July 1

Bankruptcy FAQs

1. What is bankruptcy?

Bankruptcy is a legal proceeding where an individual (or a business entity) request relief from their creditors. There are different chapters of bankruptcy which each serve different purposes. Most consumers will file either Chapter 7 or Chapter 13 bankruptcy. In either type of case, the person who files (called a “debtor”) is able to wipe out (“discharge”) their debt.

2. What’s the difference between Chapter 7 and Chapter 13?

Chapter 7 bankruptcy is often called a “straight bankruptcy.” As the name implies, it is normally a fairly fast process where a person passes through bankruptcy and wipes out their debt. A Chapter 13 bankruptcy is one where a partial repayment plan is set up through the bankruptcy court where the person who filed will repay some (or in some cases, all) of their debts over a 3-5 year period.

3. I’ve heard you can get rid of some mortgages in bankruptcy, is that true?

Yes. In a Chapter 13 case you can file a motion to “strip” away a junior mortgage lien. If the value of your home is equal to or lower than the balance of your first mortgage, then you can “strip” away any second (or third) mortgages. For example, if you owned a home that was worth $450,000.00 and your 1st mortgage balance was $475,000.00 and you also had a Home Equity Line of Credit (HELOC) of $150,000.00 then you could bring a motion to “strip” the HELOC and remove it from the home.

4. Can bankruptcy really stop a foreclosure?

Yes. You can file a bankruptcy case and stop a foreclosure. When any type of bankruptcy case is filed, the bankruptcy court orders all creditors to cease collection (the order is known as the “automatic stay”), and that includes foreclosure proceedings. While any type of bankruptcy will at least temporarily stop a foreclosure, a Chapter 13 case can allow you to submit a plan to get current and rehabilitate a defaulted mortgage.

5. Will a bankruptcy stop a garnishment or levy? Will the harassing calls stop.

Yes to all of the above. As discussed above, when a bankruptcy case is filed an “automatic stay” goes into effect that stops all collection efforts. Creditors must stop all garnishments, levies and all communication immediately.

6. What types of debt can I wipe out in a bankruptcy case?

Generally, all debts other than some very specific types listed in the bankruptcy code can be wiped out in a bankruptcy case. The most common types of debts that will usually survive bankruptcy are recent income taxes (income taxes that are more than 3 years old can often be wiped out), domestic support obligations (child support or alimony), student loans, certain debts to government agencies, personal injury damages resulting from a drunk driving incident, and criminal restitution.

7. What is the effect of bankruptcy on secured debts (like car loans or home loans)?

In a secured debt (a debt attached to some underlying property like a car or home), there are two distinct components: personal liability and a security instrument (lien). When you sign a note, it’s a personal promise to repay the creditor and you are personally “on the hook” for that loan. There is also a security instrument that gives the creditor an interest in some property of the borrower (for example, in a car loan the note is secured to the vehicle). The security instrument gives the creditor the right to retake the property if the loan goes unpaid. The note and the personal liability it creates is what gives the creditor the right to also come after the individual borrower for any unpaid amount (deficiency). Bankruptcy eliminates a borrower’s personal liability for a secured loan but typically does not remove the security interest (although there are some exceptions like the mortgage lien stripping discussed above). This means that the individual is off the hook but the creditor can still come after the property item.

8. What’s the minimum amount of debt I can have to file?

There is no set minimum amount of debt. The threshold for whether it’s worth it to file bankruptcy is unique for each person. For some people one amount of debt may not be a big deal, but to others the same amount can seem unsurmountable.

9. Can one spouse file without the other.

Yes, married couples can file bankruptcy individually. They do not have to file as a couple.

10. What happens to a co-signed debt?

If you have a loan with a co-signor and the co-signor is someone other than your current spouse, then the debt still survives as to that person. If the co-signor is your current spouse, then the debt survives but is not collectable against the non-filing spouse (assuming you both live in California).

