Consumer Bankruptcy Part I – Chapter 7 and Chapter 13
Chapter 7 and 13 are the primary chapters of bankruptcy relief available to consumers who find themselves in over their heads with debt. This course will explain the basics of Chapter 7 and Chapter 13 cases for consumer debtors. The first half will explain the basics of both chapters, the elements of each one and the players and their roles in each type of case. The second half of the course will walk through the handling of a case from inception to discharge.
Hello everyone, my name is Scott Goldstein. I'm a Bankruptcy Attorney and I practice in New York and New Jersey. The title of this program is Bankruptcy Basics, and what we're going to do is do a discussion of Bankruptcy Law, from what it is to how it works, and take you through a basic case in Chapter 7 and Chapter 13. Starting off, what is bankruptcy anyway? A bankruptcy is a process of restructuring the finances or liquidating the available assets of a person or entity in accordance with Title 11 of the United States Code. The stated purpose of bankruptcy cases are to give an honest but unfortunate debtor, a fresh start. Your client, the debtor, will provide the court with a complete picture of his or her finances and why they cannot afford to pay their debts. Generally, in exchange for doing that and following the provisions of the Bankruptcy Code, the debtor will then get their fresh start and a discharge of their debt. All of this seems pretty simple, but there's both a plus and a minus side to do in a bankruptcy case for a client. On the pro side, your client will get a fresh financial start, most of their debts will get discharged. All collection activity has to stop, lawsuits stop, and your clients will get peace of mind knowing that going forward, their debts will be cleared out and they don't have to pay them. Bankruptcy, however, does have some downsides. The first one, and the one that your clients will always know about is that your credit score is going to take a major hit from filing a bankruptcy case. Now this one may not be as bad as people think it is because generally, if someone is already visiting you to talk about a bankruptcy, their credit score is already pretty bad and they've not been paying their bills. So this is going to be something that is going to be on their mind, but you have to be able to reassure them that it'll get better, eventually. The next issue is that some lenders will never, ever work with a person who filed for bankruptcy. A lot of companies will look for bankruptcy records and they will ask you if you've filed for bankruptcy before. Some lenders will not work with you but there are plenty of lenders that will, eventually. The next issue is that there are risks to assets, under a Chapter 7 bankruptcy case, those assets that are not exempted under a provision of the Bankruptcy Code, are subject to being taken by a Chapter 7 trustee and sold for the benefit of creditors. That's where your professional judgment comes in to determine whether a Chapter 7 case is best or if you need to do something else for your client. The last problem with filing a bankruptcy is something that you're going to have to overcome with almost every single one of your clients. Bankruptcy is something that as a society, people tend to look down on, you'll see advertisements all the time, don't file for bankruptcy, settle your debts. Don't file for bankruptcy, contact our company, and we will address it for you but you don't have to do it. Culturally, we have placed this very common and extremely legal method of debt relief in a position where people are ashamed and they shouldn't be. That being said, many people will come into your office thinking about bankruptcy and deeply ashamed, thinking that they have failed. They haven't. And you now need to convince them that this is the suggestion that will work for them because sometimes when you've done everything you can, bankruptcy is the only resort you have to clear out your debt. The first and most immediate effect of a bankruptcy filing is the imposition of the Automatic Stay. The Automatic Stay is a provision of bankruptcy law governed by Section 362, and what it does is it stops almost all state or federal court cases against your client. It'll stop collection attempts, it'll stop a lien from being perfected, but on a debt, if the lien has not already been perfected, it'll also stop judgment enforcement, it'll stop judgment imposition. If your client has a garnishment, the garnishment will stop, it may take a little bit, but the garnishment will stop. It will stop bank levies from being imposed and if a levy is already in place, it will allow you to have that levy released. There are certain things that a bankruptcy stay will not stop. If you have a child support case going, it may not stop it, that being said, most state court judges, the moment they hear the word bankruptcy for any situation, will stop things. The notable exception to this will be criminal prosecutions, filing for Chapter 7 or Chapter 13 is not going to stop your murder trial. If you're got that kind of problem, you've got bigger issues than your finances. So now when someone comes into your office and wants to file for bankruptcy, what are your options? Bankruptcy doesn't have 31 flavors but we have enough. Under Chapter 7, that's a liquidation, that's really what everyone wants. Chapter 7 case is the case that everyone wants to do because it's quick. Chapter 9 is for municipal reorganization, we're not going to talk about that. Chapter 11 is a large scale reorganization, again, not something that we're going to discuss today. Chapter 12 is a reorganization for family, farmers and fishermen, not something for today. Chapter 13, which we will discuss today, is a reorganization for individuals with regular income, and then there's Chapter 15 for cross border proceedings. There are actually 15 total Chapters in the Bankruptcy Code. Chapters 1, 3 and 5 address administrative and definitional issues. And there are, except for Chapter 12, no even numbered Chapters in the