholder of a corporation engaged in business should use this book. As seen by the questions asked so far, it should be clear that such businesses will have far more complicated problems than those of a self-employed person.
Question 21 requires debtor to list every withdrawal or distribution to any partner, officer or director of the business (if it is a corporation) within 1 year of the filing of the debtor's petition for relief. For persons using this book, the answer should be "no" because no one who is a partner or shareholder of a corporation engaged in business should use this book. As seen by the questions asked so far, it should be clear that such businesses will have far more complicated problems than those of a self-employed person.
A sample completed Statement of Financial Affairs is set forth for reference purposes.
RESERVED FOR EXHIBIT
IV. SCHEDULE A: REAL PROPERTY
Schedule A is simply a list of the real property in which the debtor has an interest. Leasehold interests of the debtor are not to be listed on this form. Leasehold interests are listed on Schedule G, Schedule of Executory Contracts and Unexpired Leases. The trustee will request the debtor furnish him copies of the deeds and other instruments that are necessary for the administration of the estate.
A description of the debtor's interest in the property is included in this form. Life estates as well as easements and covenants concerning land owned by another are listed. Real property in which the debtor has an interest are to be listed, showing the percentage of ownership. Another column is for use when a married couple files jointly; it offers space to show the owner of the property. If the property is owned by the husband a H is placed in the column, if it is owned by the wife a W is placed, if it is owned jointly a J is placed, or if owned as community property a C is placed in the column.
The debtor is also required to list the current fair market value of the property in one column and to list the value of any secured claim (loan, judgment lien or statutory lien) on the property in the last column. As an example, a completed Schedule A is set forth. All bankruptcy courts will use this form, and it will be completed in the same general manner as the example herewith.
V. SCHEDULE B: PERSONAL PROPERTY
Schedule B is used to report all of the debtor's interest in personal property leases and executory contracts that are listed in Schedule G, Schedule of Executory Contracts and Unexpired Leases. The trustee will request the debtor furnish copies of the deeds and other instruments that are necessary for the administration of the estate.
This form requires a description and location in the first column of the debtor's interest in the personal property. Another column is for a married couple file jointly so that the owner of the property will be listed. If the property is owned by the husband an H is placed in the column across from the property, if it is owned by the wife a W is placed, if it is owned jointly a J is placed, or if owned as community property a C is placed in the column.
The debtor is also required to list the current fair market value of the property in the last column. The debtor is not permitted to reduce the fair market value of the property by any lien on it.
A completed Schedule B is set forth as an example. All bankruptcy courts will use this form, and it will be completed in the same general manner as the example.
RESERVED FOR EXHIBIT
VI. SCHEDULE C: PROPERTY CLAIMED AS EXEMPT
The debtor is required to list that property the debtor claims as exempt under whatever set of exemptions the debtor uses. If the debtor uses the federal set, box 11, U.S.C. section 522(b)(1), should be checked. If state exemptions and federal nonbankruptcy exemptions are used, box 11, U.S.C. section 522 (b)(2), is checked.
The debtor should carefully read Chapter 7 before electing a set of exemptions. The debtor should calculate when an election is possible and which set is more beneficial and use that set. It might even be wise for a debtor to delay filing, move to another state, reside there three months, and use either that state's exemptions or the federal exemptions.
This form is easy to use. The debtor describes the property in the first column. In the second column is code section or case law justifying the exemption. In column 3 is placed the value of the exemption. In column 4 is placed the fair market value of the property. If the value in column 4 is higher than in column 3, the debtor may have to pay the difference to the trustee in order to keep the property. Otherwise, the trustee might sell the property. Proceeds equal to the value of the exemption will be given to the debtor and the remainder kept for payment to unsecured creditors.
A sample Schedule C is completed for reference.
RESERVED FOR EXHIBIT
VII. SCHEDULE D: CREDITORS HOLDING SECURED CLAIMS
Since a debtor files for bankruptcy relief to have debts discharged, it is important that the creditors be listed along with the extent of their claims.
This form requires the debtor to list all creditors holding any type of secured claim against the debtor's property. A secured claim includes the following: consumer loans, credit loans, judgment liens, statutory liens, mortgages, deeds of trust and other security interests. If additional sheets are necessary, continuation sheets may be attached.
In the first column is placed the creditor's name and address along with the account number.
In the second column, if there is a co-debtor (such as a co-signer on a loan or a co-defendant on a court judgment), place an X across from the debt. If a spouse is also liable for the debt but is not filing jointly, place the X there as well. For all co-debtors (other than a spouse filing jointly), the debtor must also complete Schedule H Co-debtors.
The third column is for use by a married couple. The debtor is to place an H if the debt is the husband's, a W if the debt is the wife's, J if held jointly or C if the debt is community property.
Unless the debtor agrees with the amount of the debt, the debtor is required to mark the debt as contingent, unliquidated or disputed as the case may be. A contingent debt is one that mightoccur if something happens. Example: Debtor had an auto accident, and the other party has filed a complaint. If Debtor loses the lawsuit, he could owe $50,000. The $50,000. is a contingent debt.
An unliquidated debt is one where the amount has not yet been calculated. The debtor knows that the creditor will be owed an amount of money but not how much. Example: Damages caused by an auto accident that have not yet been determined.
A disputed claim is one that either the liability or the amount is disputed. Example: In a lawsuit for an auto accident each party claims the other caused the accident. The amount of the debt and its validity are being disputed.
The amount of the debt is placed in the next to the last column. The value of the collateral does not affect the amount of the debt figure that is entered. In the last column place the amount of the claim that would be unsecured. If the value of the property is less than what is owed the balance is unsecured and placed in the last column.
A sample Schedule D is set forth for reference purposes.
VIII. SCHEDULE E: CREDITOR HOLDING UNSECURED PRIORITY CLAIM
An unsecured creditor is a person who is owed money but has no interest in any collateral to secure payment.
There are a few types of unsecured claims that are entitled to be paid before the other nonpriority unsecured claims.
These types of claims having priority are:
1. Claims deriving from extension of credit to a business in an involuntary case under 11 U.S.C. section 507(a)(2). This priority would not normally be of interest to anyone using this book. This book is not intended for use by someone who has a business in involuntary bankruptcy, but any credit obtained prior to appointment of the trustee is entitled to priority.
2. Wages, salaries and commissions owed to employees are entitled to priority equal to $2,000 per person earned within 90 days of the filing. Failure to pay wages may be a crime under state law that makes the debt nondischargeable.
3. Contributions owed to employee benefit plans are also entitled to priority.
4. Taxes and other debts owed to first the federal government and, second the state.
5. Debts owed to farmers for grain or for a grain storage operator are entitled to priority equal to $2,000 under 11 U.S.C. Section 507(a)(5).
6. Debts owed to fishermen for their fish equal to $2,000 are entitled to priority under 11 U.S.C. Section 507(a)(5)
7. Deposits up to $900 for the purchase, rental or lease of property that was not delivered or for personal servicesthat were not furnished prior to the debtor filing for bankruptcy relief under 11 U.S.C. Section 507(a)(6).
Listing these debts does not help the debtor; it merely helps the trustee disseminate estate assets to the correct recipients in the correct amounts.
The form is easy to understand and follow. In the first column is placed the creditor's name and mailing address.
In the second column, if there is a co-debtor such as a co-borrower on a loan or a co-defendant on a court judgment, place an X across from the debt. If a spouse is also liable for the debt but is not filing jointly place the X there as well. For all co-debtors (other than a spouse filing jointly), the debtor must also complete Schedule H-Co-debtors.
The third column is for use by a married couple. The debtor is to place an H if the debt is the husband's, a W if the debt is the wife's, J if held jointly or C if the debt is community property.
The debtor must file the date the claim was incurred in column 4 and what the consideration was.
Unless the debtor agrees with the amount of the debt, the debtor is required to mark the debt as contingent, unliquidated or disputed. A contingent debt is one that might occur if something happens. Example: Debtor is a defendant in a current lawsuit. The damages figure is established or approximated, but no decision of liability has been rendered.
An unliquidated debt is one where the amount has not yet beencalculated. The debtor knows that the creditor will be owed an amount of money but not how much at this time. Example: Damages caused by an auto accident that have not yet been calculated.
A disputed claim is one that either liability or amount is disputed Example: In a lawsuit for an auto accident, each party may claim the other caused the accident. Both the amount of the debt and its validity are being disputed by the debtor.
The amount of the debt is placed in the next to the last column. No deduction is made against the amount of the debt for the value of the collateral.
In the last column is placed the amount of the claim entitled to priority. If not all of the claim is entitled for priority, only that portion permitted for priority is placed here. Example: A debtor owes a person $3,000 in back wages. The total of the $3,000 claim is placed in the next to the last column. Since only $2,000 is entitled to priority, only that amount will be placed in the last column. The trustee will pay the $2,000 first as a priority unsecured claim and treat the remaining $1,000 as an unsecured claim without priority.
A sample Schedule E is set forth for reference purposes.
RESERVED FOR EXHIBIT
IX. SCHEDULE F: CREDITORS HOLDING UNSECURED
An unsecured creditor is a person who owed money but has no interest in collateral to secure the payment.
On Schedule F are listed all unsecured creditors that have no portion of their claims entitled to priority.
As with Schedule E, listing these debts does not help the debtor. It assists the trustee in his dissemination of estate assets correctly in the proper amounts to the correct recipients.
The form is easy to understand and follow. In the first column place the creditor's name and mailing address.
In the second column, if there is a co-debtor (such as a co-borrower on a loan or a co-defendant on a court judgment), place an X across from the debt. If a spouse is also liable for the debt but is not filing jointly place the X there as well. For all co-debtors (other than a spouse filing jointly), the debtor must also complete Schedule H, Co-debtors.
The third column is for use by a married couple. The debtor is to place an H if the debt is the husband's, a W if the debt is the wife's, J if held jointly or C if the debt is community property.
The debtor must file when the claim was incurred in column 4 and what the consideration was for it.
Unless the debtor agrees with the amount of the debt, the debtor is required to mark the debt as contingent, unliquidated ordisputed. A contingent debt is one that might occur if something happens. Example: Debtor is defendant in a current lawsuit. The damages figure is established or approximated, but no decision has been rendered on liability.
An unliquidated debt is one where the amount has not yet been calculated. The debtor knows that the creditor will be owed an amount of money but not how much at this time. Example: Damages caused by an auto accident that have not yet been calculated.
A disputed claim is one that either liability or amount is disputed. Example: In a lawsuit for an auto accident, each party may claim the other caused the accident. Both the amount of the debt and its validity are in dispute.
The amount of the debt is placed in the next to the last column. For example, assume that George lost Bill's outboard motor while fishing; George owes Bill $500. Bill has no security for payment of the $500; he is an unsecured creditor. Since the debt is not one entitled to priority, Bill's claim is placed in Schedule F.
A sample Schedule F is set forth for reference purposes.
RESERVED FOR EXHIBIT
X. SCHEDULE G: EXECUTORY CONTRACTS AND UNEXPIRED LEASES
On Schedule G is listed every executory contract still involving the debtor. An executory contract is a contract still in effect that has not been fully performed.
The most common executory contracts are:
1. Leases for real or personal property.
2. Service contracts.
3. Sale contracts for real or personal property.
4. Franchises or licensing agreements.
5. Business contracts.
This is an information return for use by the trustee. The important information concerning property or debts of the estate is detailed in the other schedules. The main purpose of the form: to apprise the trustee of what the debtor owes to others what each owes to him.
The form is easy to complete. A description of the contract, respective rights of the parties, debts owed and addresses of the parties are listed. The debtor is required to disclose specific information needed by the trustee in identifying leases that must be assumed within 60 days after the order of relief or be deemed rejected under Section 365(d) of the Bankruptcy Code.
A completed Schedule G is set forth for reference purposes.
RESERVED FOR EXHIBIT
XI. SCHEDULE H: CO-DEBTORS
This is the one of the simplest schedules in the petition. When a person is liable with the debtor for a debt, he is to be listed here. The creditor of the debt is also listed.
If the debtor is married filing separately and there are debts for which the spouse is also liable, the spouse must be listed across from every creditor who is jointly owed the debt.
The complete schedule provides information regarding nondebtor parties, such as guarantors and nondebtor spouses that have an interest as tenants by the entireties.
A completed Schedule H is set forth as a reference sample.
RESERVED FOR EXHIBIT
XII. SCHEDULE I: CURRENT INCOME FOR INDIVIDUAL DEBTORS
The debtor is required to provide information regarding the household's income on Schedule I. This information is used for two purposes:
1. To determine the amount the debtor needs for support. This is important because many exemptions (such as ERISA pensions) are exempt equal only to the amount needed for support.
2. To determine if assets have been concealed. The circumstances involving a debtor who makes $1,000,000 per year and has no assets are suspicious.
This form is to be completed by the debtor. If a married couple is filing a joint petition, both spouses must complete the petition. The spouse first listed in the title of the action is the debtor, and the other debtor is the spouse.
The form has been greatly simplified. The introductory information is basic. An S for single or M for married is placed in the Marital Status box. The debtor's name, age, length of employment and employer's address are completed for each spouse.
If a married couple is filing jointly, both spouses complete the columns. If a married person if filing separately, the column for spouse does not need to be completed; it might be necessary to complete this column if the court makes exemption determinations based on need for support. Most states have laws requiring spousesto support each other. The court may require the information to be provided before it rules on any exemptions that are limited to the debtor's need for support.
If current income is expected to increase or decrease by more than 10% within a year, the debtor is required to attached a written explanation. The court may need this information to determine the debtor's need for support. The calculations of debtor's requirements relative to expected changes are based on this information.
If the debtor receives income from sources not listed on this schedule, those sources are to be listed under the title "Other Monthly Income." If more space is needed to list the other monthly income, the debtor can attach a continuation sheet.
A sample completed Schedule I is set forth for reference.
RESERVED FOR EXHIBIT
XIII. SCHEDULE J: CURRENT EXPENDITURES FOR INDIVIDUAL DEBTORS
The debtor is required to provide information regarding the household's expenses on Schedule J. This schedule contains information regarding the average monthly expenses of the debtor and the debtor's family. If a married couple is filing jointly but maintain separate households, each spouse must prepare a separate Schedule J.
The list of expenditures includes everything from alimony payments to tax payments. If there are some expenses not specifically listed, the debtor can list those expenses under the title "Other." If more space is needed, the debtor can attach a continuation sheet.
This form provides information the court needs to determine the level of support needed by the debtor. This determination is very important. Some exemptions are limited to the value needed for support. If the debtor does not need the property covered by such an exemption for support, the debtor will not get the property. The only way a court can determine if an exemption is needed for support is for the debtor to complete this form. All expenses should be listed by the debtor.
A sample Schedule J is completed for reference.
RESERVED FOR EXHIBIT
XIV. SUMMARY OF SCHEDULES
There is a column of schedules entitled "Name of Schedule." Each schedule is listed in the column. The attorney next column is entitled "Attached." The attorney debtor is required to state whether the schedule is attached or not. The third column requires the debtor to list the number of sheets in the schedule. Usually, there is only one sheet per schedule, but if continuation sheets are attached, the number will change. The next 3 columns are entitled as follows: "Assets," "Liabilities" and "Other" respectively. The totals from each column are placed in the appropriate boxes. To make it less confusing, where no information is to be entered, the box is blackened.