11. Will I lose my car or my home or other property if I file for bankruptcy.

In about 94% of cases, you don’t lose anything. In a Chapter 7 case you are able to claim a large amount of value in property as “exempt” (safe from creditors). Almost all Chapter 7 filers do not have property that exceeds the amounts that they’re able to claim exempt so they do not lose anything. In a Chapter 13 case (restructuring plan), nothing is taken from you regardless of whether it is exempt or not.

12. What are the impacts of a bankruptcy on my credit?

For most people who are looking at a bankruptcy, the impact of the bankruptcy is not significant compared to their current situation. That’s because most of them are significantly in default on multiple credit accounts and have already taken a pretty big credit hit. Missing just a few monthly payments can drop your score hundreds of points. A bankruptcy creates an event that stops the debts from continuing to be in default each month (because they’re discharged). For most people who file, their credit is low right after filing and increases over the next 2-3 years. Some people are able to recover even sooner.

13. How long is a bankruptcy on my record?

A bankruptcy is reported to your credit report for 10 years. But, when most people ask that question what they really care about is how long is a bankruptcy keeping my credit score low? That answer is much different – just because the public record section of a credit report has a bankruptcy, it does not mean it is keeping a person’s score low for the entire 10 years. Most people’s credit score can be rebuilt within 2-3 years after filing bankruptcy.

14. How will a bankruptcy impact a security clearance?

It probably will not negatively impact a security clearance. For most people with a security clearance, the debt that leads to the bankruptcy is more of an issue than the bankruptcy itself. Bankruptcy is a legal and government-sanctioned way to resolve your debt. Having large unpaid, defaulted debt usually puts someone at more risk for bribes or other security-sensitive problems than the bankruptcy does. For a good discussion of the impact of bankruptcy on a security clearance, the Air Force Academy Legal Office has a good discussion here.

If you have any other questions feel free to comment below or for more specific individual questions don’t hesitate to contact us by email at questions@bodielawfirm.com or by phone at 818-377-7413.

May 12

What To Expect At the 341(a) Meeting of Creditors

What To Expect at the 341(a) Meeting of Creditors

by Brett Bodie

 

In any consumer bankruptcy case (Chapter 7 or Chapter 13), every Debtor is required to attend a Meeting of Creditors (aka the “341 Meeting” – the name comes from 11 USC §341 which lays out the requirement for the meeting). Federal Rules of Bankruptcy Procedure 2003 mandates that the 341 Meeting must occur no earlier than 21 days after the case was filed and no later than 40 days after the case was filed. The 341 Meeting will be in a location assigned by the region in which the bankruptcy case is filed. For example, here in Encino we are part of the US Bankruptcy Court for the Central District of California. The Central District stretches all the way from San Luis Obispo through Santa Barbra and Los Angeles and down into Orange County. In the Central District of California there are five different 341 Meeting locations:

All creditors listed in the bankruptcy paperwork will receive notice of the 341 Meeting date, time and location. Although creditors are allowed to be present they very rarely are. In the vast majority of bankruptcy cases, there is no benefit to the Creditors by appearing at the 341 Meeting. About 94% of all Chapter 7 cases are “no asset” cases (cases where there is no un-exempt property that will be taken to pay creditors). If there's nothing to be sold and no money coming, creditors are unlikely to waste the time and expense of appearing at a 341 Meeting.

The 341 Meeting is conducted by a panel trustee. The United States Trustee's Office oversees administration of all bankruptcy cases. Included in that job is appointing local panel trustees to oversee bankruptcy cases. This may sound confusing but it's an important distinction. The panel trustee who administers a Debtor's Chapter 7 or Chapter 13 bankruptcy case is not a governmental employee. They are a private fiduciary appointed by a government agency and they have a fiduciary duty to the bankruptcy estate but they are not part of the government. They are also not a judge, so Debtors should not address the Trustee as “your honor.”

The purpose of the 341 Meeting is to allow the Trustee overseeing the case to perform an investigation into the Debtor's finances and ask the Debtor questions to ensure the case complies with code provisions and can be administered. The 341 Meeting acts like a filter for the Trustee. It allows Trustees to efficiently weed through the vast majority of cases with no significant issues and instead focus on the few that have assets to administer or other issues to address. The Trustee has a duty to oppose the Debtor's discharge in rare scenarios. Most objections to discharge, however, will come from the United States Trustee's Office, not the presiding panel trustee.

