Basic Bankruptcy

1. Basic Bankruptcy • Is filing bankruptcy the best solution? • If so, Chapter 7 or Chapter 13? • When should case be filed? • Pre-bankruptcy planning • How to file a case. • How a bankruptcy affects other cases

2. Purposes of Bankruptcy Code • Fresh start • For the honest but unfortunate debtor • Who can’t afford to pay debts – see “means test” • Reorganization (Chapters 11, 12, 13) • Plan to pay at least some debts • Individual debtor retains property • Business can continued to operate and save jobs

3. Bankruptcy is for Creditors Too • Promotes fairness among creditors • Equal treatment of similarly situated creditors • Discourages race to the court house

4. Key concepts • Automatic Stay • Protects debtor • Protects property of the estate • Property of the bankruptcy estate • Broad definition– all property rights & interests • Discharge • Injunction against collection of debts • Some debts may not be discharged

5. Property of the estate All legal or equitable interests of the debtor • Wherever located and by whomever held • Whether listed on bankruptcy schedules or not • Equitable vs. legal interest • If debtor has equitable interest but not legal title, this is property of the estate • Exception – does not include defined benefit pensions and spendthrift trusts

6. Exempt property • Debtor keeps exempt property • Property must be listed and claimed as exempt • Illinois has opted out of federal exemptions • Debtor can claim • Illinois exemptions • Non bankruptcy federal exemptions

7. Illinois exemptions735 ILCS 5/12-1001 & 12-1006 • Necessary clothing • Child support reasonably necessary • In practice, 100% • Retirement plans or accounts – unlimited • Social security & public assistance • Includes earned income credit • Principal residence owned in tenancy by the entireties is exempt from unsecured debts owed only by one spouse • Except child support owed to former spouse?

8. Illinois Exemptions735 ILCS 5/12-901 & 5/12-1001 • Homestead - $15,000 one; $30,000 two or more • Wild card any personal property - $4,000 • One motor vehicle - $2,400 • Can stack unused wild card onto motor vehicle exemption

9. Exemption issuesLimits on exemptions • Will not stop mortgage foreclosure • Purchase money security interests • Debts for child support or alimony • Non purchase money security interests • Can avoid liens on household goods, tools of the trade • Special rules if lived out-of-state in last 2 years

10. Discharge of debts • Purpose – fresh start for debtor • Discharge is injunction against collection attempts • Remedy for violation is contempt • Can only get Chapter 7 discharges once every 8 years; Chapter 13 discussed later • Doesn’t cover post-petition debts • Must complete debtor education

11. DischargeFresh start • Utility service • Cannot be denied because of dischargeable debt • Must pay deposit but not old bill • If stolen service, Chapter 13 • Drivers license • Restored if suspended for nonpayment of tort debt • No discrimination by governmental units or employers

12. DischargeExceptions to discharge • Some debts are never discharged • Creditor can collect once automatic stay ends, does not need express permission from court • Debts which are discharged unless creditor takes timely action in bankruptcy court • Student loans are only discharged if debtor proves undue hardship in bankruptcy court • Alternatives – loan consolidation, deferrals

13. DischargeDebts that are never discharged • Child support and alimony • Criminal fines and restitution orders • Drunk driving resulting in personal injury • Trust fund taxes

14. DischargeDebts that may be discharged • Income taxes ~ > 3 years, 3 months & 15 days old, return filed • Debts where creditor fails to timely object • Fraud • Theft, embezzlement, breach of fiduciary duty • Willful and malicious injury

15. DischargeChapter 13 - enhanced discharge • Chapter 13 need not pay 100% of unsecured debts • Successful Chapter 13 discharges a few debts which would not be discharged in Chapter 7 • Civil fines • Debts incurred to pay taxes • Property settlements and division of debts arising out of divorce

16. Discharge and secured debtOnly personal liability is discharged • Personal liability on a debt is discharged • Non filing co-obligors are still liable • But valid liens on property survive • Debtor not liable for any deficiency after repossession or foreclosure

17. Serial filings – waiting periods for getting another discharge • Filing a Chapter 7 now, must wait • 8 years since previous Chapter 7 • 6 years since previous Chapter 13 • Previous Chapter 13 with 70-100% payment • Filing Chapter 13 now, no discharge if • Chapter 7 within 4 years • Chapter 13 within 2 years • Measured from filing date to filing date