This schedule will be the one most used in the bankruptcy. Most amendments to the petition will result in this schedule also being amended.
A sample schedule is completed for reference.exhibit
XV. STATEMENT OF INTENTION
The Statement of Intention is important. Before completing this schedule, the debtor should read Chapters 9, 10 and 11.
The bankruptcy law requires that all property secured for payment of a debt that the debtor does not wish to keep must be surrendered. When property is surrendered, it is given to the creditor having creditor's interest for disposition. All secured property to be surrendered is listed on the statement of intention along with the creditor's name.
Under the bankruptcy laws, the only secured properties that a debtor can keep are:
1. Exempt property on which the lien has been avoided under 11 U.S.C. Section 522(f).
2. Exempt property that is redeemed by the payment of its fair market value under 11 U.S.C. section 722.
3. Nonexempt property on which the debtor ratifies the debt under 11 U.S.C. Section 524(c).
Under 11 U.S.C. Section 521(B), the debtor is required to complete the stated intentions within 45 days. This does not apply to debt ratifications that must be approved by the court at the final discharge hearing. If a creditor objects to lien avoidance or redemptions on the property, the debtor must file a motion with the court to compel creditor acceptance within that period of time.
In a joint case this form can be used if all of the debts arejointly held. Where the spouses have separate debts in a joint case, each spouse must file a separate schedule.
These schedules must be served on the trustee and all of the creditors under Rule 1007 (b)(2). The debtor should mail a copy of the schedule to each creditor listed in the schedule plus a copy of a completed proof of service (see Chapter 9 for form of proof of service). The original copy of the proof of service should be kept to prove that it was sent to the creditors in the event that they claim they did not receive it.
A sample Statement of Intention is completed for reference.
RESERVED FOR EXHIBIT
XVI. CREDITOR'S MATRIX
Many bankruptcy courts requires that the debtor list the creditors through the use of a mailing matrix. This matrix is a page that is divided into 30 blocks. The debtor is required to type the name and address of one creditor in each box. If there are more than 30 creditors, additional pages can be attached.
Some courts will have their own forms for listing creditors and for other special requirements. The debtor can determine through the clerk of the court or through the local rules of court if the enclosed mailing matrix will be accepted or if a special local form must be used. If a local form is required the debtor must get it from the clerk.
If the mailing matrix can be used, the debtor types the debtor's name, address and phone number in the top left hand corner. The debtor will list the creditors in alphabetical order, unless local rules require another method.
Particular care must be taken to assure that all creditors are listed. The debt of any creditor not listed will not be discharged. To get such a debt discharged later is a great deal of work that would require either filing an amendment and holding a new creditors' meeting or reopening the estate.
Following below, for reference only, are the local rules of the Bankruptcy Court for the Northern District of California that relate to the Creditor's Matrix. Each Bankruptcy Court promulgatesits own local rules so it is necessary to get from the court or from a law library the local rules for that Court. Examples of the two types of matrixes follow. In case of an emergency filing, a debtor might fill out both types of matrix and leave it to the clerk to select the appropriate one for filing with the court.block matrix sample
END OF PREVIEW OF CHAPTER
THE EFFECTS OF BANKRUPTCY UPON THE DEBTOR'S HOME
One of the prime concerns in any bankruptcy is the effect that it will have on the debtor's home. Will the home be lost? Will the debtor lose all of the equity in the home? Is the debt on the home loan dischargeable? What happens to judgment liens from lawsuits on the property? All of the above are questions that immediately leap into the mind of anyone considering bankruptcy.
There are additional considerations that are also present. The first is that a bankruptcy will not stop a foreclosure from occurring if the payments are not made. While a bankruptcy filing will delay the foreclosure for a few months, it will not bar it completely. To do so would result in simply giving the property debt-free to the debtor. This is just not done for secured real property. In place of simply giving the home to the debtor, under the federal and most state laws, there are exemptions for the debtor's equity in a home of a fixed amount. This exempted amount of the debtor's equity in the home is called the "Homestead exemption." In most bankruptcies the homestead exemption is the most important exemption in the entire estate. A few states do not permit a homestead exemption but most do. This chapter will deal in detail with it.
Many persons filing for bankruptcy relief are also married. Some states have special laws that exempt property held in joint tenancy or tenants by the entireties with a spouse under certaincircumstances. In these states the debtor's interest in the home, if held in joint tenancy or tenancy by the entireties with a spouse, may be exemptible whether the state has a homestead exemption or not. This chapter covers the laws of those states that permit such exemptions.
This chapter informs the reader on what is to be expected in the event of a foreclosure. The chapter also covers possible alternatives to maximize the debtor's recovery from any foreclosure.
Because of the importance of the homestead exemption and the possible exclusion of tenancy-by-the-entireties property from the debtor's bankruptcy, the debtor should review state law and consult a bankruptcy attorney for possible changes before filing the petition. The bankruptcy law is constantly being amended. New exemptions are added every few years and existing exemption amounts are sometimes increased. It only makes sense to review state law to make sure that the exemption amounts have not been raised. Example: If South Carolina raises it homestead exemption from $5,000 to $50,000 in the future, and the debtor does not know it, the debtor may lose the $45,000. The trustee will not inform the debtor of the exemptions that are available because the trustee wants as much money in the estate as possible to pay creditors. Chapter 7 in this book lists the state exemptions and their appropriate code section numbers. The debtor can simply go to a set of the state codes (sets are present in all law libraries and many public libraries) and study the particular code section for theexemption in question to see if the exemption has been changed. It is unlikely that an exemption will be revoked or reduced in amount. Usually the exemption is increased to the debtor's benefit and new ones might be added. All law libraries have books on bankruptcy such as Cowans Bankruptcy Law and Practice and Collier on Bankruptcy. Law libraries are in law schools, and every state capitol has one plus most county seats and large cities. All are open to the public. The debtor should also consider consulting a bankruptcy attorney. If a foreclosure is being undertaken by a creditor, the debtor must consult an attorney because of the complexity of the law in that area and the procedures that must be followed.
II. HOMESTEAD EXEMPTION ON THE DEBTOR'S HOME
Under both federal and most state laws a debtor is permitted to claim an exemption for his equity in the real or personal property that he uses as a residence. The exemption has a recorded fixed value. Some states also permit spouses who are filing bankruptcy, either separately or individually, to each claim the full amount of the homestead. Most states do not permit this "doubling" of the homestead exemption. The states that are known to permit or deny doubling are listed in Chapter 7. For the other states it is up to the debtor to determine if doubling is permitted in any state not listed. The simplest thing might be when in doubt, double (and see if the court or trustee object). If wrong, the doubling will simply be disallowed.
It is the debtor's burden to prove that the property on whicha homestead exemption is claimed is the debtor's residence. This can be accomplished quite easily by the recordation of a homestead declaration. Some states actually require the filing a homestead declaration prior to filing the bankruptcy petition to ensure the ability to claim the petition. A debtor should record a "Homestead Declaration" prior to filing the bankruptcy petition if a homestead exemption is sought whether the declaration is required or not. The reason: Filing the homestead declaration strengthens the homestead exemption and is proof that the property was the debtor's residence. This is important evidence if a creditor contests the appropriateness of the homestead exemption. A homestead declaration can be purchased at most stationary stores, notarized and recorded for a total cost of $20. Given the fact that the declaration may save thousands in exemption, it is a cheap insurance policy and for that reason should be used by all homeowners.
The amount of the debtor's homestead exemption is calculated by taking the fair market value of the property, subtracting the liens on the property, and subtracting the amount of the debtor's equity that is less than or equal to the amount of the homestead exemption. The trustee keeps any remaining proceeds from the property for payment to the debtor's creditors. A trustee will not sell the debtor's home unless there will be money for payment to the creditors after the debts, costs of sale and homestead exemption are paid. An example of how the homestead exemption is employed would be in the situation where the debtor's home is worth $40,000, the loan on the property is $19,000, the cost of the saleis $2,000 and the homestead exemption is $7,500.
Sale price .............................................$40,000
minus debts on home ..........................- $19,000
minus costs of sale ...............................- $ 2,000
minus homestead exemption................. - $ 7,500
remainder trustee keeps for creditors .....$11,500
The above example shows the worst case scenario. The debtor has equity that will be lost in a bankruptcy sale. There are two alternatives. The first is to sell the house before the bankruptcy and invest the proceeds in new exempt property. The second is to borrow against the equity and invest those proceeds in the exempt property. Caution should be exercised in doing either of the above. Some bankruptcy courts consider such actions an abuse of the bankruptcy law. A debtor can see the wisdom in consulting a bankruptcy attorney.
A second example more common and beneficial to the debtor exists where the debtor does not have enough equity to cover the homestead exemption. The debtor should sell nonexempt assets to apply to the loan on the home prior to filing. This will increase the debtor's assets after bankruptcy. Example: The debtor's home is worth $40,000 with loans of $35,000 on it, $2,000 cost of sale and a maximum homestead exemption of $7,500. The debtor has a nonexempt bank account of $2,000. The debtor will have a homestead exemption of just $4,500. If the debtor uses the bank account that will otherwise be lost to pay down the loan the debtor's equity and homestead exemption will increase to $6,500.
III. SETTING ASIDE A JUDICIAL LIEN ON A HOME
A judicial lien is a court judgment that the debtor pay a certain amount of money to a designated person. A judicial lien derives from a lawsuit that resulted in a monetary judgment against the debtor. When the judgment is recorded, it creates an automatic lien against all the real property of the debtor in the county where the judgment was recorded. The recordation of any judgment automatically places a judicial lien on the home of the debtor.
Unless the judicial lien is removed it will impair the homestead exemption. Example: A debtor who is entitled to a homestead exemption up to $7,500 has a home of $40,000, a mortgage of $19,000 and a judicial lien of $14,000 arising from a judgment for an automobile accident. Assuming the cost of sale is $2,000, after the sale the debtor would receive only $5,000 as a homestead exemption.
Under the Bankruptcy Code all judicial liens on exempt property such as homesteads are automatically set aside to the extent that they impair the exemption if the debtor requests it. Setting aside a judicial lien is discussed in detail in chapter 9. All that a debtor is required to do to remove a judicial lien is file the motion presented in Chapter 9 and attend the court hearing. It is a simple procedure and can save thousands of dollars of exempt property. No one should ever be afraid of going into bankruptcy court. Remember the purpose of the bankruptcy court is to help the debtor begin again. The judge will be knowledgeable and sympathetic to what the debtor is attempting to accomplish. Avoidance of a judicial lien is automatic. The judge does not haveauthority to refuse to set aside a judicial lien that impairs a valid exemption. So ask and it will be done.
IV. EFFECT OF BANKRUPTCY ON TENANCY-BY-THE-ENTIRETIES PROPERTY
Only about 20 states recognize tenancy by the entireties. It is a special joint tenancy estate between a husband and wife. Neither spouse can obtain a partition of the estate or defeat the right of survivorship of the other spouse. It cannot be terminated by the unilateral act of one spouse.
A tenancy by the entireties is terminated only by:
1. Divorce. It changes the tenancy into that of a tenants in common.
2. Mutual agreement to terminate the tenancy.
3. Execution against the property by a joint creditor of both spouses. A creditor of just one spouse cannot execute against property held in a tenancy by the entireties.
A tenancy by the entireties is usually not a good method of estate planning, in community property states, because it does not provide a surviving spouse with a stepped-up basis of both halves of the property upon death of a spouse. This could result is a substantial tax liability if the property is later sold.
Under Section 522(b)(2)(B) of the Bankruptcy Code, a debtor is permitted to exempt his interest in property held in tenancy by the entireties or joint tenancy to the extent that such interest would have been exempt from process under nonbankruptcy law.
(B) Any interest in property in which the debtor had, immediately before the commencement of the case, an interest, as a tenant by the entireties or joint tenant to the extent that such interest as a tenant by the entireties or joint tenant is exempt from process under applicable nonbankruptcy law.
In practice, the only joint tenancy property of a debtor that has ever been held exempt is that of tenancy by the entireties. The following states permit a debtor to exempt tenancy by the entireties property when the debts of both spouses are not being discharged. That usually means that both spouses are not filing bankruptcy either separately or jointly or that both spouses had not incurred the debt on the property: only one spouse put the debt on the property or the debt was not for necessities for the couple.
DELAWARE DISTRICT OF COLUMBIA FLORIDA
HAWAII MARYLAND MASSACHUSETTS
MICHIGAN MISSOURI NORTH CAROLINA
OHIO PENNSYLVANIA TENNESSEE
VERMONT VIRGINIA WYOMING
The U.S. Fourth Circuit Court of Appeals that includes Maryland, North Carolina, South Carolina, Virginia, and West Virginia held in Ragsdale vs. Genesco 674 F.2d 277 1982 that a creditor can reach property held in tenancy by the entireties in a bankruptcy where both of the spouses are liable on the creditor's claim. The Sixth Circuit Court of Appeals reached a similar conclusion (In the Matter of Grosslight 757 F.2d. 773). The Third Circuit Court of Appeals (In re Thicket 5 C.B.C. 2d 85) also arrived at a similar judgement.
It is important for a debtor to know not only if his statepermits property to be held as tenancy by the entireties but if the property will be exempt in a bankruptcy. Example: In re Ford 1 C.B.C.2d 840 held that under Maryland law tenancy by the entireties property was exempt under bankruptcy law.
In re Weiss 2 C.B.C.2d 426 held under New York law that tenancy by the entireties property could be sold under execution; it was not exempt.
In re Gibbons 13 C.B.C. 759 1985 held that tenancy by the entireties property held by a debtor in Rhode Island was not exempt.
If a married person is filing bankruptcy separately and owns property jointly with the spouse, that person should consult an attorney specializing in bankruptcy to determine if the joint property is exempt under state law. If a debtor lives in one of the above states and the nonfiling spouse is not obligated to pay the debt on the property, the debtor's interest is exempt. Consulting a bankruptcy attorney to determine if such property is exempt can save a great deal of money.
V. FORECLOSURE ON DEBTOR'S HOME
An act that usually results in the debtor filing for bankruptcy relief is foreclosure on the debtor's home. Foreclosure happens in accordance with state law based on the security agreement the lender has on the property. There are two general types of security agreements a lender may employ. The remedies the lender has resulting from a borrowers breach depend on the type ofsecurity agreement employed. The two types of security agreements are a "deed of trust" and a "mortgage."