Bankruptcy Code, probably because Congress decided to reserve those for future expansions of the Code. Now we're going to get into the real meat of this presentation. What are the main features of a Chapter 7 case, and why do clients really want to do it? First, your debtor is going to get a quick discharge of all debts that they can get rid of. Chapter 7 is, I often refer to as, the quick and dirty method of debt relief. It works, it is limited in certain ways, but it works and it works really well. What kind of debts are eliminated? Examples are credit card debts, medical bills, personal loans, including internet loans, like LendingClub, Kabbage, any of those, those can all be eliminated. If you have certain income tax obligations, specifically income tax obligations that were incurred more than three years ago with a return that has been filed and which were assessed within the last two years. And then if you got overpayment by unemployment or worker's compensation or social security or welfare benefits, overpayments that don't involve you committing fraud can be discharged. A Chapter 7 case is usually done in three to six months. Now, as we said before, there are certain risks. You do put a risk to property, but most clients fit within the exemption categories, and unless your client knows that they're going to lose something and is okay losing it, you don't file it, you have other options. But if you can get your clients in, this is what they're going to want to do, and if for some reason you have to change tactics, they're going to get really upset. The first thing that everyone needs to do, when you have a client who is going to file for Chapter 7 or who wants to file for Chapter 7, is determine if they meet the qualifications. First things first, what's your client's income? And this is the first question I will ask a client when they come to my office or call-in. Income has to be below what's called median for your household size, or you have to pass what's called the means test. Median income is just what it sounds like, The United States trustee's Office, every quarter or so, will post a series of numbers based on the median income currently reported for each and every state. They post the list on the United States trustee's website, and it will have the median income for household sizes of one, two, three or four people in that state, in every single state, and then at the very, very bottom of it, they give an adjuster for people who have households above four people. This is computed by taking the median of all areas of your state, which creates some very strange results. For example, in New Jersey, our median income for a household of four is $140,657, in New York, it's $117,706. This creates the rather bizarre situation that someone who lives in Jersey City, who makes $120,000 a year, will be able to file for Chapter 7 with their household of four, whereas if that family were to move physically less than two miles across the Hudson River, they would not be able to file for Chapter 7, theoretically. This is despite the fact that it is actually probably more expensive to live in Manhattan than it is to live in Jersey City or otherwise in New Jersey. And just for fun, you should also know that the lowest median income is in New Mexico at $70,316, and the highest median income is in Washington DC at $182,068. Amusingly enough, when you look at things, California isn't even in the top five of the highest median income states, their median income is $111,535, they actually have a lower meeting income than Illinois, which is $113,649 for a family of four. Now that doesn't mean that a family with an income above the median income cannot file for Chapter 7. They have to do what's called the means test, which is a little miniature tax return, where you would take the income and deduct things like taxes, secured payments, and other things to see if the debtor falls below what's called the threshold of abuse. If your client does pass the means test after you take all the deductions and falls below the threshold of abuse, they can file a Chapter 7 and they won't have a problem. The next qualifying thing and this is only a qualifier, in terms of whether or not you can professionally file a Chapter 7 for your client and get them the result that they want, is whether the client's assets are fully exemptible under either federal or state law, or the debtor knows that they have non-exempt assets and they are willing to turn them over to the Chapter 7 trustee. Finally, and this one's tricky, your client's budget should not have a significant surplus, once you take debt service out of consideration and by debt service, I don't mean their mortgage, I don't mean their taxes. What I mean is, when you take your client's general unsecured debt, credit card, medical, personal loans, all those things, out of the calculation of their expenditures, is there a lot of money left over? Now, a lot of money could mean different things to different people. A $100 may not be a lot, $500 you're going to start having issues. And I will tell you from personal experience that having a client with a $1000 surplus, will get you an inquiry from the United States trustee's Office that you will not enjoy. There are some other reasons that your client should not file for Chapter 7, and these are things you're going to need to try to ask about in your case, before you make that call when you're consulting. First and foremost, and this is a big one and it happens a lot, if your client has made recent payments to family or friends on account of a prior debt, that may be a problem, because a Chapter 7 trustee can try to recover that money for the benefit of other creditors, because it's what's called a preference. Basically your client has preferred their family or friends to their general unsecured creditors, technically this is not really the client's problem, but when a Chapter 7 trustee sues the debtor's mother because the debtor paid their mother $20,000 six months before filing for bankruptcy, generally, that's going to make Thanksgiving dinner really