The 341 Meetings are held at specific dates and times. The Trustee will have a “calendar” that normally covers one hour. During that calendar they will have many cases scheduled and will call them one at a time. Most Trustees will begin the 341 Meeting with a short statement about their role, what to expect and they will discuss any fliers or questionnaires that Debtors must complete (each local office has their own specific rules when it comes to required fliers to read or questionnaires to fill out). When the Trustee calls a case, they will normally begin by inspecting the identification of the Debtor. It is imperative that the Debtor has a government issued photo identification and acceptable proof of social security number with them at the 341 Meeting. Without it, the Trustee cannot conclude the meeting and the Debtor will have to return anohter time.

After the identification check, the Trustee will go on to ask a set of questions of the Debtor. Each Trustee has their own way of phrasing the questions they will ask at the 341 Meeting and many have unique questions they ask aside from the “standard” questions almost all Trustees ask. An example of the “standard” questions asked at almost every 341 Meeting is:

  • Did you sign the petition, schedules, statements, and related documents and is the signature your own?
  • Did you read and understand the petition, schedules, statements and related documents before you signed them?
  • Are you personally familiar with the information contained in the petition, schedules, statements and related documents?
  • To the best of your knowledge, is the informaton contained in them true and correct?
  • Are there any errors, omissions or changes to bring to my attention at this time?
  • Have you listed all of your assets on the schedules? If you are married (and in a community property state like we are here in California) have you listed all of your spouse's assets that you have an interest in?
  • Have you listed all of your creditors on the schedules?
  • Have you ever filed for bankruptcy before? If the answer is yes, the Trustee wil usually ask to verify the type of case (What Chapter), the location where it was filed, the year it was filed, and whether there was a discharge.
  • Do you have a domestic support obligation such a schild or spousal support? If the answer is yes, the Trustee will require the address of the claimant.
  • Have you read the Bankruptcy Information Sheet provided by the US Trustee?
  • Have you made any transfers of any prpoerty or given any property away within the last two year period?
  • Do you have any lawsuits pending against anyone where you expect to receive money for any reaoson?

There are many other questions a panel Trustee may ask but these are a basic version of the “standard” ones to expect in any case. In a Chapter 13 case, the 341 Meeting is usually used by the Chapter 13 Trustee to also verify and scrutinize a Debtor's budget to see if there is additional funds available to pay to creditors. In that type of meeting, the Trustee often will ask very specific questions about the Debtor's monthly income and expenses.

A Debtor's attorney will be present at the 341 Meeting and will help facilitate the questions and should be able to correct any inconsistencies or errors in the Debtor's testimony. Issues often arise that can create unneccesary continuances or other complications is the attorney is not able to clarify and explain them. It is extraordinarily important that the attorney who appears at the meeting is personally familiar with the information in the Debtor's bankruptcy case. An attorney is a useless empty suit if they cannot clarify, correct and explain complex issues in the Debtor's case. Judge Alan Jaroslovsky wrote an excellent article on the importance of having an attorney who is personally familiar withe Debtor's bankruptcy case present at the 341 meeting.

Toward the end of the meeting, the Trustee will ask if there are any creditors present. If a creditor is present, they will come up to the table and be allowed time to ask questions. Although the bankruptcy code provides a broad scope for the 341 Meeting, many local jurisdictions restrict the questioning at the 341 Meeting to questions regarding the nature and location of assets. If the Trustee, a creditor, or other interested party wishes to conduct a more thorough deposition of the Debtor, they can request a Rule 2004 examination which will be scheduled for a later date.

After the Trustee has asked all questions and received sufficient answers, they will either conclude the meeting (the vast majority of the time this is the ending) or continue it if there is additional information or documentation needed.

For most Chapter 7 Debtors, the 341 Meeting is a bit of waiting to go up to a table and answer 10-15 straightforward questions and then it's over and the meeting is behind them. Approximately 60 days after the 341 Meeting the Debtor will be eligible for discharge.