A "deed of trust" has become the preferred means of security lien on real property and is employed in most states. In a deed of trust the borrower (called the trustor) signs a promissory note for a loan on the property. The promissory note is then secured by a deed of trust given by the borrower (trustor) to a third party (trustee). The deed of trust gives the trustee the authority to see the property without getting permission if the borrower fails to make the payments. The law of most states authorizes the trustee to give a 20 day notice to pay if the borrower fails to make the payments on the loan. If the back payments are not made, the trustee sets the property for sale in another 90 days. At this point the loan has to be paid in full. If the loan is not paid, the property is sold at a public sale, and the debtor loses all interest in the property. Any proceeds remaining after the loan and costs of the sale are paid are returned to the buyer. In most states if there is a balance left owing, a deficiency judgment can be obtained against the borrower. Some states, such as California, have enacted anti-deficiency legislation holding that there cannot be deficiency judgments for purchase money loans on residential property. Some states hold that there cannot be a deficiency judgment for property sold under a power of sale of a deed of trust. The debtor does not have any right to redeem property sold by a trustee under a power of sale.
A "mortgage" is a straight security agreement on the property.When the borrower fails to make the payments, the lender must go to court and sue the borrower The court will grant a judgment against the borrower. The lender has the sheriff sell the home at an execution sale. The proceeds pay the loan and the costs of sale. Any remaining proceeds are returned to the borrower. Most states permit deficiency judgments only for judicial sales under a mortgage foreclosure. Some states, like California, have anti-deficiency legislation on purchase money residential property. Most states give the borrower one year to redeem the property. The borrower redeems the property by paying the buyer the price paid for the property at the judicial sale. Because a borrower might redeem, many potential buyers are not interested in bidding on the property. That plus the fact that judicial foreclosure on a mortgage can take a year explains why lenders prefer deeds of trust.
Whichever method of foreclosure is used, both security agreements give the lender the right to accelerate the loan on default (that is declare the outstanding balance entirely due and payable). It is this acceleration that usually results in the filing of bankruptcy.
B. AUTOMATIC STAY
Once the bankruptcy is filed any attempt to foreclose on the debtor's home or any other property is stopped under the automatic stay of the bankruptcy law. Until the automatic stay is lifted no creditor can repossess or sell any property of the debtor.
It seems that filing a bankruptcy petition would protect thehome, but such protection is only fleeting. Remember most Chapter 7 cases are closed within four months and purchase money security interests are not dischargeable.
The secured lender on any property, including the debtor's home, can and will, unless the back payments are made, make a motion with the court to lift the automatic stay on that property. If the debtor cannot pay the back payments and make the future payments, the court will usually lift the stay and permit the foreclosure to continue.
Any proceeds left over after the sale are first used to pay the lender and then cover the sale. The remaining proceeds are split as follows: the debtor is given the amount of the homestead exemption, and the rest is given to the trustee for payment to the debtor's creditors.
In a sale during bankruptcy by either a creditor or a trustee, the debtor should make sure there is enough to assure payment of the homestead exemption. This can be accomplished by selling nonexempt property prior to the bankruptcy and using the proceeds to increase the debtor's equity in his home.
The debtor should act before filing a bankruptcy petition to assure that unused equity in the home will not be lost. This can be accomplished by taking a loan in the amount that the equity exceeds the homestead amount and using it to purchase exempt property. Where a home is involved, a debtor should consult an attorney specializing in bankruptcy for advice on the state's homestead exemption.
ENDOF PREVIEW OF CHAPTER
THE EFFECT OF BANKRUPTCY ON THE DEBTOR'S PENSION
The bankruptcy law establishes a debtor's pension and retirement benefits as assets of the debtor's estate like any other property. To keep some or all of the pension the debtor must choose the federal or state schedule of exemptions that exempts the whole or a part of his pension. Many pensions are not exempt under state or federal law. These pensions will be lost in a bankruptcy filing.
If a debtor is retired and receiving benefits prior to the filing of the bankruptcy petition many states will exempt as much as 75% of the pension benefits received if needed for support.
A pension is deductible depending on whether the debtor is using the state or federal exemptions. Pensions that are exempt under state exemptions are not always exempt under federal exemptions and vice versa.
A horrendous effect on a pension that can occur as a result of the bankruptcy is a huge tax bill that is not dischargeable. Take the situation where the debtor or his employer has been making tax deferred contributions to the plan (contributions that are taxable once the debtor starts drawing from the plan). When the trustee takes the assets in the pension plan they are treated as a distribution to the debtor that must be presented to the trustee; even though the debtor does not get the pension he must pay incometax on the tax deferred contributions. A debtor having a pension plan should consult with an attorney experienced in bankruptcy law prior to filing the bankruptcy to review current bankruptcy law. If a debtor does not wish to consult with an attorney, the person should at least review the state exemptions (starting with those listed in this chapter) to see if the pension exemption has been changed. It is quite possible, given the frequency of the changes to the Bankruptcy Code, that pensions that are not now exempt will be so in the future when the reader intends to file.
There are a few things that can be done to minimize or prevent a partial or total loss of pension benefits. These alternatives will be discussed below.
II. EXEMPTING A PENSION UNDER FEDERAL LAW
Bankruptcy Code Section 522(d) created a list of exemptions. The federal exemptions can be used in place of a debtor's state exemptions provided the law of the debtor's home state permits him to use them. Only the following 13 states and the District of Columbia permit a debtor an option to use the federal exemptions instead of the state exemptions:
CONNECTICUT HAWAII MASSACHUSETTS
MICHIGAN MINNESOTA NEW JERSEY
NEW MEXICO PENNSYLVANIA RHODE ISLAND
TEXAS WASHINGTON WISCONSIN
Under Bankruptcy Code Section 522(d) only those pensions that are covered under the Employee Retirement Income Security Actcommonly called ERISA are exempt to the extent needed for support. Almost all private retirement plans are covered by ERISA, whereas most state and local government pension plans are not covered by ERISA. Before a person residing in one of the above states or the District of Columbia elects to use the federal exemption, he must know if his pension is covered by ERISA.
To determine if a pension plan is ERISA qualified, the employee merely calls the pension plan administrator and asks. The employer and the union (if there is one) should have the name and phone number of the plan administrator readily available. If the pension plan is not governed by ERISA, the federal pension exemption cannot be used, and the person should consider using state exemptions instead.
Section 522(d)(10)(E) reads as follows regarding the determination of which pension benefits are exemptible under the federal exemptions:
(E) A payment under a stock bonus, pension, profit sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, unless:
(i) such plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor's rights under such plan arose;
(ii) such payment is on account of age or length of service; and
(iii) such plan or contract does not qualify under section 401(a), 403(a) 403(b), 408 or 409 of the Internal Revenue Code of 1954 (26 U.S.C. section 401(a), 403(b), 408 or 409).
Under the federal exemption only that part of the pension that is "reasonably necessary for the support of the debtor and any dependent of the debtor" is exempt. To determine the amount of the benefits from a ERISA pension that are exempt, the court will look at the following:
1. The debtor's age and health.
2. Whether or not the debtor is employed and the amount of take home pay.
3. The debtor's monthly expenses after dischargeable debts have been canceled.
4. The number of dependents in the debtor's home.
5. The amount of assets that the debtor owns plus income from other sources (such as family trusts) that are not part of the debtor's estate.
From all of these factors, the bankruptcy court will determine how much of the debtor's pension payments are needed for his
support. Even though the pension may be governed by ERISA, it may be found not to be needed for the debtor's support and will be entirely lost in the bankruptcy.
A recent Supreme Court case (Patterson vs. Shumate 1191 L.Ed2d 519 1992) held that whether or not federal or state exemptions are used, an ERISA pension plan having a transfer restriction (which means it cannot be transferred or assigned) is not part of the bankruptcy estate. Under this decision an ERISA pension with a transfer restriction is totally excluded from the bankruptcy estate and not just for the benefits needed for support. Under this case the participant in an ERISA plan would probably exempt the entirepension plan rather than just the portion needed for support as permitted under the limited federal exemption. Congress may change the effect of this case. Had Congress originally intended to exempt ERISA plans, it would have done so outright rather than by implication. Congress would not have created a limited federal exemption for pension plans. Until Congress passes legislation to change the Supreme Court's interpretation, ERISA plans will remain totally exempt.
If a pension is to be lost because it is not an ERISA plan or the debtor does not need it for support the debtor should consult a bankruptcy attorney for alternatives that will save some, if not all, of the pension.
III. EXEMPTING A PENSION UNDER STATE LAW
A. NON-ERISA PENSIONS
Most governmental state pensions are not covered by ERISA. Unless there is a specific exemption under state law for a state pension plan, a state or local pension will be lost when the person covered by the state or local government files for bankruptcy. Some states have specifically enacted laws to exempt all plans that pension state or local public employees. Most states have only enacted limited exemptions for certain public employees. Only those non-ERISA plans that have been exempted under state law may be exempt in bankruptcy. Before filing a bankruptcy petition, public employee should determine if his pension plan is exempt.
As with non-ERISA state pensions, non-ERISA private pensionswill not be exempt unless there is a specific state law making them exempt. A few states will exempt private pension plans if the benefits are needed for support.
Most states do not exempt private plans whatsoever. This is where the problem comes into play. Many state pensions for public workers are exempt, whereas pensions of the average citizen are not exempt. This is a case of government employees looking out only for themselves. It is unfair for a state to exempt only government pensions and not exempt those pensions of the average citizen. Yet, this is usually the case. If a debtor has a private pension that is not listed in the exemption chapter, the debtor must consult a bankruptcy attorney before filing.
Chapter 7 of this book lists and details state pension exemptions. Pension exemptions may change. Usually more exemptions will be added or the amounts of the existing exemptions will be increased. It is unlikely that an existing exemption will be deleted. If a person having a pension is going to file for bankruptcy relief he can cross-check the exemption chapter by either looking in the state code or consulting a bankruptcy attorney.
B. EXEMPTIONS OF ERISA PLANS UNDER STATE LAW
Many states have specific exemptions for ERISA pensions. These states are listed in Chapter 7. Some of these states exempt the entire plan while others exempt only those payments needed for support. The United States Supreme Court in Mackey vs. LanierCollections Agency & Service, Inc. 486 U.S. 825, 100 L.Ed 2d. 836 ruled in a collection case that a state could not grant an exemption for ERISA plans. Georgia had a law that prevented a creditor from attaching a debtor's ERISA plan. The Supreme Court held the ERISA act superseded state law when it stated:
"We hold that ERISA does not forbid garnishment of an ERISA welfare benefit plan even where the purpose is to collect judgments against plan participants. Moreover, we agree with the Georgia Supreme Court that the anti-garnishment provision found in Section 18-4-22.1 is pre-empted by ERISA. The judgment is affirmed."
Since ERISA does not forbid creditors in a nonbankruptcy case from attaching the plan, state law cannot prevent the attachment. The question that remained open for several years was whether or not a debtor who was using the state exemptions could exempt an ERISA pension, and if he could, how much of the pension could be exempted.
In contrast, the Circuit Court of Appeals for the Tenth Circuit in the case Gladwell vs. Harline 950 F2d 669 1991, permitted a debtor to exempt his ERISA pension under the federal nonbankruptcy exemption. Both the Fourth Circuit Court of Appeals in the case Anderson vs. Raines 907 F2d. 1476 and the Sixth Circuit in Forbes vs. Lucas 924 F2d. 597 held that ERISA pensions are not to be considered part of the debtor's estate. These courts reason it is irrelevant whether or not the ERISA pensions are exempt since a trustee cannot take them under any circumstance. These Courts of Appeals cover the following states: Fourth Circuit: Illinois, Indiana and Wisconsin; Seventh Circuit: Maryland, North Carolina, South Carolina, Virginia and West Virginia.
A Supreme Court case (Patterson vs. Shumate 119 L.Ed2d 519 1992) has settled the matter. The case dealt with the excludability from a bankruptcy estate of an ERISA plan in Virginia, a state that does not permit the use of federal exemptions. The Supreme Courtruled that REGARDLESS OF WHETHER or not federal or state exemptions are used, an ERISA pension plan having a transfer restriction (which means it cannot be transferred or assigned) is not part of the bankruptcy estate. Under this decision an ERISA pension plan with a transfer restriction is totally excluded from the bankruptcy estate and not just for the benefits needed for support.
The United States Supreme Court held as follows:
"Having concluded that 'applicable bankruptcy law' is not limited to state law, we next determine whether the anti-alienation provision contained in the ERISA qualified plan at issue here satisfies the literal terms of Section 541(c)(2).
The anti-alienation provision required for ERISA qualification and contained in the Plan at issue thus constitutes an enforceable transfer restriction for purposes of Section 541(c)(2)'s exclusion of property from the bankruptcy estate."
Taken together, the U.S. Supreme Court's Mackey and Patterson decisions mean that an ERISA pension can be taken by creditors prior to a bankruptcy but are exempt from any attachment for the benefit of the debtor's creditors after a bankruptcy petition is filed. If a large pension is involved, the debtor should consult a bankruptcy attorney for the most current statement of the debtor's state law regarding pension exemptions.
IV. WHAT CAN BE DONE IF THE PENSION IS NOT EXEMPT
If the pension is not exempt under either state or federal law, the debtor has a couple of options available although they are somewhat extreme. The debtor can do the following:
A. MOVE TO A STATE THAT PERMITS THE EXEMPTION PRIOR TO FILING. If before filing the debtor finds that the pension will be lost, the debtor can move to another state that will exempt the pension, establish residency and file for bankruptcy relief. Thedrawback is that the debtor might lose the homestead in the first state and the time involved as well. To establish residency for bankruptcy purposes, the debtor must live in the new state more than 90 days before filing the petition. Moreover, an employed person may not be able to move to another state on short notice. These are the practical problems in such a case.
B. CASH THE PENSION AND PURCHASE EXEMPT PROPERTY. The other alternative is to cash the plan, if possible, pay the taxes as required and buy exempt property that can be kept through the bankruptcy. It might even be possible to roll a nonexempt pension into an exempt pension.
Because a pension is an important part of a person's future, any reader who determines his pension may not be exempt must consult an attorney skilled in bankruptcy law.
V. EFFECT ON IRA'S AND SEP'S
Two common types of retirement plans for individuals are the Individual Retirement Accounts (IRA's) and Simplified Employee Plans (SEP's). A debtor who has a large amount invested in such plans should consult an attorney skilled in bankruptcy law before filing for bankruptcy relief.
IRA's and SEP's are considered part of a bankrupt's estate and can be lost in a bankruptcy. There is no federal exemption for IRA's and SEP's under 11 USC 522(d)(10)(E) as there are for ERISA plans. The bankruptcy courts in denying an exemption for IRA's and SEP's reason that these plans are under the substantial control ofthe debtor and there is no assurance they will be used for the debtor's support (In re Pauquette 1984, 38 BR 170, In re Hersey 1988, 88 BR 47, In re Velis 109 BR. 64). The bankruptcy court in the case In re Shackleford 1983, 27 BR. 372 rejected the argument that IRA's and SEP's were not part of the estate under the nonbankruptcy law exemptions.
The best chance a debtor has to keep IRA's, SEP's and Keogh plans is under state exemption. Many states specifically exempt such plans to the extent they are necessary for support. New York does (In re Fill 1988, 84 BR 332) and California does as well (In re Dalaimo 1988, 88 BR 268). If using the federal exemptions, there are some states that do not exempt IRA's, SEP's or Keogh Plans because of the substantial control the debtor has over the plan: Louisiana (In re Talbot 15 BR 536), Oregon (In re Mace 1978, 16 CBC 254, Nebraska Education Asst. Corp. vs. Zellner 827 F2d 1222).