18. Repeat filingsCan file even if no discharge • Can file even if debtor would not be eligible for discharge • Chapter 13 filed within 4 years of Chapter 7 • Not eligible for discharge but • Can save property • by catching up on mortgage • or by paying secured debt in full

19. Automatic StayAutomatic nature • Filing petition invokes stay • Exception if this is 3rd case pending during last 12 months • No court order is necessary • Actions in violation of stay are void

20. Automatic StayBroad scope • Applies to acts against debtor • Lawsuits & other action to collect debts • Applies if debt nondischargeable unless DSO • Applies to acts against property • to recover property for pre-petition debts • to recover property of bankruptcy estate

21. Extension of time • Trustee has up to 60 days to take action if the time for such action had not expired when the case was filed. 11 USC §108(b) • This can be used to get more time to redeem property taxes • Debtor may get more time by filing Chapter 13.

22. Automatic StayNotable exceptions • Criminal and regulatory • Domestic relations (almost everything) • Establishing paternity • Establishing or modifying alimony or support • Collecting alimony or child support • Stay does apply to division of property • Post-petition debts

23. Automatic StayRelief from automatic stay • Grounds • No adequate protection of creditor’s interest • Debtor has no equity in property AND not needed for effective reorganization • Other “cause” • Examples • Recover car which is not insured • Foreclose when debtor not making payments

24. Repeat filingsLimits on automatic stay • If case filed within 1 year after previous case dismissed, stay expires after 30 days • Stay can be extended by court. • Motion must be filed and granted within 30 days. Must show clear and convincing evidence of changed circumstances. Stay may still apply to property of the estate • If 2 dismissals in previous year, no automatic stay • Must file motion to impose stay

25. Automatic StayExpiration • When discharge granted (or denied) • When case dismissed or closed

26. Sources of law – jurisdiction, venue & substance • Jurisdiction & venue in Title 28, U.S. Code Judiciary & Judicial Procedure • Substance - Bankruptcy Code, Title 11 • “means test” use IRS collection standards and Census Bureau statistics • Property rights based on state law and nonbankruptcy federal law

27. Sources of law - procedure • Procedure – • Bankruptcy Rules • Incorporates some sections of Federal Rules of Civil Procedure • Bankruptcy code has some procedural rules • Administrative office of US Courts • N.D. Illinois local rules & general orders • mandatory electronic case filing (ECF) • Individual judges standing orders – • Web site www.ilnb.uscourts.gov – “judges” tab

29. Bankruptcy players • Case Trustee • Chapter 7 – panel trustee • Chapter 13 – standing trustee • United States Trustee ************* • Auditors • United States Attorney

30. Bankruptcy events • Creditors meeting (341 meeting) – all cases • Confirmation hearing – Chapter 13 • No asset report by trustee - Chapter 7 • Discharge (no hearing required) • Reaffirmation hearing when presumption of undue hardship • Closing of case • Dismissal of case,

31. Discovery & mandatory disclosures • Required documents – tax returns, pay advices, bank statements, • Debtor’s duty to cooperate with trustee (or auditor) • Failure to cooperate can lead to denial of discharge • Discovery – when there is a contested matter or an adversary proceeding • Rule 2004 exam. When discovery not available

32. Litigation • Contested matters – within bankruptcy case • Adversary proceedings – separate case • More like normal litigation

33. Practice & procedure Important differences • Motions must be served on represented debtor in addition to debtor’s attorney • Motion filed by debtor’s attorney to withdraw or for approval of fees must be served on debtor • US Trustee and/or case trustee must be served

34. Important differences, cont. • Notice required - 5 business days, unless • Service by ECF- 3 business days • Personal delivery - 2 business days • Rules require longer period • Emergency - attorney must file Rule 9011 certification, give as much notice as possible

35. Important differences, cont. • Time to file motion to vacate or for “reconsideration” is only 10 days • Time to appeal is only 10 days • Jury trials rare; • by filing bankruptcy, debtor has waived jury • filing claim waives jury