 

April 29

What Is Bankruptcy?

What is Bankruptcy?

by Brett Bodie

Short Version:

Bankruptcy has not always been available in the United States. Bankruptcy is a legal process that allows individuals, business entities, and municipalities to address debts they are unable to pay. There are different chapters of bankruptcy. Some chapters (9, 11, 12, and 13) allow the party to reorganize their debts. This usually consists of a plan that drastically alters what they have to pay and how they have to pay it. Chapter 7 cases are “liquidation” cases where individuals are granted a discharge (a legal injunction that absolves people of their debts). Despite the name, most individuals don’t have to lose any property in a Chapter 7. When corporations or other entities file Chapter 7, their assets are all liquidated and the entity does not receive a discharge.

What is Bankruptcy: A Short History of Bankruptcy In the United States:

Almost everyone has heard of bankruptcy, but very few people actually understand it. Bankruptcy is a legal proceeding where a Court determines that a person or business is bankrupt. Being bankrupt means a Court has judged you to be insolvent and unable to repay your obligations.

The roots of bankruptcy as a concept can be tied back to many sources. One source that people often point to is the Bible. The idea for the basics of forgiving insolvent debtors can be found in Deuteronomy 15:1-2 which states, “At the end of every seven years you must cancel debts. This is how it is to be done: Every creditor shall cancel any loan they have made to a fellow Israelite. They shall not require payment from anyone among their own people, because the Lord’s time for canceling debts has been proclaimed.” This idea was written about 3,500 years ago, but it contains the basic idea behind bankruptcy: at a certain point, creditors should forgive unpaid debts and free debtors from their burden.

Contrary to what many people believe, you do not have a Constitutional right to bankruptcy. The US Constitution does discuss bankruptcy in Article I, Section 8, Clause 4, but all it states is that Congress shall have the power to “establish … uniform Laws on the subject of Bankruptcies throughout the United States.” Although this gives Congress the power to create bankruptcy laws, nothing about it forces them to create bankruptcy laws; nor does it entitle any of us to the benefits of bankruptcy. In fact, during some parts of American history, there was no legal process for people to voluntarily file bankruptcy.

The first Bankruptcy legislation passed by Congress was the Bankruptcy Act of 1800 (2 Stat. 19), which only passed by one vote. This basic law authorized creditors to force merchant debtors into bankruptcy involuntarily. It only allowed a discharge if 2/3 of a Debtor’s creditors agreed to the discharge. Three years later, Congress repealed the Act for excessive cost and concerns about corruption. For the 30 years that followed, there were no national bankruptcy laws. Notably, during this time individual states did pass bankruptcy laws and this led the US Supreme Court case Sturges v. Crowninshield which dealt with the constitutionality of state bankruptcy laws that purported to discharge debts in other states.

The next major legislation passed by Congress was in 1839 (5 Stat. 321) and outlawed Debtors’ prisons in the United States. Not only were individuals not entitled to bankruptcy protection in 1839, but prior to 1839 Debtor’s prisons were perfectly legal. In fact, some notable founding fathers ended up in Debtors Prisons. Henry Lee III (father of Civil War General Robert E. Lee, former Governor of Virginia and member of Congress), James Wilson (one of the original signers of the Declaration of Independence), and Robert Morris (one of the founding fathers and a principal financier of the revolution) all served time in United States Debtors Prisons.

Two years later in 1841, Congress passed its next attempt at federal bankruptcy legislation with the Bankruptcy Act of 1841 (5 Stat. 440). This act granted federal district coruts jurisdiction over all bankruptcy matters and for the first time it allowed voluntary cases and extended bankruptcy relief to all individuals. It provided for a discharge of debts for any debtor who voluntarily turned over all assets and even laid out early versions of fraudulent transfer and preference recovery powers for bankruptcy commissioners. Unfortunately, the Act didn’t last long and two years alter in 1843 Congress repealed the act under pressure from creditors and citing the high costs of administration.