Chapter 7 lists those states that permit IRA's, SEP's and Keogh plans to be exempted. The laws for these states frequently change. Before filing a petition for bankruptcy relief, if such a plan exists, the debtor should review the current status of the law either by reading the statutes as indicated and any amendments and by consulting a bankruptcy attorney.
END OF PREVIEW
EXEMPTIONS AVAILABLE TO A DEBTOR
The only property a debtor can keep after a bankruptcy is the property that was exempt or redeemed or had the debt reaffirmed. A bankruptcy starts with the premise that all of the property belongs in the estate and under the management of the trustee. Property that the debtor claims as exempt is removed from the bankruptcy estate. The debtor keeps the exempt property irrespective of what happens to the rest of the estate,
The purpose of the Bankruptcy Code is to provide the means for a person to get free from overbearing debt he cannot handle and start afresh. Since it would be difficult to start anew if totally broke, a debtor is given the opportunity to keep some of the property in the estate to begin a new life.
Property to the extent that it is classified as exempt cannot be taken and sold by the trustee. It can only be taken after the bankruptcy or earlier (if the automatic stay is lifted) by a creditor and only if the property had been pledged as collateral for a debt. For example, assume that George has a car that is worth $6,000. There is lien on it for $3,000. There is a state exemption of $1,000. The trustee sells the car for $6,000. He must pay the secured creditor $3,000 and give the debtor the $1,000 exemption. The trustee keeps the remaining $2,000 for distribution among theunsecured creditors.
II. FEDERAL EXEMPTIONS
A. WHEN ELECTION TO USE FEDERAL EXEMPTIONS IS MADE
The Bankruptcy Code provides a set of exemptions. These exemptions are listed in a schedule following this chapter. When Congress passed the Bankruptcy Code, it did not intend to overrule or preempt any state law regarding exemptions. To avoid that happening, Congress has given each state the right to decide if its residents can use the federal exemptions.
Only 13 states and the District of Columbia have permitted their citizens to using the federal exemptions instead of the state exemptions. These 13 states are:
CONNECTICUT DISTRICT OF COLUMBIA HAWAII
MASSACHUSETTS MICHIGAN MINNESOTA
NEW JERSEY NEW MEXICO PENNSYLVANIA
RHODE ISLAND TEXAS VERMONT
A citizen of any of the above jurisdictions has the option of using the applicable state exemptions or the federal exemptions. The exemption election is total. A person must elect to use either all of one set or the other. A person cannot use some of the federal and some of the state exemptions.
In electing which set of exemptions to use, the debtor should compare the sets and use the one that is most beneficial. Example: The federal homestead exemption is $7,500; the Wisconsin exemption is $40,000. The Wisconsin state exemption is better. On the other hand, the Virginia homestead exemption is only $5,000.
The exemptions are placed in groups for ease of comparison. A person should compare both state and federal exemptions and perhaps those of selected other states. It might be beneficial for a person to move to another state and live there for three or more months before filing for bankruptcy. By choosing, the person can have that state's exemptions or perhaps the federal exemptions, depending on which state the person chooses.
B. WHEN ELECTION TO USE FEDERAL EXEMPTION IS NOT MADE
If a person is not permitted to use the federal exemptions or does not wish to do so, there are several exemptions available under the general federal law for use with the state exemptions. These particular non-bankruptcy exemptions cannot be taken if the debtor elects to use the federal set of bankruptcy exemptions. No state can prevent its citizens from taking these nonbankruptcy exemptions along with the state exemptions.
These special exemptions do not derive from the bankruptcy code, they derive from statutes throughout the United States Code. These special nonbankruptcy exemptions follow the end of this chapter. When making an election between federal and state exemptions (in those states permitting it), a person should not forget to compare federal bankruptcy and nonbankruptcy exemptions. It might prove to be more advantageous to use the state exemptions with the federal nonbankruptcy exemptions than the federal exemptions alone.
III. STATE EXEMPTIONS
Every state has its own list of property that a citizen may claim as exempt from attachment. In a bankruptcy this list of exemptions determines what property a debtor is allowed to claim as exempt if federal exemptions are not used.
Following this chapter are the exemptions of the 50 states and the District of Columbia. A person contemplating a bankruptcy filing should review the exemption schedule of his state of residence (or the District of Columbia if that is where the person resides) and the nonbankruptcy exemptions schedule. If the person lives in a state that permits its citizens to use the federal exemptions, he should compare the two schedules.
The only way to compare schedules is to enter in the values of the property that will be claimed as exempt. Example: having a $7,500 homestead exemption does not do much good if the person does not have a homestead. Knowing that an exemption is available gives a person the incentive to sell nonexempt property and invest the proceeds in exempt property prior to filing bankruptcy.
A debtor should select and maximize those exemptions that will permit the most money or property to be kept after the bankruptcy. In order to maximize the property to be kept, the debtor should elect the most favorable set of exemptions (federal or state plus the nonbankruptcy set) and attempt to maximize the exemption by increasing the debtor's equity in the property.
If a person's equity in exempt property exceeds the amount of the exemption, the person should consider selling the propertyprior to the bankruptcy and reinvesting the proceeds in exempt property. Then again, the debtor may more quickly borrow against the property to reduce the equity and invest the borrowed funds in exempt property. Any equity in exempt property may be lost in a bankruptcy. Example: A person has a home with an equity of $10,000. The homestead exemption is $7,500. In a bankruptcy the overage will be lost. If the person borrows $2,500 the house as collateral, the equity is reduced to the homestead limit. The money may then be used to buy a car, may also be exempt. While such planning is possible the debtor should consult with a bankruptcy attorney first to determine how such actions are viewed in the bankruptcy court where the petition will be filed.
SUMMARY OF STATE EXEMPTIONS
(ALL STATUTES REFER TO THE ALABAMA CODE)
There is a $5,000 general exemption on any personal property by Statute 6-10-6. In 1983, the Bankruptcy Court for Alabama in the case IN RE MORRIS 30 B.R. 392 denied the application of this exemption to insurance proceeds.
The following government benefits are exempt:
1. Aid to AFDC, aged, blind and disabled by statute 38-4-8.
2. Black lung benefits (pneumoconiosis) by statute 25-5-179.
3. Compensation to victims of crimes by statute 15-23-15.
4. Prisoner of war benefits by statute 31-7-2.
5. Unemployment compensation by Statute 25-4-140.
6. Worker's Compensation benefits by Statute 25-5-86.
In Alabama Code statute 6-10-2, there is a $5,000 homestead exemption on real property or a mobile home. The property cannot exceed 160 acres. A homestead declaration must be recorded beforeany sale of the property. A husband and wife filing for bankruptcy relief may double this exemption (each can take the full amount).
There are several exemptions for different types of insurance proceeds in Alabama law:
1. Annuity proceeds of $250.00 per month are exempt by Statute 27-14-32.
2. Benefits from fraternal societies are exempt by Statute 27-24-27.
3. Benefits from mutual aid associations are exempt by Statute 27-30-25.
4. Disability benefits of $250 per month are exempt by Statute 27-14-31.
5. Life insurance proceeds when the debtor-beneficiary is the insured's spouse are exempt by Statutes 6-10-8 and 27-14-29.
6. Life insurance proceeds when the debtor-beneficiary is the insured's exempt child by Statute 6-10-8.
7. Life insurance proceeds when the insurance policy prohibits payment of the proceeds being made to the debtor-beneficiary's creditors are exempt by Statute 27-15-26.
Alabama has exemptions for the following personal property:
1. Books by Statute 6-10-6.
2. Church pew by Statute 6-10-5.
3. Family pictures and portraits by Statute 6-10-6.
4. Funeral plot by Statute 6-10-5.
5. Needed clothing by Statute 6-10-6;
6. Property of a business partnership by Statute 10-8-72.
The following retirement benefits are exempt:
1. An anti-alienation provision in an ERISA qualified pension constitutes a restriction on transferability under Section 541(2) of the Bankruptcy Code the pension from the bankruptcy estate of whether federal or state exemptions are used by the debtor (Patterson vs. Shumate 112 S.Ct. 2442).
2. Judges are exempt only to the extent of payments being received by Statute 12-18-10.
3. Law Enforcement Officers by Statute 36-21-77.
4. State Employees by Statute 36-27-28.
5. Teachers by Statute 16-25-23.
TOOLS OF THE DEBTOR'S TRADE
By Alabama law, arms, uniforms, equipment which the debtor is required to keep as a member of the National Guard by statute 31-2-78.
There is an exemption of 75% of earned but unpaid wages under 6-10-7.
(ALL STATUTE REFERENCES ARE TO THE ALASKA STATUTES)
The following government benefits are exempt:
1. By Statute 9.38.015:
(a) Compensation to victims of crimes.
(b) Alaska longevity bonus.
(c) Federally exempt public benefits.
2. Unemployment compensation by Statute 23.20.405.
3. Worker's Compensation benefits by Statute 9.38.015.
4. One-half of permanent fund benefits by Statute 43.23.065.
5. General Relief by Statute 47.25.395.
6. Aid to AFDC by Statute 47.35.395.
7. Aid to the aged, blind and disabled by Statute 47.25.550.
By Alaska Code Statute 9.38.010, there is a $54,000 homestead exemption. If joint owners file for bankruptcy, the total exemption is $54,000.
There are several exemptions for different types of insurance proceeds by Alaska law:
1. Benefits from fraternal societies are exempt by Statute 21.84.240.
2. Disability benefits by Statutes 9.38.015 and 9.38.020.
3. Insurance proceeds for wrongful death or personal injury to the extent of exempt wages by Statute 9.38.030.
4. Life insurance proceeds when the debtor-beneficiary is the insured's spouse or dependent are exempt, to the extent of exempt wages by Statute 9.38.030.
5. Life insurance or annuity contract with a value of $10,000 by Statute 9.38.025.
6. Medical and hospital benefits by Statute 9.38.015.
Alaska has exemptions for the following personal property:
1. By Statute 9.39.015:
(a) Funeral plot.
(b) Medical aids.
(c) Child support payments.
(d) Liquor licenses.
(e) Alaska fisheries permits for limited entry.
2. By Statute 9.38.020:
(a) Books, family pictures, portraits and heirlooms of $3,000.
(b) Jewelry of $1,000.
(c) Motor vehicles with equity of $3,000.
(d) Pets worth of $1,000.
3. Recoveries for personal injuries and wrongful death to the extent of exempt wages by Statute 9.38.030.
4. Alimony to the extent of exempt wages by Statute 9.38.030.
5. Recoveries for damaged property by Statute 9.38.015.
6. Business partnership property by Statute 9.38.100.
7. Building Materials by Statute 34.35.105.
The following retirement benefits are exempt:
1.An anti-alienation provision in an ERISA qualified pension constitutes a restriction on transferability under Section 541(2) of the Bankruptcy Code that excludes the pension from the bankruptcy estate of whether or not federal or state exemptions are used by the debtor (Patterson vs. Shumate 112 S.Ct. 2442.)
2. ERISA, IRA and Keogh benefits deposited more than 120 days before filing the bankruptcy relief by Statute 9.38.017.
3. Public employees by Statute 9.38.015.
4. Teachers but only for benefits increasing by Statute 9.38.015.
5. Other pension plans but only for payments being received to the extent of exempt wages by Statute 9.38.030.
TOOLS OF THE DEBTOR'S TRADE
By Alaska law there is an exemption for books, tools and implements used in the debtor's trade to $2,800 by Statute 9.38.020.
Weekly earnings of $350 are exempt. If the debtor is the sole wage earner for the household it is $550 by Statutes 9.38.030 and 9.38.050.
END OF SAMPLE PREVIEW OF STATE EXEMPTIONS
V. FEDERAL NONBANKRUPTCY EXEMPTIONS
When a debtor uses the state exemptions or the exemptions of the District of Columbia, the debtor is permitted to also claim the following nonbankruptcy exemptions:
1. Railroad workers' unemployment insurance under 45 U.S.C. Section 352(e).
2. Social Security benefits under 42 U.S.C. Section 407.
3. Veteran's benefits under 38 U.S.C. Section 3101.
The following insurance benefits are exempt for a debtor not using the federal exemptions:
1. Group life insurance for the military under 38 U.S.C. Section 770(g).
2. Death and disability benefits to government employees under 5 U.S.C. Section 8130.
3. Death and disability payments to harbor workers and longshoremen under 33 U.S.C. Section 916.
4. Death and disability payments for military service under42 U.S.C. Section 1717.
The following personal property is exempt for a person using the state exemptions of District of Columbia:
1. Seaman's clothing under 46 U.S.C. Section 11110.
2. Savings accounts of military deposits while on duty outside the U.S. under 10 U.S.C. Section 1035.
3. Tribe benefits for Klamath Indians residing in Oregon under 25 U.S.C. Sections 534 and 545.
4. Survivor's benefits for military service under 10 U.S.C. Section 1450.
5. Benefits for lighthouse workers' survivors under 33 U.S.C. Section 916.
6. Benefits for survivors of Judges, judicial directors, U.S. court directors under 28 U.S.C. Section 376.
The following retirement plans can be claimed as exempt by a debtor using state exemptions or the exemptions of the District of Columbia:
1. An anti-alienation provision in an ERISA qualified pension constitutes a restriction on transferability by Section 541(2) of the Bankruptcy Code that excludes the pension from the bankruptcy estate whether or not federal or state exemptions are used by the debtor (Patterson vs. Shumate 112 S.Ct. 2442).
2. CIA employees under 50 U.S.C. Section 403.
3. Civil Service employees under 5 U.S.C. Section 8346.
4. Foreign Service employees under 22 U.S.C. Section 4060.
5. Military employees under 10 U.S.C. Section 1440.
6. Railroad workers under 45 U.S.C. Section 231m.
7. Military honor roll pensions under 38 U.S.C. Section 562.
TOOLS OF TRADE
The following exemptions exist for debtors using the state exemptions or the District of Columbia exemptions:
1. 75% of earned but unpaid wages under 15 U.S.C. Section 1673.
2. Seamen's wages while on a voyage and pursuant to a written contract under 46 U.S.C. Section 11111.
END OF PREVIEW
THE MEETING OF CREDITORS
Under Section 341 of the Bankruptcy Court, the trustee is required to hold a meeting of creditors within a reasonable period of time after the filing of the bankruptcy petition. Notice of the time and place of the meeting is mailed to the debtor and all of the designated creditors by the clerk of the bankruptcy court.
Section 341 reads as follows:
"(a) Within a reasonable time after the order for relief in a case under this title, the United States trustee shall convene and preside at a meeting of creditors.
(b) The United States trustee may convene a meeting of any equity security holders.
(c) The court may not preside at, and may not attend, any meeting under this section including any final meeting of creditors."