uncomfortable for your client and they're going to get really mad. If a client has that kind of situation, perhaps a Chapter 7 either is not a good idea or they're going to need to wait. If your client has a significant budget surplus, extra money after their debts are taken out of calculation, that's going to also cause you problems. If your client has got extra money in their budget after you take out debt service, that can also cause a problem in a Chapter 7 case, and the reason for that is that the qualifying statute for Chapter 7, 11 USC Section 707, does provide that in the event that there is an appearance of impropriety based on the totality of the circumstance, that a case can be either dismissed or converted to Chapter 13 on motion. So if your client looks like they've got a lot of extra money and they can pay something to their creditors, The Office of The United States trustee may make some noise. If your client has assets that they want to keep that do not fall within the exemptions that are either available under 11 USC Section 522, or your state statute, depending on whether or not your state has opted into using federal exemptions, or if they require their residents to use the state exemption scheme. Almost every single state does have their own set of bankruptcy exemptions in addition to the federal scheme, under 11 USC section 522, some states allow you to choose, some states require you to use the state system. If your client has non-exempt assets, they need to understand that those assets are subject to being recovered by the Chapter 7 trustee and then sold for the benefit of creditors. And this means literally everything, it could mean a lawsuit that the debtor has, it could mean a house, it could mean jewelry, anything is up for grabs. If your client doesn't want to give up the assets, Chapter 13 is the route to go or they can't file. Another reason that your client may not want to do a Chapter 7 is that they have debts that will survive, that can be dealt with in Chapter 13. An example of this would be things like alimony or child support arrears or mortgage arrears, or a car that they're behind on or tax arrears. Another thing that's kind of interesting is that you can't deal with fines and penalties in Chapter 7, but they can be discharged in Chapter 13. So that's a fun one. And the final reason that I really would discourage someone from trying to file a Chapter 7 is that there are a repeat filer. If your client has filed for Chapter 7 within the last eight years, they cannot get another Chapter 7 discharge. It's a pretty special silver bullet that you only get to use in a limited amount of times. So if your client's filed for bankruptcy and received a Chapter 7 discharge within the last eight years, there's no point to filing a Chapter 7 because the debt will still be there when you're done. And isn't that the whole point? So now we're going to turn our attention to Chapter 13 cases. The main features of a Chapter 13 is that it's a repayment plan and it is between, generally, 36 to 60 months. Now you can do less than 36 months, but you're going to be paying back a 100% of all your debts for your client. So if your client has the funds and they just need to restructure it and do it in 18, 12, 24 months, they can do that in a Chapter 13, but they need to understand that all of their debts, all their general unsecured debts, need to get paid back within that timeframe. If you want to have them pay less than their full debts, then it's 36 to 60 months depending on their situation. The next major feature and this is why clients do in fact seek me out for Chapter 13 cases, is that you can cure mortgage arrears, you can cure arrears on a car loan, you can cure tax issues, you can cure arrears in child supporter alimony. Chapter 13 plans include the ability to do, what's called curing and maintaining, where you will cure the arrears on that specific kind of debt and maintain your ordinary payments for cars and mortgages. Similarly, you can cure your arrears on alimony or child support, you can cure tax arrears to the IRS or your state taxing authorities. This is an incredibly powerful tool because you can prevent someone losing their home, their vehicle, which is their primary means of getting to work, you can prevent them from being levied for child support or jailed, even worse. You can stop IRS problems. You can also pay off otherwise non-dischargeable debt, so if you have sales tax issues, if you have maybe some criminal fines that need to be spread out a little bit 'cause they're due a little more. If the debt's otherwise non-dischargeable, you can cure it, and there are other things that you get to use, a more powerful form of discharge, where you can get rid of things like maybe traffic tickets or fines for not paying a toll, when you go through. Chapter 13 is an incredibly powerful tool. In Chapter 13, your general unsecured creditors, that's the credit cards, medical bills, things like that, they'll get paid somewhere between 0% and 100% of the debt. The question is going to be, how much? And that is going to be determined by how much your client owes in other kinds of debt, and what their monthly plan payment will be. The final and most important feature that I want to talk about today is that your client in a Chapter 13 gets to keep all of their assets, but they must pay their creditors the cash equivalent of non-exempt equity. So if your client has $20,000 in equity, that is not otherwise exempt, they have to pay that cash equivalent over the three to five year period to the general unsecured creditors through their plan payment, that's going to be on top of any cures of mortgage arrears, attorneys fees or anything else that has to get paid through their plan. Those unsecured creditors are going to have to get that theoretical $20,000. So who actually gets to do a Chapter 13? Only individuals. Corporations are not permitted to file for Chapter 13 relief. If your corporation wants to do a reorganization, it's going to be under Chapter 11. The debt in a Chapter 13 has to be within certain