Clients sometimes are surprised and get frustrated with the amount of documentation and work they have to do in order to file bankruptcy. Here’s a quick list of documents we generally need the client to gather, and why:
- Income verification. For wage earners, this is the last six calendar months of paystubs. Why? Because the means test examines that period of time to determine whether the debtor is eligible to file a chapter 7 bankruptcy, or needs to pay back debt through a reorganization plan. For self-employed people, that means a profit and loss statement and bank records. Trustees will often ask for these documents if they have any suspicion about the debtor’s income.
- Social security card and driver’s license. We want to make sure you have this before the bankruptcy. You will need to produce this at the creditors’ meeting, and we like to know that you have it already.
- For landlords: copies of insurance binders for each property, lease agreements, and cash flow statements. The trustee will want to see these to verify income, and to see whether to challenge the holding of a property (why should unsecured creditors get nothing while a debtor landlord shovels good money into a bad rental?).
- Federal tax returns for the last three years, and California tax return for the last year; we want to verify the last three years of income, which must be reported on your schedules, and we want to have the documentation that trustees routinely request.
- Credit reports from all three major reporting agencies less than 90 days old. We want to make sure that we report every debt you have; some debtors forget a creditor or two. Yeah, it happens.
- Broker’s price opinion on every piece of real estate owned by the debtor. Property values get to be very important in determining what kind of bankruptcy to file, and how to treat a particular property. Creditors will ask for this as verification of the debtor’s numbers too. Best to disclose as much evidence as possible for valuations.
- Purchase contracts on vehicles still being paid for: some have clauses making bankruptcy an automatic default. On those, we will reaffirm the note; if that clause is not there, we do not reaffirm.
- Child support and alimony documentation. This affects income drastically.
- Pending lawsuits, including summons and complaints or judgments. Again, we want to see these to make sure that we are scheduling the debt correctly.
We also ask debtors to fill out a questionnaire by hand, and sometimes online. Our staff finds that it is a whole lot easier to get a correct and accurate petition if we gather all this information and have the time to handle it.
Bankruptcy homework
January 11th, 2012Strategic Defaults – that is, walking away from your mortgage
December 22nd, 2011The New Yorker suggests that homeowners with houses worth less than their mortgages – “underwater” – just walk away.
Over here, Jay Fleischman, a New York attorney, calls the column elitist: his defaulting clients aren’t defaulting “strategically,” they’re having trouble putting food on the table.
And Megan McCardle gives her two cents on strategic defaults – here and here.
Here in Agoura, Santa Barbara, Westlake Village, Ventura County – we’re seeing that few people can make the choice to keep paying the mortgage.
Out of Africa
December 21st, 2011I recently rented “Out of Africa” and watched it with my family. If you have not seen this movie, do: it is a beautiful and romantic tale, and ultimately a tale of redemption. Karen Blixen moves from Denmark to Kenya, marries a cad, starts a coffee plantation, and falls in love with a free-spirit safari hunter.
And she gets ruined financially.
After years of teetering on the edge, her coffee plantation finally starts to taste success. Then a fire engulfs the factory; flames rather than paying customers consume her best crop of coffee. She must liquidate the rest of her belongings, allow the bank to take over the farm, and return to her native Denmark.
Once in Denmark, she starts a new career as writer Isak Dinesen.
While she is born into the nobility of Denmark, that birth does not help her much when she runs out of money a continent away from home, and she could not have easily returned to Denmark as a failed plantation owner. Her high birth also did not grant her the talent to write.
I recommend this movie as a story of redemption after failure.
What happens in chapter 7?
December 21st, 2011A debtor going through a chapter 7 bankruptcy takes the simplest path to a discharge. Understanding this process gives us an advantage in understanding the rest of the bankruptcy code: other chapters build on the simple process of a chapter 7 case.
Our debtors need to provide four items to file a chapter 7 case: they must sign a retainer agreement with us, pay all fees (because we cannot be creditors in their chapter 7 bankruptcy case), take a credit counseling class, and sign a petition.
Preparing the petition for signing is a large job: the debtor must list everything he owns, everything he owes, all his income, and all his expenses. In addition, he must list a variety of transactions over the last two to four years. There is a basic bargain here: disclose all your financial information, show that you have almost nothing to pay your debts, and the government (through the judicial system) will grant you a discharge, relief from your debts.
Once we have all four items, we file the bankruptcy petition. We can file this petition electronically, at any time of day or night (except when the court system has shut down the electronic filing for maintenance; even then, we can physically file by driving to the court, dropping off the petition, and getting a stamp on it).
The filing of the petition creates an immediate nationwide injunction against any creditor from trying to collect on the debtor’s obligations. With very narrow exceptions, every creditor, even the IRS, has to stop whatever collection or foreclosure process was in place at the moment of the petition filing.
Legal title to everything that the debtor owns transfers to a trustee upon filing. This is usually a private-sector attorney who handles hundreds of these cases a month. The trustee reviews the schedules to see whether there is anything worth administering, in other words, is it worth the trustee’s efforts to take the debtor’s property and sell it so that the creditors can get something back? In about 99 percent of all cases, there is nothing to administer; the debtor gets everything back, and the trustee moves on to the next case. These are called “no-asset” cases. But the trustee still legally owns the property until she either abandons it or the case is closed.
Once the petition is filed, the debtor must take a financial management class, another requirement introduced in the 2005 changes to the bankruptcy law. Without this class, the court may dismiss the bankruptcy case without a discharge, requiring the debtor to reopen the case at great expense.