The meeting of creditors is conducted pursuant to section 341 by the trustee. In order not to intimidate the parties and to allow free and unhindered discussion and possible settlements, the bankruptcy judge is specifically prohibited from presiding over or even attending any meeting of creditors. The clerk of the bankruptcy court usually presides over the meeting, but the creditors may, under Rule 2003, elect another presiding officer.
Bankruptcy Rule 2003 calls for the first creditor's meeting to be held between 20 and 40 days of the filing of the petition. Under Rule 2003 if the court designates the place for the meeting and there is no clerk regularly assigned at that place, the time in which to hold the meeting is extended to 60 days.
The usual location of the creditors meeting is where the regular sessions of the bankruptcy court are held. The court may designate other locations for the meeting that are convenient for the parties. The time and place of the meeting is not set in stone and can be delayed or changed for various reasons, such as a motion to dismiss the petition or illness of any of the parties. In some courts postponement of the meeting is easy while in others it is more difficult. Basic questions are asked of the debtor at the meeting by the trustee and by the creditors.
The purpose of the meeting is for the creditors to examine the debtor and ensure that all of the debts and assets of the debtor have been listed. Bankruptcy Rule 2004(b) governs the scope of the debtor's examination and reads as follows:
(b) Scope of Examination. The examination of an entity under this rule or of the debtor under Section 343 of the Code may relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate, or to the debtor's right to a discharge.
Secured creditors are particularly interested in their collateral. Most of the secured creditors will want an account of where their collateral is located, its condition and how the debtor determinedits value. The secured creditors will be somewhat hostile where the debtor is attempting to reduce or eliminate a lien on the property through a redemption or lien avoidance, but there is nothing they can do about it. If the creditors become overly obnoxious the debtor can complain to the clerk who will then admonish the creditors. The debtor should be prepared for some of the following questions:
BY THE TRUSTEE
1. What is your name and address?
2. Are you married? If so, state spouse's name, address and date of marriage.
3. If married has your spouse filed bankruptcy separately or prior to your petition?
4. Have you ever used another name?
5. Why are you unable to pay your debts?
6. Will you be able to pay your debts in the future if the application you had filed for bankruptcy relief is approved?
7. Are you expecting any inheritances, insurance payments or property settlements in the future?
8. Have you made any sales of your property within the last year? If so what was sold, to whom, for how much and how was the value calculated?
9. Have you made any gifts within the last year? If so, what was given, to whom and what was its value?
10. Are you still using credit cards? If no, have they been canceled or returned?
11. Have you listed all of your creditors having priority on Schedule E?
12. Have you listed all of your secured creditors on yourSchedule D?
13. Have you listed all of your unsecured creditors on Schedule F?
14. Have you listed all of your real property on Schedule A?
15. Have your listed all of your personal property on Schedule B?
16. Have you listed all your other property on Schedule B?
17. Has all of the property that you claim as exempt been listed on Schedule C?
18. Is your Summary of Assets and Debts correct?
19. Did you prepare the petition yourself? If not, who helped?
20. Did you pay an attorney or typing service for assistance in preparing this petition? If so, who, and are you engaged in any lawsuits either as a plaintiff or defendant?
22. Do you have any expectation of any money coming to you in the future, including tax refunds, that has not been stated?
23. Have you surrendered or had any property repossessed during the last year?
Creditors and secured creditors in particular will usually ask some version of the following:
1. Where is the collateral located?
2. Have you disposed of any of the collateral? If so to whom and for how much?
3. What is the condition of the collateral?
4. If you are surrendering the collateral, when can it be repossessed?
5. Did you previously sell non exempt property and use the proceeds to increase your equity in exempt property? If so what property was sold and in what exempt propertywere the proceeds invested?
6. If the lien is being reduced, the creditors will ask:
(a) How much is the collateral now worth?
(b) How did you determine the property's value?
7. If a reaffirmation is sought the creditor will ask:
(a) How much is the collateral worth?
(b) What is its condition?
(c) How will you be able to make the payments?
It is usually at the meeting of creditors that the negotiations for redemption or ratification agreements take place. When a ratification agreement is completed it is submitted to the court for approval at a discharge hearing. A redemption agreement does not have to be approved by the court; although it could be. If the secured creditors do not agree to have their liens voided or the property redeemed, the debtor must file a motion to seek court resolution of the matter (see Chapters 9 and 10).
Ordinarily there is only one creditor's meeting. If the first meeting is not completed or new information such as an undisclosed creditor later arises, more creditor meetings may be held.
III. CREDITORS OBJECTIONS
A. TO EXEMPTIONS CLAIMED BY DEBTOR
If after the meeting, a creditor objects to an exemption claimed by the debtor, the creditor is thereafter required to file objections with the court under Bankruptcy Rule 4003. Bankruptcy Rule 4003 reads as follows:
(b) Objections to Claims of Exemptions. The trustee or any creditor may file objections to the list of propertyclaimed as exempt within 30 days after the conclusion of the meeting of creditors held pursuant to Rule 2003(a) or the filing of any amendment to the list or supplemental schedules unless, within such period, further time is granted by the court. Copies of the objections shall be delivered or mailed to the trustee and to the person filing the list and the attorney for such person.
If creditor objections are filed, a hearing is scheduled to determine if the exemption should be denied. The burden of proof is entirely on the creditor. Unless ordered to do so by the local rules of court, the debtor is not even required to file a response to the creditor's objections. Given the importance of exemptions, however, in such an event the debtor should consult an attorney who specializes in bankruptcy law.
END OF PREVIEW
It is not uncommon for a debtor to wish to keep certain property that would otherwise be lost in the bankruptcy. The purpose of the bankruptcy law is to provide a reasonable means for a debtor to begin anew when his debts are such that they cannot all be paid. Congress created an overall scheme of exemptions under both state and federal law.
Often some or all of the debtor's exempt property will be encumbered by judicial liens or security interests that prevent the exemption. Unless the lien is removed from the property, the debtor will be unable to claim an exemption on the property. If the exemption is not claimed, it will be lost in the bankruptcy. It tends to defeat the purpose of the Bankruptcy Code to give a debtor exemptions and not allow them to be taken because of liens on the property. Congress attempted to resolve this problem by permitting a debtor to reduce or avoid altogether a lien on certain personal property.
Under Section 522(f) of the Bankruptcy Code, a procedure is created whereby a debtor may eliminate or reduce the amount of liens on certain exempt property.
"(f) Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if the lien is:
(1) A judicial lien, or
(2) A nonpossessory, nonpurchase money security interest in any:
(a) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor,
(b) implements, professional books, or tools of the trade of the debtor, or the trade of a dependent of the debtor, or
(c) professionally prescribed health aids for the debtor or a dependent of the debtor."
Lien avoidance permits the debtor to reduce or remove a lien on otherwise exempt property to the extent the lien impairs an exemption. If the property would be exempt under whatever exemption schedule the debtor employs (the federal or state schedule), the lien may be removed from the property if it is oneof the following:
A. A JUDICIAL LIEN. A judicial lien is lien created by virtue of a court decree or judgment usually resulting from a lawsuit. For example, assume that a debtor had a judgment taken against him. Recordation of the judgment created a lien against the real property of the debtor that impairs the debtor's homestead exemption. The debtor can seek to have the judicial lien reduced to the extent of the homestead exemption. Judicial liens can be avoided on any exempt property of the debtor, including real estate, automobiles, and pensions.
Sometimes in order to get credit a creditor must execute a "confession of judgment" for use against the debtor in the event of default in making the payments. A "confession of judgment" permits the creditor to go to court immediately upon a debtor's default and get a judgment against the debtor without ever serving the complaint or giving the debtor an opportunity to offer a defense. A confession of judgment is used in conjunction with a security agreement. Under the law a confession of judgment is construed more liberally than a judicial lien. A lien secured by a confession of judgment can be avoided as a judicial lien, even if it might not be avoidable as a nonpurchase security interest. (In re Fisher 13 B.R. 286 1981, and In re Gardner 685 F.2d 106).
B.STATUTORY LIEN. A judicial lien is different from a statutory lien imposed on the debtor's property. A statutory lien is imposed by operation oflaw and created automatically by law such as mechanic's liens or a lien from a divorce decree. A statutory lien cannot be avoided; a judicial lien can. Some statutory liens can be avoided by the trustee under Section 545 which reads:
"545. Statutory Liens. The trustee may avoid the fixing of a statutory lien on the property of the debtor to the extent that such lien:
(1) First becomes effective against the debtor:
(a) when a case under this title is commenced,
(b) when an insolvency proceeding other than under this title concerning the debtor is commenced,
(c) when a custodian is appointed or authorized to take possession,
(d) when the debtor becomes insolvent,
(e) when the debtor's financial condition fails to meet a specified standard, or
(f) at the time of an execution against property of the debtor levied at the instance of an entity other than the holder of such statutory lien,
(2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists,
(3) is for rent, or
(4) is a lien of distress for rent."
In order to perfect a statutory lien, the creditor is required to comply with all of the filing requirements under state law. A mechanic's lien requires that appropriate notices be filed within set time periods with the county recorder and to be followed by a lawsuit. If the filings are not made the lien lapses.
The majority of liens are judicial, not statutory in nature,and can be avoided to the extent they impair an exemption.
B. NONPURCHASE MONEY SECURITY INTERESTS. In addition to judicial liens that can be avoided on any exempt property, liens on nonpurchase money security interests can be avoided for the following property:
(a) Household furnishing, goods, clothing, appliances, books, animals, crops, musical instruments or jewelry used primarily for the debtor's personal, family or household use;
(b) Implements, professional books or tools-of-trade for either the debtor or a dependent; (some states do not have a tools of trade exemption; therefore if the federal exemptions are not used, no lien on this property can be avoided);
(c) Health aids for debtor or dependent if prescribed.
As with a judicial lien, the "nonpurchase money security lien" must attach property that would otherwise be totally or partially exempt. A "nonpurchase money security interest" is defined as a lien given as a pledge or collateral for a loan. Example: George borrows $5,000 from Ed. Ed signs a security agreement using his house as collateral. By doing so, George has given Ed a nonpurchase money security interest in the house. Motor vehicles are not specifically mentioned as the type of property for which a nonpurchase money lien can be avoided. Unless the motor vehiclequalifies for an exemption as a "tool of the trade" the lien on it cannot be avoided (a lien on a motor vehicle might still be avoidable if it meets the requirements for a judgment lien).
III. HOW THE AMOUNT AVOIDED IS CALCULATED
Once it is determined that a lien on exempt property can be avoided, the next matter is to decide how much of the lien is avoidable. The amount of lien avoidance depends on the amount of the exemption on the property, the size of the lien on the property and the value of the property.
If all of the property is exempt, the size of the lien makes no difference because the entire lien will be avoided. Under Pennsylvania law sewing machines are exempt. A judicial lien or nonpurchase security lien on a sewing machine will be entirely avoided regardless of the amount.
If the property is worth more than the exemption limit the lien is reduced to guarantee the exemption and the remainder is given to the creditor. For example, assume that Ohio permits an exemption of $200 for a piano. The piano is worth $400 and the creditor has a lien of $500. The court will reduce the value of the lien to $200 and have the remaining $300 of the lien eliminated.
The lien avoidance works as follows:
Value of the Property ..........................................$400
minus the exemption amount ...............................-$200
..............remaining part of lien $200
After the lien avoidance the debtor will still owe $200 on theproperty. If the lien balance is not paid the creditor can still foreclose for the nonpayment of the unavoided balance.
After the debtor has determined that a lien on exempt property is avoidable, his next step is to list the property on which the lien is to be avoided on the "Statement of Intention" filed with the court. If the creditor objects to the lien avoidance the debtor must petition the court to avoid the lien. The bankruptcy court will not reduce or eliminate a lien on its own discretion. The Bankruptcy Code requires that the debtor request lien avoidance from the court.
The procedure for a debtor to request lien avoidance is simple. The request for lien avoidance is made in the form of a motion. A pleading (a writing requesting lien avoidance) is filed with the court and mailed to the creditor having the lien. The creditor may object to the lien avoidance and file a pleading in opposition to the lien avoidance. The creditor cannot prevent a lien avoidance if it is proper under the law. The most that a creditor can do is contest the fair market value given to the property in the calculation of the amount of lien to be avoided if there is a valid exemption available.
Following this chapter are sample forms for motions seeking lien avoidance. A debtor wishing to avoid a lien can retype the correct lien avoidance form. He then inserts the debtor'sinformation where indicated and files it with the court.
The steps for filing a motion are as follows:
1. Consult the local rules for the bankruptcy court for any special rules or format regarding motions. There probably will be no special requirements. The general rule is that it requires a minimum of 30 days notice to the other party (in this case the creditor). Notice means that the hearing on the motion is set on a date at least 30 days after the motion is mailed to the creditor. The date of mailing is shown by the Proof of Service that is filed with the motion.
2. The debtor should call the clerk and ask when motions for lien avoidance are heard. Some courts only hear these motions on certain days and times of the week. The debtor can also ask if there are any special local notice requirements for the motion or if the standard 30 days minimum notice is followed (it usually is). The debtor then types out the motion and the notice of motion. All court pleadings must be on lined paper and in the format shown by the sample motion. This paper can be purchased at any stationary store. Several sheets of this paper follow this chapter and more copies can be made of them if necessary.
3. Preparing the motion is nothing more than completing inthe blanks. The sample motions following this chapter cover both avoiding judicial and nonpurchase security liens. Once the correct type of motion is chosen based on the type of lien to be avoided, the debtor fills the blanks with the information from his case. In the case of a judicial lien the debtor should attach a copy of the judgment giving rise to the lien. The information should be detailed enough that the bankruptcy court will be fully informed on what the other court ordered in its judgment.
4. After the motion is typed, complete a proof of service and blank order approving the lien avoidance for the judge to sign. Some courts prepare their own orders, but it doesn't hurt to be prepared. When everything is done make at least 5 copies.
5. After the copies are made, a copy should be given to a person over 18 years of age to mail. That person completes the proof of service and mails it to the creditor. The date of the hearing must be at least 30 days after the date of mailing. The person must sign the proof of service for the original motion and other copies.
6. After the motion has been mailed to the creditor (along with the proof of service and Order Avoiding the Lien)the debtor goes to the clerk's office and files the motion. The clerk will put a time and date stamp on the original and keep it along with the additional copies local rules require. The remaining copies will be stamped and returned to the debtor.
7. After filing, all that remains is for the debtor to wait for the date of the hearing. On that date the court will hold a hearing that the debtor must attend to determine how much of the lien will be avoided. The creditor may appear to challenge the exemption but more likely than not the creditor will just send written objections. If no objection is filed, the lien will be automatically avoided by the court.
If arguments are necessary, the debtor goes first and simply states that the property is exempt under the applicable state or federal exemption and the current value of the property. The creditor responds, but his reply is limited to challenging the right to claim the exemption and arguing the value of the property. The judge decides whether to grant or deny the lien avoidance. Usually the judge announces the decision from the bench. Sometimes the judge will take the matter under submission and mail the decision to each of the parties in a few days.