Twenty six years later, Congress tried for a third time and enacted the Bankruptcy Act of 1867 (14 Stat 517). This act included more precursors of modern bankruptcy law such as allowing judges to appoint bankruptcy registers and allowing debtors to claim federal or state exemptions. Two years after it was enacted, it was amended to include the possibility of an asset distribution plan. In 1878, after nine years, Congress again repealed the law citing corruption and cost.

Finally, twenty one years later, Congress passed the Bankruptcy Act of 1898 (30 Stat. 544), which was the beginning of modern bankruptcy law and provided the bankruptcy framework that would serve the Country for the next eighty years. The Bankruptcy Act of 1898 created bankruptcy referees to oversee the administration of bankruptcy cases. Similar to modern bankruptcy trustees, bankruptcy referees were incentivized to recover assets for creditors by allowing them to retain a percentage of the assets they administered. The Act allowed all individuals to voluntarily file for bankruptcy and entitled them to exempt some property. Originally, it allowed corporations to be placed into involuntary liquidating bankruptcy only, but voluntary corporate bankruptcy was added by amendment in 1910. In the mid 1930s, the law was again amended to allow for voluntary reorganization cases for corporations and municipalities. Congress repealed the amendments of the mid 1930s and replaced them with the more comprehensive Municipal Bankruptcy Act which was a precursor to modern Chapter 9 bankruptcy (municipality reorganization).

In 1938, Congress passed the Chandler Act (52 Stat. 840) which again revised the Bankruptcy Act of 1898 and created the first “Chapters” of bankruptcy. Although there were minor revisions and amendments in the years that follow, the next significant change came with the Bankruptcy Reform Act of 1978 (92 Stat. 2657), which is the basis for the current bankruptcy code found Title 11 of the United States Code. The Bankruptcy Reform Act introduced sweeping changes including the establishment of bankruptcy courts and specific bankruptcy judges. The act provided that Bankruptcy Judges would be appointed to 14 year terms and have authority to rule on matters arising in or related to bankruptcy, but they are not article three judges. Later amendments to the Act revised bankruptcy Judge authority to cover “core” proceedings (a point which has become a major issue recently). The Act created Chapter 11 reorganizations and authorized a new version of Chapter 13 that included the “super discharge.” In 1986, Congress passed the Bankruptcy Judges, United States Trustees and Family Farmer Bankruptcy Act of 1986 (100 Stat. 3088), which created Chapter 12 reorganization cases for family farmers and made the US Trustee Program permanent. The Act was generally regarded as making it easier for Debtors to file bankruptcy and provided for more efficient administration of bankruptcy cases. In 1994, the Bankruptcy Reform Act (Public Law 103-394) expanded the ability of bankruptcy courts to hold jury trials and contained procedural revisions.

In 2005, Congress passed the most recent (and significant) change to the Bankruptcy Code, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Despite the name, the legislation largely aimed to reduce perceived abuses by consumer Debtors and generally made filing for bankruptcy more difficult and complex. The most significant change BAPCPA introduced was Means Testing. For the first time, Congress created a hard line standard for determining eligibility for a particular chapter of bankruptcy. It also established a hard line “minimum” monthly payment for consumer restructuring plans. BAPCPA’s other major changes include: extended wait times between discharge, automatic dismissal for failure to provide certain forms and documents, requirements that consumer debtors complete credit counseling, audits (although these are sometimes suspended when federal budgets get tight), extension of non-dischargeability to private student loans, restriction of the “super-discharge,” reduction in the amounts for statutory fraud presumption, extended residency requirements for state exemption eligibility, limitations on new homestead claims and removal of the “ride-through” for debtors with secured loans who do not wish to reaffirm. The changes introduced by BAPCPA have been strongly debated with most consumer advocates and attorneys strongly opposed to its changes.