Within about 45 days of filing the petition, the debtor gets to meet the trustee at a “meeting of creditors,” sometimes called a “341 hearing” because of the code section that requires this. Creditors almost never show up at a 341 hearing; this hearing creates a chance for the trustee to ask the debtor, under oath, whether he wanted to file bankruptcy and was truthful in what was reported on the schedules. Usually this meeting lasts about five to ten minutes, although the debtor may wait an hour or more from the scheduled time to be heard.
The prospect of showing up at a creditors’ meeting often makes the debtor nervous, and we get many questions about how to prepare for it. We recommend that debtors show up at the meeting 15 to 30 minutes early, and just watch what happens – if there is a problem at the meeting of creditors, it is almost always because there is a problem in the paperwork. There is little coaching that we can do for the debtor; we strive to disclose as much as possible in the petition, so there are no difficulties at the meeting.
Most of our debtors say that the meeting of creditors was much easier than they anticipated.
After the meeting of creditors, the debtor waits for a discharge. There is a 60-day period after the meeting of creditors during which parties may challenge the discharge. In 99 percent of cases, there is no such challenge; usually, debtors have an idea whether such a challenge will occur.
At the end of the 60-day period, the court may issue the discharge, assuming that the debtor has taken the financial management class and no one has challenged his right to a discharge.
American Airlines files for chapter 11 protection
November 29th, 2011AMR Corporation, holding company for American Airlines and American Eagle, filed for bankruptcy protection in New York today. The corporation is represented by Weil, Gotshal, and Manges, a nationally-known bankruptcy firm. American had never filed for bankruptcy before.
The airline says that it will continue normal operations through this reorganization. That’s good, because I received a promotional email from Expedia this morning touting low fares on American.
May it reorganize and continue to provide transportation to us all.
Can I use my credit cards, then file bankruptcy?
November 22nd, 2011It happens fairly often: a client comes in and says that he needs to buy something, can’t afford it, and wants to put it on his credit card and then discharge the debt later by filing bankruptcy.
While I don’t mind sticking it to the credit card man, I can’t advise doing this. Taking something you don’t intend to pay for is fraud. Debts for goods, services, or money obtained by fraud are not dischargeable in bankruptcy, under 11 USC Section 523. If you’re caught, you will need to pay the debt, and you will have a judgment that says “fraud” out there.
My advice is to always cut up your credit cards as soon as you decide that you are filing bankruptcy. While the chances of getting caught in some of these debtor schemes are almost nothiing, It is just not worth it to take the chance. As an attorney, I must advise my clients to obey the law, including not running up charges on a credit card before filing bankruptcy. If the debtor does it anyway and I find out about it, I cannot represent that debtor.
Happily, I have never had a debtor go ahead and use the credit cards after I have explained this issue.
Emergency Homeowners’ Loan Program didn’t help much
November 21st, 2011It appears that most of the funds for this Treasury program didn’t even get spent. Not surprising, at least to me; even with federal funds in place, banks don’t have much of an incentive to change the contract terms on loans they’ve made.
HSBC is having problems in US and elsewhere
November 9th, 2011We deal mostly with smaller debtors: families, small businesses. One of the banks we see on a regular basis is HSBC. Here’s an article showing that the sum total of small debtors not paying their mortgages snowballs into a major problem for a worldwide player.
The bank blames the problem on the “moral hazard,” I guess meaning the business decisions of small debtors to walk away from debt that crushes them or makes no financial sense any longer. Of course, HSBC got here by buying a great number of subprime loans. Does “morality” enter into HSBC’s decisions? They seem to expect it to enter into the small debtors’ decisions about whether to continue to pay a mortgage on a house that’s worth less than what’s owed on it.
The Ice Cream of the Future Tries to Sort Itself Out in Chapter 11
November 5th, 2011Dippin’ Dots Ice Cream filed for chapter 11 protection this week. http://news.yahoo.com/ice-cream-maker-dippin-dots-files-bankruptcy-193831673.html
The means test
November 1st, 2011Chapter 7 is a relatively easy way to do a bankruptcy: you file a petition listing everything you own, everything you owe, all your income and all your expenses. About three months later, assuming everything goes okay, you get your discharge.
Congress, however, has a problem with this; credit card companies taught our representatives that there are lots of people who make a lot of money and file bankruptcy to get rid of debt they should be paying off. So Congress created the mean test, an objective test to determine whether you can do a simple bankruptcy or are required to spend the next five years of your life on a court-supervised budget wagon.
The monstrosity of a statute Congress came up, 11 USC Section 707(b), is quite difficult to read through. Its basic message: Unless your income is below the median income (adjusted for expenses) for the state you live in, you cannot file a chapter 7 bankruptcy; Congress wants you to pay off your credit cards over the next five years.
How do we figure median income? The US Trustee’s office gives us the figures here, from the census bureau. For a single person in California, the figure is $47,683 (down about $2,000 over the last two years).
But the debtor is allowed to subtract certain expenses: taxes, medical expenses, standard amounts for living expenses, and payments on secured debts such as mortgages and auto payments. In fact, many practitioners see that the means test discriminates in favor of homeowners who have overextended themselves at the expense of modest renters.
Do you qualify for a chapter 7 case? Our staff at Hurlbett & Faucher can tell you after collecting a small packet of information from you.