The one thing to remember is that nothing is final until thedischarge is granted. If mistakes are made in the form of the motion or in giving notice, the hearing might be dropped (taken off calendar so that it can be redone), but the creditor will not lose his rights under the bankruptcy because of such procedural errors. The debtor will simply be allowed to do it over again, and this time he will know the mistakes to avoid.
V. EFFECT OF STATE LAWS ON LIEN AVOIDANCE
Several states have laws that prevent a debtor from engaging in lien avoidance when state exemptions are used. The validity of these had been in question for many years. In re Pelter 16 C.B.C. 306 1986, held that even if the state opts not to allow the federal exemption scheme under Section 522(d) there is no similar option under 522(f): the debtor's lien avoidance powers remain intact.
Finally, in its decision Owen vs. Owen 114 L.Ed.2d 350,111 S.CT 1833, the United States Supreme Court held that a debtor was permitted to avoid a lien even though state law (Florida) prohibited the lien avoidance.In its decision, the Supreme Court stated:
"Nothing in the text of Section 522(f) remotely justifies treating the two categories of exemptions differently. The provision refers to the impairment of 'exemptions to which the debtor would be entitled under subsection (b), and that includes federal and state exemptions alike...
On the basis of the analysis we have set forth above with respect to federal exemptions and in the light of the equivalency of treatment accorded to federal and state exemptions by section 522(f), we conclude that Florida's exclusion of certain liens from the scope of its homestead protection does not achieve a similar exclusion from theBankruptcy Code's lien avoidance provision."
As a result of this decision the Supreme Court made it clear where a lien impairs an exemption that would otherwise be allowed, if not for the presence of the lien, lien can be avoided.
Following hereafter are 8 basic forms that should be adequate in the bankruptcy courts for all 50 states and the District of Columbia:
1. Notice of Motion to Avoid Nonpossessory Nonpurchase Money Security Interest
2. Motion to Avoid Lien
3. Proof of Service
4. Order Avoiding Lien
5. Notice of Motion to Judicial Lien
6. Motion to Avoid Lien
REDEMPTION OF SECURED PROPERTY
A debtor should never forget that the purpose behind the Bankruptcy Code is to provide a means for a person to begin afresh. As a society we no longer have debtor prisons or indenturement to force people in dire straits to enter into a life of virtual slavery. It is in furtherance of this avowed purpose that Congress created the bankruptcy law at a time when other civilized nations, such as Great Britain and France, still had debtors' prisons.
One of the provisions of the Bankruptcy Code permits a debtor to redeem personal property intended primarily for personal, family or household use that would otherwise be lost in the bankruptcy. The property is redeemed (purchased) from the creditor having a lien on the property by paying the fair market value ,not what is actually owed on the property.
Redemption usually occurs where the debtor owes more on the property than it is worth. In this case the debtor simply pays what the property is worth, not what is owed. If a table is worth $500 and the debt is $1,000, on redemption the debtor pays $500 for it. It makes no sense to pay $1,000 for a property worth half that. If the debtor owes less than the property is worth, it makes no sense to redeem the property, but the debtor should either reaffirm the debt or simply continue making the payments. Example: The table isworth $1,000 and only $400 is owed. Redeeming would mean the debtor would have to pay $1,000 when only $400 is owed. If the debt is reaffirmed, as discussed in the next chapter, the debtor simply continues to pay the original debt of $400 and gets the $1,000 table. In the absence of the reaffirmation agreement, the creditor simply continues to make the payments in the hope that the debtor doesn't repossess the property, which the creditor will not do as long as the payments are made.
Redemption is the favored means of keeping an automobile when the lien on the vehicle cannot be avoided because it is a purchase money lien, not a judicial lien or not used in business (see Chapter 9).
Usually redemption payments must be made in a lump sum unless the creditor agrees to take payments. A few courts will require the debtor to take the payment in installments at the same rate of interest (In re Clark 10 B.R. 605).
Under section 722 of the Bankruptcy Code a debtor may redeem certain exempt property encumbered by creditor's secured interests. Unlike lien avoidance, the secured interests the debtor is attempting to reduce can be either purchase money or nonpurchase money security interests.
Section 722 reads as follows:
722. Redemption. An individual debtor may, whether or not the debtor has waived the right to redeem under this section,redeem tangible personal property intended primarily for personal, family, or household use from a lien securing a dischargeable consumer debt if such property is exempted under section 522 of this title or has been abandoned under section 524 of this title by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien.
For there to be a redemption, the property must satisfy the each of the following requirements:
1. THE LIEN MUST BE FROM A CONSUMER DEBT. A consumer debt is one that was not incurred for business. This is proven by the fact that the property is used primarily for personal, household or family use.
2. THE LIEN MUST BE ON PERSONAL PROPERTY. To have a redemption, the lien must cover personal property, not real property. The personal property must be of a tangible nature. Example: cars, furniture, boats, clothing are tangible and redeemable property. Stocks, bonds and promissory notes are intangible property and not redeemable.
3. THE PROPERTY MUST BE EXEMPT OR ABANDONED BY THE TRUSTEE. As lien avoidance, only property that is exempt under whatever schedule of exemptions the debtor uses can be redeemed. Unlike lien avoidance, property that is not otherwise exempt may be redeemed if the trustee has abandoned it (allowed the creditor to take it). Since the trustee does not wish to be bothered with the property, there is no valid reason why the debtor should be prevented from redeeming it for fair market value.
In fact court decision In Re Williams 9 B.R. 701 held that redemption is possible even for property that is not exempt and not abandoned by trustee. This was a special situation where the court denied an exemption unless the equity in the property exceeded the secured debt. This is a minority view, but there is no harm in asking for redemption when it would be beneficial. The worst the court can say is no because the motion would have been made in good faith.
III. HOW THE REDEMPTION SUM IS CALCULATED
Once it is determined a redemption is possible on exempt property covered by a consumer property lien, the redemption price must be determined. In a redemption, the claims are classified as secured or unsecured rather than classifying the creditors as secured or unsecured.
Section 506 (a) reads as follows:
(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to set off under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to set off, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to set off is less than the amount of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.
Under section 506(a) when the value of property does not equal or exceed the lien, the lien is only secured to the value of the property, the remaining balance of the lien being an unsecuredclaim. The redemption price would be the secured value of the claim at the time of the filing of the bankruptcy petition.
For example, assume that the debtor has a piece of exempt property worth $1,000; the lien is $1,800. Under the redemption procedure, the exempt property can be purchased by paying the creditor the fair market value of $1,000. The remaining $800 that exceeds the value of the property is canceled.
After the court issues its order permitting the exemption, the debtor will have to pay the redemption price ($1,000 in the above example) usually within 45 days unless the creditor agrees to take installments. If the payment is not made the creditor can proceed with the foreclosure for the entire amount of the original debt. In the case of foreclosure the creditor takes the property, sells it and applies the proceeds to the full outstanding balance. Any proceeds remaining they are paid to the debtor's trustee. If there is a balance owing, the creditor must absorb the loss and cannot get the deficiency from the debtor.
The procedure for redemption is easier than it is for lien avoidance if the creditor does not object. With a lien avoidance the debtor must list on the Statement of Intention what property he wishes to redeem. If the creditor and debtor can agree on the fair market value of the property, the parties execute a redemption agreement detailing the payments to be made thereunder. Redemptionpayments must be made within 45 days of the agreement unless the creditor agrees to take installments. It is not necessary to seek court approval of the redemption agreement. A sample form of the redemption agreement follows this chapter.
If the creditor will not agree to a redemption or disputes the fair market value of the property, the debtor must file a motion with the bankruptcy court. The judge determines if the redemption is proper and what should be the redemption price.
The request for redemption is made in the form of a motion. A pleading (a writing requesting redemption) is filed with the court and mailed to the creditor having the lien. The creditor may object to the redemption and file a pleading in opposition to the redemption. The creditor cannot prevent a redemption if it is proper under the law. The most a creditor can do is contest the fair market value given to the property in the calculation of the amount of the lien to be avoided if there is a valid exemption available.
Following this chapter is a sample form for a motion seeking redemption. A debtor wishing to redeem exempt personal property can type the redemption motion by inserting the debtor's information where indicated and file it with the court.
The steps for filing a motion are:
1. Consult the rules of the local bankruptcy court for any special procedures or format regarding motions. Thereprobably will be no special requirements. The general rule requires a minimum of 30 days notice to the other party (in this case the creditor). "Notice" means the hearing on the motion is set on a date at least 30 days "after the motion was mailed to the creditor." The date of mailing is shown by the "proof of service" that is filed with the motion.
2. The debtor should ask the clerk when motions for redemption are heard. Some courts hear these motions only on certain days and times of the week. The debtor can also ask if there are any special local notice requirements for the motion or if the standard 30 days minimum notice applies. The debtor then types the motion and the notice of motion. All court pleadings must be on lined paper and in the format shown by the sample motion. This paper can be purchased at any stationary store. Several sheets of this paper follow the lien avoidance chapter.
3. Preparing the motion is nothing more than filling the blanks. The sample motion for redemption follows this chapter. The debtor fills the blanks with the information from his case.
4. After the motion is typed, complete a proof of service and blank order approving the redemption for the judge tosign. Some courts prepare their own orders, but it doesn't hurt to be prepared. When everything is done make at least 5 copies.
5. After the copies are made, a copy is given to a person over 18 years of age to mail. That person (the mailer) will sign the proof of service and mail it to the creditor. The date of the hearing must be at least 30 days after the date of mailing. The mailer must sign the proof of service for the original and other copies.
6. After the motion has been mailed to the creditor (with the proof of service and "order avoiding the lien"), the debtor files the motion in the clerk's office. The clerk will put a time and date stamp on the original and keep it with the additional copies local rules require. The remaining copies will be stamped and returned to the debtor.
7. After filing, all that remains is for the debtor to wait for the date of the hearing. On that date the court will hold a hearing (the debtor must attend) to determine how much if any of the lien should be avoided. Creditors may appear to challenge exemptions, but more likely than not creditors will just send written objections. If no objections are filed, the lien will be automatically avoided by the court.
If arguments are necessary, the debtor appears first and states the property should be exempt under the applicable state or federal exemption and describes the current value of the property. The creditor responds, but his reply is limited to challenging the right to claim the exemption and arguing the value of the property. The judge decides whether or not to grant or deny the redemption. Usually the judge announces the decision from the bench. Sometimes the judge takes the matter under submission and mails the decision to each of the parties in a few days.
The one thing to remember is that nothing is final until the discharge is granted. If mistakes are made in the form of the motion or in giving notice, the hearing might be dropped (taken off calendar so that it can be redone), but the creditor will not lose his rights under the bankruptcy because of procedural errors. The debtor will simply be allowed to do it over again, and this time he will know the mistakes to be avoided.
Following are basic forms that should be valid and acceptable in the bankruptcy courts of all 50 states and the District of Columbia:
1. Redemption Agreement
2. Notice of Motion to Redeem Personal Property
3. Motion to Redeem Personal Property
4. Proof of Service
5. Order Authorizing Redemption of Personal Property
END OF PREVIEW
REAFFIRMATION OF DEBT ON SECURED PROPERTY
Reaffirming discharged debts revives the obligation of the debtor to pay them. By filing for bankruptcy protection the debtor was relieved of the responsibility to pay the dischargeable debts. By filing for bankruptcy relief the debtor lost the right to keep any property pledged as security for a discharged debt. To keep that property the debtor must do one of four things:
1. Seek a lien avoidance: good for judicial liens or nonpurchase money liens on personal property and tools of trade that are otherwise exempt (see Chapter 9).
2. Seek a redemption: a purchase of exempt property for its current fair market value.
3. List nonexempt property as abandoned and keep it until it is repossessed or continue to keep making the payments and it probably will not be repossessed.
4. Reaffirm the debt for nonexempt property. This guarantees that the property will not be repossessed as long as the payments are made under the agreement.
The only time a ratification agreement makes sense is when the property is worth more than is owed and it would cost the debtor more to replace than to continue to pay. Example: The debtor's car is worth $2,000 and is not exempt under state law. The debtor owes$500 on it. Unless the debtor reaffirms the debt the creditor may repossess and sell the car for a potential loss to the debtor of $1,500.
Under section 524(c) of the Bankruptcy Code a debtor may reaffirm the debts on certain exempt property encumbered by creditors secured interests. Unlike lien avoidance or redemption, the property is not exempt, and the court will not reduce or eliminate the lien. In a reaffirmation the debtor must agree to pay some or all of the outstanding balance owed in order to keep the property. No debtor should ever agree to a ratification agreement if the outstanding balance is more than the property is worth. Most bankruptcy courts will not approve a reaffirmation if this is the result.
Section 524 (c) reads as follows:
(c) An agreement between a holder of a claim and the debtor, the consideration of which, in whole or in part, is based on a debt that is dischargeable under this title is enforceable only to the extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, if:
(1) such agreement was made before the granting of the discharge under section 727, 1141, 1228 or 1328 of this title;
(2) such agreement contains a clear and conspicuous statement which advises the debtor that the agreement may be rescinded at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim;
(3) such agreement has been filed with the court and, ifapplicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that such agreement:
(A) represents a fully informed and voluntary agreement by the debtor, and
(B) does not impose an undue hardship on the debtor or a dependent of the debtor.
(4) the debtor has not rescinded such agreement at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim,
(5) the provisions of subsection (d) of this section have been complied with, and
(6)(A) in a case concerning an individual who was not represented by an attorney during the course of negotiating an agreement under this subsection, the court approves such agreement as:
(i) not imposing an undue hardship on the debtor or a dependent of the debtor, and
(ii) in the best interests of the debtor.
(B) Subparagraph (A) shall not apply to the extent that such debt is a consumer debt secured by real property.
For there to be a valid reaffirmation the bankruptcy court must approve it. The bankruptcy court will decide at the discharge hearing whether or not to approve the ratification. The court advises the debtor that he cannot be forced to enter into a reaffirmation agreement. The court also informs the debtor of the legal effect of the reaffirmation and the hazards following a default in the payments. The reaffirmation agreement is not enforceable unless the court was made aware of it. A debtor mayhave informal agreements regarding reaffirmations or redemptions. These "equitable reaffirmations" may be enforced by the court if the court finds they are equitable and fair attempts to resolve the matter (In re La Fave 9 B.R. 859 1981). To avoid additional court hearings, it is better to have a reaffirmation agreement approved by the court.
The debtor should bear in mind that if the debtor wishes to keep the property without reaffirming the debt, the debtor should list the property as surrendered on the list of intentions and continue making the payments. The creditor is left with only a lien on the property that the debtor is not required to pay. Some courts hold that a creditor cannot foreclose as long as the debtor is making the payments. It is better planning to make arrangements with the creditor, formally or informally, to continue to make payments and avoid a situation where the creditor repossesses the property even though payments have been made. If no payments are made the creditor will have the right to repossess the secured property at any time.
The procedure for reaffirmation is essentially the same as it is for a redemption. The debtor must list on the form "Statement of Intention" what property and debts the debtor intends to reaffirm. The debtor and creditor will have executed a ratification agreement which spells out the respective duties and obligations of eachparty. A sample form of the ratification agreement follows this chapter.