The current bankruptcy code is found in Title 11 of the United States Code. The bankruptcy code is separated into Chapters which each outline different methods of filing bankruptcy. Chapter 7 covers liquidation cases. Chapter 7 cases can be filed voluntary or involuntary (in rare circumstances, creditors can force a person or business into Chapter 7). In a Chapter 7 consumer case, a Debtor will schedule all of their assets, liabilities, income and expenses. A Debtor’s assets can be liquidated in a Chapter 7 case, but most of the type the Debtor is able to claim their property exempt. Chapter 7 consumer Debtors also have to complete the means test. If a Debtor’s income is too high (according to the Means Test), then their case is presumed to be abusive, and the United States Trustee’s Office will formally oppose their bankruptcy case. A Chapter 7 Debtor can rebut the presumption of abuse, although it is difficult to succeed in this type of case unless there is a clear and ongoing income change that has recently occurred. At the end of a Chapter 7 case, debtors are granted a discharge. A discharge is a legal injunction order which bars collection on any eligible debts. Some debts are not dischargeable by statute (some examples are recent income taxes, student loans, and domestic support obligations, among others). Any creditor can file a lawsuit against a Debtor (known as an adversary proceeding), to establish that their debt should not be discharged. The basis for having a claim survive bankruptcy are found in 11 U.S.C. §523. When a corporation files Chapter 7, it does not discharge their debts. Instead, Chapter 7 simply provides an efficient way for a corporation’s assets to be liquidated to repay their creditors. In a Chapter 13 case, consumer Debtors create a plan to restructure their debts over 3-5 years. Chapter 13 cases can be used to repay defaulted secured loans (such as mortgages or car loans) over time. They allow debtors to stop foreclosures, repossessions and other secured debt collection activities and then repay the arrears of the secured obligations over the life of the plan. Chapter 13 plans allow for “lien stripping” of unsecured junior mortgages and cram-downs of vehicle loans (lowering of the balance owed to the value of the vehicle). In a Chapter 13 case, debtors are not required to repay all of their creditors. Very often, a portion of the outstanding debt will be repaid while the remainder is discharged. Chapter 11 bankruptcy cases are reorganization plans for businesses. Although individuals are eligible for Chapter 11, it is normally used by corporations to restructure large debt obligations. Chapters 9 and 12 are specialized Chapters that allow for reorganization plans for municipalities and family farmers and fisherman, respectively.

April 17

Bankruptcy Basics: Chapter 7

Chapter 7

by Brett Bodie

The bankruptcy code is found in Title 11 of the United States Code (Title 11 is the bankruptcy code). The code is the basis for every rule and power that exists in bankruptcy.

The code contains chapters which each address different ways of filing bankruptcy. “Chapter 7” refers to the portion of the bankruptcy code beginning with 11 U.S.C §701. A Chapter 7 case is known as a “Liquidation” bankruptcy. When Congress passed the Bankruptcy Reform Act of 1978 and created modern the modern Chapter 7, they wanted to create a system where people could file bankruptcy and obtain relief from their creditors. They also wanted the system to efficiently distribute the benefit of the Debtors’ assets to their creditors. This where the term “liquidation” comes from.

Congress understood, however, that even Debtors in bankruptcy could not be left destitute and so they provided for “exemptions” that the Debtors are entitled to. Exemptions are laws which allow the Debtors to claim safe certain items in bankruptcy. Exemption statutes can be federal or state based, depending upon the specific residence or domicilary history of the Debtors. Here in Encino, Ca where I practice (part of the San Fernando Valley – a suburb of Los Angeles) we have state exemptions that are used by most Debtors. There are two statutory schemes, California Code of Civil Procedure §704 and California Code of Civil Procedure §703. A Debtor who uses the California exemption scheme cannot “mix and match” exemptions, but must elect either elect to use either California Code of Civil Procedure §703 or California Code of Civil Procedure §704.

Exemptions are powerful – despite being called a “liquidation” case, in most Chapter 7 cases nothing is liquidated. In fact, as many as 94% of cases filed under chapter 7 are “no asset” cases.

A Chapter 7 case begins with the Debtor (or Debtors if filed Jointly) first completing a credit counseling course. A case can almost never be successfully filed without the Debtors having previously completed a credit counseling course. The next step is filing a bankruptcy petition asking the bankruptcy Court to grant them relief under bankruptcy. Upon filing of a bankruptcy case, an estate is created. All property that the Debtors own or have an interest in (and some property they may no longer have, depending on various issues that can arise), becomes part of the bankruptcy estate.