36. Case analysisAlternatives; Chapter 7 or 13; cost • Doing “nothing” • “Judgment proof” client; • claiming exemptions, preserving exempt property • Negotiating workouts, refinancing • State court litigation, Fair Debt Collection Practices Act, etc. • Chapter 7 or Chapter 13 • Costs – filing fee; opportunity cost; reduced access to credit

37. Access to credit • Bankruptcy stays on credit record for 10 years • Effect on credit score • Paradoxically, can improve after bankruptcy • Usually 2 years before qualified for mortgage • Beware of post-discharge vultures • Credit during Chapter 13? • Requires court authorization

38. Secured debtsChapter 7 – approved ways to retain property • Lien avoidance, exempt property • Judicial liens that impair exemptions • Non purchase money liens on household goods • Redemption (redemption lenders for cars) • Has to be at retail value, not wholesale • Reaffirmation on original terms • As if bankruptcy never happened for this debt • Must perform choice stated on Form 8 (statement of intentions) within specified time

39. Secured debtsChapter 7 – other ways to retain property • Other options, not mentioned in Code • Reaffirmation on better terms than original contact? • Will creditor act in its own best interests? • Making all payments without reaffirmation? • Can lead to repossession of vehicles even if current

40. Secured debtChapter 13 strategies • “Cram down” • If creditor is “under secured” • Pay value of collateral, not amount of debt • Plus interest – prime rate is starting point • Can’t cram down home mortgages • Unless creditor takes additional security • “Strip off” • Wholly unsecured junior lien (e.g. 2nd or 3rd mortgage) can be “stripped off”

41. Secured debtChapter 13 strategies – limits • Can’t cram down • cars bought within 910 days of filing • personal property bought w/in 365 days • Will have to pay contract amount even though collateral worth much less • Can lower interest rate

42. Case analysisChapter 7 • Liquidation analysis • Is there non exempt property? • Dischargeability analysis • Debts that can never be discharged • Debts that could be discharged in Chapter 13 • Secured debts, leases • What property can debtor keep? At what cost? • Could debtor keep property in Chapter 13 at less cost? • Disposable income analysis

43. Case analysisChapter 7 • Disposable income – means test • If “current monthly income” > state median, debtor must pass means test or no Chapter 7 • Based on 6 month average; • Even low-income must fill out part of form • If “current monthly income” < state median, disposable income should not matter

44. Case analysisChapter 13 • Best interests of creditors (cf. liquidation) • What debts will be discharged • Ch 13 discharges a few more debts than Ch 7 • Secured debt options • Cure, cram down, strip off • Best efforts • Must pay all disposable income for 3 years

45. Case analysisChapter 13 • Debtor may want to file Chapter 13 even if no discharge, to save property • Unsecured debt that can be paid 100% even when other debts are paid less • Rent arrears if lease being assumed • Utility service obtained by fraud or theft (only the nondischargeable portion) • Long term debts not in default (student loans)

46. When to FileReasons to file sooner • Losing or about to lose property • Foreclosure sale • Tax deed • Garnishment/ offset of benefits [tax intercept] • Repossession / sale • Eviction – 5/10/14 day notice for rent • Utility shutoff/ restoration • Involuntary transfer <90 days/ 2 yrs / 4 yrs

47. When to fileReasons to wait • Expenses still exceed income • No health insurance • Recent credit card charges • over $500 for luxury goods within 90 days • Over $750 for cash advances within70 days • Recent voluntary transfers • Exemption planning • Tax refund • Income taxes owed will be dischargeable

48. Who can/should file ? • Husband and wife can file joint petition • Joint filing fee same as for individual • Ch 13 codebtor stay protects non filing spouse • If only one files, non filing spouse will still owe joint debt, but can file own case later • Heirs • Debtor who owns property but didn’t sign mortgage can file Chapter 13 to save property

49. How to file What to file - paperwork • Forms require full financial disclosure • Credit counseling certificate • “Emergency” filing – can be done same day • If represented, electronic filing required • 15 days to file the rest • (can move for more time)

50. Credit counseling • Has to be from approved agency • Provided without regard to ability to pay. • Within 180 days before filing case • But not on same day? • Limited exception • can file petition if exigent circumstances & attempted to get counseling at least 5 days before. But Judge has discretion.