Under Bankruptcy Code 524(c) and Bankruptcy Rule 4008, the debtor must file a motion with the bankruptcy court for approval of the reaffirmation agreement. The judge can then determine if the reaffirmation is proper and give the debtor the required admonitions and warnings regarding the legal effects of a ratification.
The request for reaffirmation is made in the form of a motion (a writing requesting reaffirmation). Preparing the motion is nothing more than filling the blanks. A sample motion for reaffirmation follows this chapter. The debtor simply fills the blanks with the information from his case. The debtor should also prepare a blank court order approving the reaffirmation for the judge to sign. Some courts prepare their own orders, but it doesn't hurt to be prepared. When everything is done make at least 5 copies.
The motion and ratification agreement are presented to the court for its approval at the discharge hearing. The court will approve the ratification agreement if it:
1. Does not impose an undue hardship on the debtor or a dependent of the debtor, and
2. Is in the best interests of the debtor.
The debtor should consult with the rules of the local court for anyspecial requirements prior to attending the hearing.
A debtor may under section 524(c)(2) rescind a ratification agreement at any time prior to the court's granting of discharge or within 60 days after such ratification agreement is filed with the court, whichever is later, by giving notice of the rescission to the creditor.
Following basic forms are generally should be acceptable in the bankruptcy courts of all 50 states and the District of Columbia.
1. Ratification Agreement
2. Motion for Approval of Ratification Agreement
3. Order Approving Ratification Agreement
END OF PREVIEW OF CHAPTER
AMENDMENT OF THE PETITION
It is the rare bankruptcy petition that will not need to be amended at some point in time. The bankruptcy petition is intended to reflect the life of the debtor. A long measure of the debtor's life can be reconstructed from the contents of the petition. It is not surprising and perhaps even expected that the petition will be incomplete or mistaken as to certain aspects of a person's life. It is a rare person who can condense his life into 20 or so pages when specific detail is required.
Amendments exist to correct mistakes on the petition that can jeopardize or limit a debtor's discharge. There is a filing fee of $20 every time an amendment is filed. The most common mistakes that necessitate the filing of an amendment are:
1. The debtor forgot to list a creditor. If a creditor is not listed in a bankruptcy petition, the debt to that creditor is not discharged. The following must be filed whenever a petition is amended to add an overlooked creditor:
(a) An amended mailing matrix that lists all the creditors and their addresses, including the new creditor.
(b) An amended Schedule E, if the creditor's debt is priority debt that must be paid first.
(c) An amended Schedule D if the creditor's debt is secured by personal or real property.
(d) An amended Schedule F if the payment of the creditor's property is unsecured.
(e) An amended Schedule C if the creditor's debt is secured and any portion of the property securing the debt (the collateral) will be claimed as exempt by the debtor.
(f) An amended statement of financial affairs, if listing the new creditor and the property changes the original form in any manner.
2. The next most common mistake is the debtor wants to change the property claimed as exempt. To add or delete exempt property, the debtor must file:
(a) An amended Schedule C listing the property that the debtor now wants to take as exempt, and
(b) The following schedules may also have to be amended when Schedule C, "Property Claimed as Exempt" is amended:
(i) Schedule D, if the change to Schedule C results in adding or taking away secured property from the existing list.
(ii) Schedule A, if the change involves real property not previously listed or identified.
(iii) Schedule B, if the change involves personal property not previously listed or identified.
(iv) Statement of financial affairs, if the use of the property was not previously listed or identified.
(v) Statement of intention, if the property is collateral for a debt and the debtor's intention for that property is not stated on the original form.
(vi) The summary sheet, if the changes to Schedule C alter the totals.
3. When the amendment is necessary to add property mistakenly omitted or acquired within 180 days of the filing (such as insurance proceeds, inheritances or property settlements) the following schedules may have to be amended:
(a) Schedule D and the statement of intention, if the changes involve property that is collateral for secured debt.
(b) Schedule A, if real property is being added.
(c) Schedule B, if personal property is being added
(d) Schedule C. if the property being added is collateral for a secured debt and is being claimed as exempt.
4. Statement of intention if the debtor changes his intentions concerning his disposition of debts on secured properties (redeem, reaffirm or lien avoidance).
5. A change of address is not really an amendment of the case. A debtor is required, however, to keep the bankruptcy court informed of the debtor's address and phone number. Therefore, in the event of a move, the debtor is required to notify the court of his new address and phone number. Failure can result in a discharge being denied to the debtor. Following this chapter is a format for of a change of address by a debtor. It should be filed with the bankruptcy court with a proof of service showing that a copy was mailed to the trustee. (See chapter 9 for a discussion of a proof of service).
Bankruptcy Rule 1009 governs when an amendment to a petition can be filed. Rule 1009 reads as follows:
(a) General Right to Amend. A voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed. The debtor shall give notice of the amendment to the trustee andto any entity affected thereby. On motion of a party in interest, after notice and a hearing, the court may order any voluntary petition, list, schedule, or statement to be amended and the clerk shall give notice of the amendment to entities designated by the court.
(b) Statement of Intention. The statement of intention may be amended by the debtor at any time before the expiration of the period provided in Section 521(2)(B) of the Code. The debtor shall give notice of the amendment to the trustee and to any entity affected thereby.
(c) Transmission to United States Trustee. The clerk shall forthwith transmit to the United States trustee a copy of every amendment filed pursuant to subdivision (a) or (b) of this rule.
Under Rule 1009, an amendment can be filed at any time except for a Statement of Intention. An amendment to the Statement of Intention can only be amended within 45 days of the filing of the original Statement of Intention.
The steps to amending a schedule are simple and easy to follow for any debtor wishing to amend the petition:
1. COMPLETE THE COVER SHEET FOR THE AMENDMENTS. Before completing the amendments, the debtor should read the local rules and determine if the court uses its own cover sheet for amendments. The debtor must get a copy of the approved form and use it. Most courts do not have an approved form for a cover sheet. Following this chapter is a representative format for a cover sheet to use in amending a petition.
2. TYPE THE WORD "AMENDED" BEFORE THE TITLE OF EVERY AMENDED SCHEDULE. By typing the word "amended," the clerk will know that the schedule was changed and order the file in accordance. Some courts also require the word "amended" be placed at the bottom of each page. The debtor should read the local rules to ascertain such requirements.
3. When the amended schedules are completed, one copy is mailed by a third party who completes a proof of service to the trustee. The original of the amended schedules and the cover sheet are filed with the clerk. The filing completes the amendment process.
If the meeting of creditors has been held and new creditors are being added, the court will have to hold a second meeting of creditors. Since it is the debtor's fault a second meeting is being scheduled, some courts require the debtor to notify the creditors of the time and place of the meeting. If so the debtor will mail the notice with a proof of service to each creditor. The debtor should ask the clerk if the debtor is required to give the notice for this second creditor meeting.
Depending on local rules, if the first meeting of creditors has not been held either the clerk or the debtor will send a copy of the notice for creditors meeting and the amendments to the newly listed creditor along with a proof of service.
From this point foreword the case will proceed as though the amended material had always been part of the original petition.
Following forms are basic forms which should be generally valid and acceptable in the bankruptcy courts of all 50 states and the District of Columbia.
1. Notice of Change of Address
2. Chapter 7 Amendments Cover Sheet
END OF PREVIEW OF CHAPTER
CREDITOR'S ATTEMPT TO LIFT THE AUTOMATIC STAY
Once a debtor files for bankruptcy relief there is an automatic stay on all proceedings against the debtor's estate. All collection and repossession proceedings against the debtor are automatically delayed for the duration of the bankruptcy case. The automatic stay remains in effect against all of the debtor's creditors although it can be lifted on request by individual creditors under certain circumstances.
To get the stay withdrawn the creditor must file a complaint with the court to lift the automatic stay and serve it on both the trustee and the debtor. Bankruptcy Rule 9014 describes the procedure for having a hearing to lifting an automatic stay. Bankruptcy Rule 9014 reads as follows:
"In a contested matter in a case under the Code not otherwise governed by these rules, relief shall be requested by motion, and reasonable notice and opportunity for hearing shall be afforded the party against whom relief is sought. No response is required under this rule unless the court orders an answer to the motion. The motion shall be served in the manner provided for service of a summons and complaint by Rule 7004, and, unless the court otherwise directs, the following rules shall apply: 7021, 7025, 7026, 7028-7037, 7041, 7042, 7052, 7054-7056, 7062, 7064, 7069 and 7071. The court may at any stage in a particular matter direct that one or more of the other rules in Part VII shall apply. An entity that desires to perpetuate testimony may proceed in the same manner as provided in Rule 7027 for the taking of a deposition before an adversary proceeding. The clerk shall give notice to the parties of the entry of any order directing that additional rules of Part VII are applicable or that certain of the rules of Part VII are not applicable. The notice shall be givenwithin such time as is necessary to afford the parties a reasonable opportunity to comply with the procedures made applicable by the order."
Under Rule 9014, the debtor is not required to file a response to the complaint unless the local rules require it. The creditor has the burden of proof. He must provide sufficient evidence to convince the court the automatic stay should be lifted on that particular creditor. The debtor should appear to explain to the court why the stay should not be lifted whether a response is filed or not.
Generally, a bankruptcy court will not lift an automatic stay unless there is a compelling reason to do so. Over the years case law has developed certain situations where the court is likely to lift a stay. These situations are:
1. In a foreclosure on real property (including the debtor's home), where the court is convinced that the foreclosure will ultimately take place anyway because the debtor is unable to make the payments. Since the debtor will be unable to keep the property, allowing the stay to continue will harm the creditor.
2. The matter being stayed is not really subject to bankruptcy adjudication. The automatic stay might stop a divorce, child custody, or other legal action that does not involve the debtor's estate. There is no reason for the action to remain stayed.
3. The creditor's interest in nonexempt property is being harmed by the stay. This is similar to the first item and arises where payments for the property have ceased or the property is being abandoned to deteriorate. If the creditor's collateral or other legal interest in the debtor's estate is decreasing in value as time passes the court may release the stay to allow the creditor to proceed with the collection or other action.
4. The debtor does not have any ownership interest in the property. Example: A debtor may be required to be given notice in a quiet title action to property the debtor does not own. The bankruptcy court will lift the automatic stay because although the debtor must be given notice of the action, the debtor has no interest in the property that will go into the creditor's estate.
The lifting of the automatic stay is within the discretion of the bankruptcy judge. The judge will hear the evidence and decide whether or not the equities in the case justify lifting the stay. If justified, the court will issue the appropriate order lifting the stay.
If a creditor files a complaint to lift a stay, the debtor should consult a bankruptcy attorney. If the complaint is denied, the court may award the debtor's attorney fees in opposing the complaint, but is not required to do so.
END OF PREVIEW
CONGRATULATIONS! When a person has reached this point the hard parts are over. When the judge lowers his gavel, the case is over. It is the rare bankruptcy case that will have anything else occur after the bankruptcy. In order to get to this point, the debtor had to go through the meeting of creditors and weather any and all complaints to set aside the automatic stay along with any motions regarding exceptions or objections to the debtor's discharge. Unless the debtor receives property after the discharge within 180 days of initial filing (as discussed in the Chapter 15) or has deliberately concealed assets, the case is over, finished, completed and concluded.
The discharge hearing is mandated by Section 524(d) of the bankruptcy code which reads as follows:
"(d) In a case concerning an individual, when the court has determined whether to grant or not to grant a discharge under section 727, 1141, 1228, or 1328 of this title, the court may hold a hearing at which the debtor shall appear in person. At any such hearing, the court shall inform the debtor that a discharge has been granted or the reason why a discharge has not been granted. If a discharge has been granted and if the debtor desires to make an agreement of the kind specified in subsection (c) of this section, then the court shall hold a hearing at which the debtor shall appear in person and at any such hearing the court shall:
(1) inform the debtor:
(A) that such an agreement is not required under this title, under nonbankruptcy law, or under any agreement not made in accordance with the provisions of subsection (c) of this section, and
(B) of the legal effect and consequences of:
(i) an agreement of the kind specified in subsection (c) of this section, and
(ii) a default under such an agreement,
(2) determine whether the agreement that the debtor desires to make complies with the requirements of subsection (c)(6) of this section, if the consideration for such agreement is based in whole or in part on a consumer debt that is not secured by real property of the debtor."
The discharge and ratification hearing is governed by Bankruptcy Rule 4008 that reads as follows:
"Not more than 30 days following the entry of an order granting or denying a discharge or confirming a plan in a Chapter 11 reorganization case concerning an individual debtor and on not less than 10 days notice to the debtor and the trustee, the court may hold a hearing as provided in section 524(d) of the Code. A motion by the debtor for approval of a reaffirmation agreement shall be filed before or at the hearing."
The clerk will send notice of the discharge hearing to the debtor. Since so much of the case has been settled prior to this time, unless the debtor is seeking to reaffirm a debt, there actually is nothing for the court to do or accomplish at the discharge hearing. Many bankruptcy courts will only hold a discharge hearing if the debtor seeks to reaffirm a debt. The clerk will know by the statement of intention filed by the debtor whether a ratification agreement is being sought. Should the debtor change his mind about reaffirming a debt an amended statement of intention should be filed. This is important because otherwise the courtmight schedule an unnecessary discharge hearing.
If the debtor is seeking to reaffirm a debt, the court is required to hold a discharge hearing. Congress mandated a discharge hearing under these circumstances, because it was concerned that a naive debtor might mistakenly be tricked, connived, cajoled or otherwise convinced into reaffirming a debt that is against his interest.
No ratification agreement will be valid unless it meets the following requirements:
1. The agreement must have been made prior to the granting of the discharge,
2. The agreement must clearly state that the debtor canrescind it at any time prior to the discharge and for 60 days thereafter, and
3. The agreement must have been approved by the court. It is for this reason that the agreement is submitted to the court for approval.
The court will approve a ratification agreement at the discharge hearing if it finds that the ratification will not impose an undue hardship on the debtor or the debtor's dependents and is in the debtor's best interest. To make that determination, the judge usually asks the following questions in some fashion:
1. Are you aware that you are not required to reaffirm this debt?
2. Are you aware that the debt for the property is discharged and that you do not have to pay it?
3. Do you understand that if you reaffirm this debt, you will owe this money even though a discharge is granted?
4. How will you make the payments for this property?
5. What is the fair market value of the property? (Usually, the court will not approve a ratification for a debt that is more than the property is worth.)
6. Will the payment for this property be made from the sale of exempt property?
7. Was this debt incurred for consumer goods?
8. Is the property for which the debt was incurred still owned by the debtor? In the case In re Hinkle, 9 B.R. 283 1981 the court denied a ratification where the debtor no longer had the property which was the basis for the debt.
9. Is the ratification being entered under duress? In the case In re Griffin 13 B.R. 591 the court refused to reaffirm the debt, calling it extortion, where the creditor was requiring the ratification in order not to prosecute the debtor's wife for a bad check.