This may sound disconcerting, but for almost all cases (remember about 94% of them), nothing important changes for the Debtors. The creation of the bankruptcy estate is to allow a Bankruptcy Trustee to liquidate any assets that are not exempt. If all the Debtors’ assets are exempt, then the estate will close when the Debtors’ bankruptcy case is closed.

A Bankruptcy Trustee is a private fiduciary appointed to oversee and administer a bankruptcy estate. Although the Trustee is appointed by the office of the United States Trustee, the individual Bankruptcy Trustee is not a government employee. Bankruptcy Trustees are often bankruptcy attorneys, accountants or other experts in receivership who have been chosen for their knowledge and expertise.

The office of the United States Trustee (known as the “UST”) is part of the United States Department of Justice. The UST’s role is to oversee the administration of bankruptcy cases. In a consumer Chapter 7 bankruptcy case, the UST’s primary role is to be a “watchdog” that enforces many of the rules in bankruptcy. The UST employes analysts, paralegals and attorneys who watch for fraud, perjury, abuse (including by creditors) or other malicious conduct. The UST does not bring criminal cases on its own, but it does refer criminal cases for prosecution by the United States Attorney’s office. The UST also has a duty to review all Chapter 7 bankruptcy filings for “abuse.”

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). BAPCPA introduced significant changes to the Bankruptcy system including the inclusion of the “Means Test.” The Means Test is a test that tries to set an objective standard for whether Debtors have (or rather, should have, not that they actually do) so much disposable income that it would be “abuse” for them not to at least partially repay their creditors in a Chapter 13 case.

The Means Test is complex but a simplified version is this: The first step compares the Debtors average income in the six months preceding the case to the median income for a household of similar size for the area in which the Debtors live. If the Debtors are below the median income for their household size, they “pass” the Means Test (meaning it is presumed that their filing is not “abuse”). If the Debtors are above the median income for their household size they do not automatically “fail” the Means Test, they simply go on to part two. For example, here in Los Angeles, Ca the median income for a single person for the Chapter 7 bankruptcy Means Test is $48,415.00 or $4,035.00 per month. So, if you were single and lived in the greater Los Angeles area and earned over $4,035.00 per month, then you would go to step two of the Means Test.

The second part of the Means Test takes the Debtors’ average household income and then deducts a hybrid of expenses. Most of the expenses are allowance expenses from tables provided by the UST (they are not the Debtors’ actual expenses). A few of the Debtors’ actual expenses can be used. At the end of the second step to the means test, Debtors may have negative disposable income or disposable income below the threshold to be considered “abuse.” If this is the case, then they still “pass” the Means Test (meaning their filing is not presumed to be and “abuse”). If the Debtors’ disposable income is above the “abuse” threshold, then a rebuttable presumption arises that their case is an “abuse.” Debtors can successfully rebut a presumption of abuse and still remain in Chapter 7 but they generally will have a more complex case and will have to do a significant amount of work to overcome the objections of the UST. This is just a general overview of the Means Test which is significantly more complex than what is discussed above.

Assuming the Debtors “pass” the Means Test and are presumed not to be an abuse, the next step in their bankruptcy case is attending the Meeting of Creditors. The Meeting of Creditors location is assigned based on the jurisdiction the Debtors filed in (which should be based on the recent residence history of the Debtors). If you lived in any part of the San Fernando Valley for example (such as Woodland Hills, Encino, Van Nuys, etc..) then you would be assigned to attend your Meeting of Creditors at the Woodland Hills UST location (21051 Warner Center Lane #115 Woodland Hills, Ca 91367). Many times the UST will use a location that is not a Bankruptcy Courthouse (such as the Woodland Hills, Ca location above), but rather a private space rented by the UST and used to conduct the Meeting of Creditors

Despite the name, for most Debtors, there will not be any creditors present. The Bankruptcy Trustee is acting for the benefit of all creditors and in most cases the Trustee is the only party who will question the Debtors at the Meeting of Creditors. At the Meeting of Creditors, Debtors will be called to appear before the Bankruptcy Trustee. They are required to testify under oath. Every Trustee has their own unique questions they may ask, and many questions are tailored to the Debtors’ individual case. The Trustee will have reviewed the Debtors’ bankruptcy petition, schedules and forms prior to the meeting and will have an idea of the Debtors’ financial situation ahead of time. In many cases, the Trustee may only ask a “normal” set of questions. If the Trustee has seen something in the papers, or if something arises during the meeting, they may ask many additional questions. For many Trustees, the initial Meeting of Creditors allows them to isolate the vast majority of cases where there are clearly no assets to distribute, nor defects that must be addressed, from the few cases where there may be significant issues. If there are issues the Trustee needs to look into further, they will often continue the Meeting of Creditors. In such a case it is common for the Trustee to request additional documentation and possibly amendments to the Debtors’ schedules. In cases with significant issues, the Trustee may request a Rule 2004 examination (essentially a deposition) where they can perform an in depth inquiry into the Debtors’ case.

Assuming all goes well at the Meeting of Creditors, it concludes and the Debtors do not have to return. The conclusion of the meeting can end with a few different results. In the vast majority of cases, the Meeting of Creditors will conclude and within a few days the Bankruptcy Trustee will file a a Report of No Distribution. Depending upon the jurisdiction, this item may be described differently (it may be called a “No Asset” Report or other similar names). Whatever the name, it is a report by the Bankruptcy Trustee which states that there are no assets of the Debtors which are not exempt (it means there is nothing the Debtors own that the Trustee intends to liquidate for the benefit of creditors). If the Debtors may have assets that the Trustee is investigating, the Trustee will instead file an “Initial Report” which tells the creditors and other parties in interest that there is a possibility that the Trustee may recover assets in the case. Normally, unless there is a notification by the Trustee that there are assets to administer, creditors will not file Proofs of Claim in a Chapter 7 case. Upon notification by the Trustee of assets that may be recovered, the Court will set a Claims Bar Date (a deadline to file proofs of claim, normally 90 days from the conclusion of the Meeting of Creditors. Governmental creditors are given additional time.) Proofs of Claim are exactly what they sound like – formal statements filed by creditors which state the amounts owed to them and the basis for their claim against the Debtor. Proofs of Claim can be objected to by the Debtor or the Trustee if either party believe there is a reason to do so. Sometimes, a Trustee is unsure whether there will be any tangible asset recovery for creditors. In such a case, the Trustee will file an Initial Report that indicates to creditors and other parties that there may be an asset to distribute. In many cases, the Trustee may end up concluding the case without actual recovery. In a few cases (again, about 6% of the time) there will be un-exempt assets that can be liquidated for the benefit of creditors. The Trustee is entitled to statutory fees and costs and often incurs significant professional expenses (in most cases, the Trustee has to hire lawyers and accountants to recover assets) that are usually also deducted from any recovery. Any payment to the Trustee or professionals they hire is done so with the permission of the Bankruptcy Court Judge who oversees the distribution of any asset liquidated for creditors. Often times, there are scenarios where a Trustee may wish to abandon specific assets. They do so through a Notice of Proposed Abandonment (or similar name depending upon jurisdiction). Often, Debtors get a copy of a Notice of Abandonment for large items such as real estate and are confused about the meaning – not to worry, it is a formal notice that the Trustee has no interest in the item described therein.

After the Meeting of Creditors, there are usually very few things for the Debtors to do. The Debtors may need to finish completing Reaffirmation Agreements (agreements to remain personally liable on secured debts. To read more about them click here), or to complete their Financial Management Course (2nd Credit Counseling).

After 60 days have passed from the conclusion of the Meeting of Creditors, the Debtors will be eligible for discharge. The 60 days allows time for creditors and other parties in interest to file objections to the dischargeability of their particular claims, or objections to the discharge in general. Objections to discharge are relatively rare, although “junk-debt” discharge objections are unfortunately becoming more commonplace.

Once the Debtors receive their Discharge Order, the case will normally conclude soon thereafter (assuming there are no assets or other issue to keep the case administratively open).