If the court is satisfied that reaffirmation of the debt should occur, it approves the agreement and issues the final discharge. Unless something happens that requires the case to be reopened (such as newly discovered property, an omitted creditor or a complaint to set aside the discharge for fraud), the case is closed and the debtor is now free to continue his life without fear of the discharged creditors.
LIFE AFTER BANKRUPTCY
For the vast number of people who file for bankruptcy protection, when the court issues the final discharge, their case is closed, and they can begin to enjoy the bankruptcy's promise of new life. For a few people their contact with the bankruptcy court, trustee and creditors does not end with the final discharge. There are special circumstances that sometimes arise that, like a rubber band, can pull the debtor into the bankruptcy court despite the final discharge. The two most frequent situations are likely to result in the debtor returning to bankruptcy court after a final discharge is granted are:
1. The debtor receives nonexempt property within 180 days of the final discharge, or
2. A creditor or the trustee seeks to revoke the final discharge.
Another set of problems arises not from the bankruptcy court but from third parties and their relations to the debtor once they learn of the bankruptcy. In certain segments of our society filing for bankruptcy relief carries with it a personal stigma. While such stigma may attach personally, it cannot legally be attached to the debtor. A debtor suffering discriminationbecause of the bankruptcy should be aware of how the law handles and redresses such discrimination.
II. NEWLY DISCOVERED PROPERTY AFTER THE FINAL DISCHARGE
To obtain a valid final discharge, the debtor is required to list on the bankruptcy petition all of the property he owned or has an interest at the time of filing of the petition. A debtor is not permitted knowingly to omit property from a bankruptcy petition. A willful failure to disclose the existence of property is grounds for revoking the debtor's discharge and may result in criminal prosecution if egregious.
In most instances the property was omitted by oversight or a genuine lack of knowledge of its existence. Once the undisclosed property is discovered, the debtor must report it to the trustee. Failure to report the property after its discovery will turn an innocent mistake into a deliberate attempt to evade the law. What was once a mistake becomes an actual criminal concealment.
Once new property is discovered, the debtor is required to notify the former trustee and clerk of the bankruptcy court. The notification need be nothing more than a simple letter stating the following:
Dear (name of trustee)
You were the trustee of my case, In re , case number . On , a final discharge was granted. I discovered the existence of some property that I had mistakenly failed to list on my petition. The property is the property is worth about dollars. I am reporting it to you because I believe that I am required to do so underthe law and do not wish to do anything to violate the law or jeopardize my final discharge.
Please inform me if you wish to reopen the case to sell and distribute the proceeds of this property.
As a general rule the trustee will do nothing. The debtor not only complied with the law and preserved the final judgment but also got to keep the property. A trustee will not reopen a closed case just because of newly discovered property unless it happens to be very valuable. The proceeds from the sale of the property must be sufficient to cover the trustee's fees and the cost of selling the property. If there are not going to be any proceeds for creditors after the sale there is no justification for the trustee the property: the property will be abandoned to the debtor.
Even if the trustee wants to reopen the case to sell the property, the court might not allow it. The trustee must file a complaint with the Bankruptcy Court to reopen the case. The court will look at the length of time since the discharge and the value of the property and make its decision. The debtor can oppose any attempt of the trustee to reopen the case. While the debtor may be his own attorney in court, he should consider employing a bankruptcy attorney because of the complexity of the law.
III. NEWLY ACQUIRED PROPERTY
Under Bankruptcy Code Section 541(a)(5) there is a provision that certain property acquired within 180 days of the filing date for the bankruptcy petition is to be included in the estate of the debtor. This constraint prevents someone who is shortly expecting to come into valuable property from discharging their current debts before receiving the property.
Section 541(a)(5) reads:
"Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date:
(A) By bequest, device or inheritance,
(B) As a result of a property settlement agreement with debtor's spouse, or of an interlocutory or final decree, or
(C) As beneficiary of a life insurance policy or of a death benefit plan."
The properties covered by Section 541(a)(5) (inheritances, property settlements and insurance proceeds) are the types of windfall that a person could expect to receive with enough certainty that a bankruptcy petition might be filed to protect the anticipated property from the claims of creditors. If received within 180 days of the bankruptcy filing, it must be reported to the trustee and the court.
The best way to handle the reporting of such property is to file a "supplemental schedule of property acquired after discharge" with the court and have a copy served on the trustee. Following this chapter is a copy of the format for this schedule.
As with newly discovered property, the trustee will have to decide whether or not the value of such newly acquired property justifies reopening the case. If the trustee decides to reopen the case, the debtor should consult with a bankruptcy attorney regarding opposing such action.
IV. AN ATTEMPT TO REVOKE A DEBTOR'S FINAL DISCHARGE
In an extremely rare situation, a trustee or a creditor may seek to have a debtor's final discharge set aside. The debtor should run, not walk, to the nearest bankruptcy attorney. Setting aside a bankruptcy discharge is a difficult thing for a trustee or a creditor to do. That knowledgeable trustee or creditor's attorney would attempt to do so must be viewed as extremely serious.
The grounds for setting aside a final discharge that was granted to a debtor are set forth in Bankruptcy Code Section 727. The grounds for revoking a discharge are:
1. The discharge was obtained through fraud that wasunknown to the trustee of creditor until after the discharge was granted,
2. The debtor knowingly and fraudulently failed to report and deliver property belonging to the estate to the trustee, or
3. The debtor deliberately failed to obey a lawful order of the court.
If a complaint for revocation of the discharge is granted, the debtor immediately becomes liable again for payment of all the debts that had been discharged. All of the redemption and reaffirmation agreements the debtor entered become null and void. A debtor must see a bankruptcy attorney if a complaint to revoke a discharge is filed.
Winning a new life through a bankruptcy discharge is of no avail if the person can never again hold a job or get credit. For many years the filing of a bankruptcy petition was viewed as a scarlet letter branding a person as undesirable and unemployable. That is no longer the case.
A. GOVERNMENT DISCRIMINATION
Section 525(a) of the Bankruptcy Code prevents any government agency from discriminating against a person solely because the person sought protection under the Bankruptcy Code. Section 525(a) reads as follows:
"(a) Except as provided in the Perishable Agricultural Commodities Act 1930, the Packers and Stockyards Act 1921 and section 1 of the Act entitled "An Act making appropriations for the Department of Agriculture for the fiscal year ending June 30, 1944 and for other purposes", a government unit may not deny, revoke, suspend or refuse to license, permit, charter, franchise or other similar grant to, condition such a grant to discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act."
Under this section no government agency, state or federal, can deny a person who has been granted bankruptcy relief any government employment, assistance, education, licenses or any other benefit that is available to a person who has not filed forbankruptcy relief. If a person who owes the government money filed for bankruptcy relief and has the debt discharged, the government cannot thereafter use the failure to pay the discharged governmental debt as grounds for denying any type of government license or benefit. The government is treated no differently than any other creditor. When a person is granted a bankruptcy discharge, all excused governmental debts are immediately canceled. Canceling a debt has the same effect as paying it, therefore a government agency cannot use the nonpayment of discharged government debt as justification for any type of discrimination.
If a government agency wrongly discriminates against an individual because of the granting of a bankruptcy discharge, the person can file a discrimination lawsuit against the agency and win if that was the only reason for the discrimination.
B. PRIVATE DISCRIMINATION
Section 525(b) of the Bankruptcy Code also prohibits discrimination by an employer because of the filing of a bankruptcy petition. At one time it was quite common for an employer to fire any employee who filed a petition for bankruptcy. This is no longer the case. A person cannot be denied employment, fired, transferred, denied training benefits available to other employees or in any other manner discriminated solely because the person sought protection under the bankruptcy law.
In fact many states forbid outright an employer asking an employee or prospective employee whether or not a bankruptcy petition has ever been filed. These states view the question as improper since the information cannot be used to base an employment decision.
Any person who has been granted a discharge and is denied employment after admitting in a job application he once filed bankruptcy might have an excellent case of discrimination against the prospective employer and should consult an attorney skilled in bankruptcy.
VI. REESTABLISHING CREDIT
Once a person has filed for bankruptcy protection, that information will remain on the records of the credit reporting agencies for 10 years. The information that the debtor filed bankruptcy will always be a public record; it is just that under federal law credit agencies can only report it for 10 years. Example: After 11 years a person doing a credit check on a debtor cannot get knowledge of the bankruptcy from the credit report but can get it from the court.
In some instances filing bankruptcy actually can increase a person's credit worthiness. Remember once discharge has been granted the person cannot file bankruptcy again for 7 years. Moreover, he has had most of his debts discharged. A potential lender may view the person as being a better risk than many who have not filed bankruptcy. A lender looks at the income and theoutstanding debts of the borrower when deciding to make a loan. If the borrower has (1) a good job and (2) no debts and (3) the inability to go bankrupt for 7 years, some lenders will consider that an ideal situation.
On the other hand credit card companies probably will not give a credit card to a person who has filed a bankruptcy petition for some time after the discharge is granted. In fact some credit card companies will cancel their cards once they discover a holder has been bankrupt even if he has a perfect payment record. Not having a credit card can be a major problem since many businesses, such as car rentals and hotels, will not do business for cash.
An alternative is to obtain a "secured credit card": a secured account with a bank. A person deposits a fixed amount into an account and is given a credit card with a limit equal to the amount in the account. The interest rate on these accounts are the same as a regular credit card or lower.
VII. REOPENING THE CASE BY THE DEBTOR
Section 350(b) of the Bankruptcy Code vests the bankruptcy court with full discretion to reopen a case when good cause is shown. Usually it is a creditor who asks for the reopening of the case in order to have the discharge revoked on certain debts. In the Advisory Note to Bankruptcy Rule 515 it is explicitly acknowledged that granting relief to a debtor is a proper cause for reopening a case.
There is no express time limitation for reopening an estate for cause shown (Brust vs. Irving Trust Company 129 F. Supp 462). The motion must state with particularity those facts that give rise to the reason for the reopening. The court will then take judicial notice of the original case and all of the pleadings thereunder. After the hearing on the motion, the court will render its order. If the motion is granted, the order cannot be attacked in a collateral action. The reopening of the case will not automatically reinstate the trustee.
A debtor will seek to reopen a case for one of two reasons. The first is that a creditor was mistakenly omitted, and it is necessary to have that creditor's debt discharged. The second is the debtor wishes to amend the exemptions in the original petition, usually because of after-acquired property.
Once the court determines the equities of the case justify reopening, creditors whose interests will be affected are given an opportunity to present their opposition. After the presentation of the motion, the court will decide whether or not the debtor's requested relief is proper.
It is difficult for a debtor to convince a court to reopen a case. The debtor must do everything possible to assure that all creditors and property are duly listed the first time.
The following basic form is generally valid and acceptable in the bankruptcy courts of all 50 states and the District ofColumbia:
Supplemental Schedule of Property Acquired After the Final Discharge
END OF PREVIEW
AMENDMENT OF THE PETITION 353
BANKRUPTCY WORKSHEET 70
COMMON BANKRUPTCY QUESTIONS 4
DISCHARGE HEARING 366
ELECTION TO USE FEDERAL EXEMPTIONS 200, 290
NONBANKRUPTCY FEDERAL EXEMPTIONS 291
STATE EXEMPTIONS 203
HOMESTEAD EXEMPTION 178
SETTING ASIDE A JUDICIAL LIEN 181
TENANCY IN THE ENTIRETY PROPERTY 182
AUTOMATIC STAY 186
LIEN AVOIDANCE 301
JUDICIAL LIENS 302
NONPURCHASE MONEY SECURITY INTERESTS 304
LIFE AFTER BANKRUPTCY 370
CREDITOR'S ATTEMPT TO REVOKE DISCHARGE 378
BY GOVERNMENT 376
BY PRIVATE INDIVIDUALS 380
NEWLY ACQUIRED PROPERTY 376
NEWLY DISCOVERED PROPERTY 372
REESTABLISHING CREDIT 377
REOPENING THE CASE 379
LIFTING THE AUTOMATIC STAY 363
MEETING OF CREDITORS 294
CREDITORS' OBJECTIONS 299
TO EXEMPTIONS 299
TO DISCHARGE 296
NON-DISCHARGEABLE DEBTS 43
NON-DISCHARGEABLE UNLESS AN EXEMPTION EXISTS 43
INCOME TAXES 44
PROPERTY TAXES 45
UNLISTED DEBTS 46
COURT ORDERED CHILD AND SPOUSAL SUPPORT 47
FINES, PENALTIES AND FORFEITURES 49
DEBTS INCURRED WHILE INTOXICATED 51
PREVIOUSLY UNDISCHARGED DEBTS 53
DISCHARGEABLE DEBTS UNLESS A CREDITOR OBJECTS 54
FRAUDULENT DEBTS 55
DEBTS FOR WILLFUL AND MALICIOUS ACTS 56
DEBTS FROM EMBEZZLEMENT, LARCENY OR BREACH
OF FIDUCIARY DUTY 57
EXEMPTING A PENSION UNDER FEDERAL LAW 190
EXEMPTING A PENSION UNDER STATE LAW 193
NON-ERISA PENSIONS 193
ERISA PLANS 194
OPTIONS WHEN PENSION NOT EXEMPT 196
PREPARATION OF THE PETITION 81
APPLICATION TO PAY FEE IN INSTALLMENTS 161
LIST OF CREDITORS 146
NOTICE OF AVAILABLE CHAPTERS 174
PREPARATION OF THE VOLUNTARY PETITION 86
SCHEDULE A REAL PROPERTY 110
SCHEDULE B PERSONAL PROPERTY 112
SCHEDULE C PROPERTY CLAIMED AS EXEMPT 116
SCHEDULE D CREDITORS HOLDING SECURED CLAIMS 118
SCHEDULE E CREDITORS HOLDING UNSECURED
PRIORITY CLAIMS 122
SCHEDULE F CREDITORS HOLDING UNSECURED
NON-PRIORITY CLAIMS 126
SCHEDULE G EXECUTORY CONTRACTS AND UNEXPIRED
SCHEDULE H CO-DEBTORS 132
SCHEDULE I CURRENT INCOME FOR INDIVIDUAL
SCHEDULE J CURRENT EXPENDITURES FOR INDIVIDUAL
STATEMENT OF INTENTION 125
STATEMENT OF FINANCIAL AFFAIRS 142
SUMMARY OF SCHEDULES 139
PURPOSE OF THIS BOOK 40
REAFFIRMATION OF A DEBT ON SECURED PROPERTY 344
REDEMPTION OF SECURED PROPERTY 328
CALCULATION OF REDEMPTION PRICE 331
STEPS IN A BANKRUPTCY ACTION 59
GETTING THE RULES AND FORMS 59
EMERGENCY FILING 62
PREPARATION OF THE PETITION AND FILING 62
MEETING OF CREDITORS 63
TRUSTEE'S MANAGEMENT 65
MOTION TO REDEEM SECURED PROPERTY 65
MOTION TO SET ASIDE LIEN 66
CREDITOR'S MOTION TO SET ASIDE AUTOMATIC STAY 66
RATIFICATION AND DISCHARGE HEARING 67
DEBTOR'S REOPENING OF THE CASE 68