specific debt limits as set forth on 11 USC Section 109E, which is periodically adjusted, the current numbers are $419,275 for unsecured debt and $1,257,850 for secured debt. This is actually subject to a proposal that's currently floating around in Congress to create a single combined number, but that hasn't happened yet. And your client must be able to propose a feasible plan, which means that you are going to have to prove through the debtor's income statements and other evidence, that they have the ability to make the payments that you're going to propose that they can do. So now that we've talked about who can do a bankruptcy and what are the features of it, who are the players, who is involved in a bankruptcy? The first person and most obvious one is going to be you and your client, the debtor and their counsel. Then you're going to have the creditors, that's everyone your client owes money. You're going to have the Chapter 7 or Chapter 13 trustee and The Office of The US trustee, and then like anything else that we lawyers deal with, you have the court. So what does everybody do? What is the role of a Chapter 7 trustee and what's the role of a Chapter 13 trustee? They're actually two different things. So under Chapter 7, the duties of a Chapter 7 trustee are defined by 11 USC Section 704. The trustee gathers information required to administer the bankruptcy estate, the trustee will collect all non-exempt property, they'll investigate the finances of the debtor, initially through a meeting of creditors and then maybe with substantive subsequent examination. They're going to conduct that 341a hearing, the Chapter 7 trustee will prosecute preferential transfer and fraudulent transfer avoidance actions, and if your client has messed up, they will oppose the discharge of the debtor if it's needed. It's not fun to have a Chapter 7 trustee trying to avoid the discharge of your client, it is a bad day for you. The duties of a Chapter 13 trustee are very different than that of a Chapter 7 trustee, but also somewhat similar. The Chapter 13 duties are defined by 11 USC Section 1302, a Chapter 13 trustee acts as a gatekeeper to the bankruptcy system for a Chapter 13 debtor. They make sure that your client belongs there and can actually do what they say they're going to do. They will investigate that financial affairs of the debtor, again, through a Section 341a meeting, they will conduct that meeting of creditors pursuant to 11 USC Section 341a. They will verify by looking at your client's income proofs and the proofs of claim filed, that the plan you want to do is feasible under the Bankruptcy Code, they will collect your client's payments on a monthly basis and distribute them to creditors, and where your client misses payments or the plan becomes non-feasible, they will move to dismiss your case. It has been my experience that working with a Chapter 13 trustee is far more collaborative than it is with a Chapter 7 trustee, and the simple reason is economics. A Chapter 7 trustee is motivated by prosecuting preferential actions or collecting assets because that's how they get paid, they get a commission based on collected assets and sold assets. A Chapter 13 trustee gets their commission based on your client's payment. So a Chapter 13 trustee gets paid when your client pays into the system, Chapter 7 trustee gets paid when they get your client's stuff. So obviously the roles are very different and the motivations are very different. So what are the debtor's responsibilities? That's set out in 11 USC Section 521. First and foremost, your client's responsibility is to be completely and scrupulously honest, lying on a bankruptcy petition is a federal crime pursuant to 18 USC Section 157, it says so right on page six of the Bankruptcy Petition. If your client lies to you or lies to the bankruptcy court, they're looking at significant federal time and major fines. Client is required to provide all documents required under Section 521, that means at minimum six months of pay stubs or any other income proofs, their last two years of tax returns, valuations for any real property. And frankly, anything else that your Chapter 7 or 13 trustee asks for, different trustees have different laundry lists. Client's got a duty to appear and testify at the 341a hearing and any other hearings required by the trustee or the court, and they have a duty to cooperate with the Chapter 7 or Chapter 13 trustee and their requests. Final aspect that I wanna talk about is what kinds of creditors there are. When you start off, you have secured creditors. These are your mortgage creditors, car loan holders, maybe someone that somebody gave a UCC to, judgment holders, these people have security interest in your client's property. If they have a debt underlying the security interest at the end of a Chapter 7, that actual promissory note or obligation is discharged, but the lien will remain, in Chapter 13, it's treated somewhat differently. The next category of creditors are priority creditors. Priority is assigned by 11 USC Section 507 to certain kinds of debts that are given preferential treatment. Very important to note that priority creditors do not receive a discharge in Chapter 7 cases, they are not dischargeable. Now, if you have a client who has domestic support obligations, those are priority, taxes of certain kinds that are newer and certain other kinds of taxes are given priority, as well as administrative claims. And it's important to note for Chapter 13 practitioners that your fees are considered an administrative claim in a Chapter 13 case and actually get paid out first. And finally you have general unsecured debt that is everybody else, credit cards bills, medical bills, personal loans, student loans, $50 that your client lost in Poker last weekend and didn't pay back, that is all a general unsecured debt, and that is what is primarily sought to be discharged in Chapter 7 cases. So now that I've talked to you about all the different things that make up a bankruptcy, how do you actually handle one, when one walks in your door? As a bit of a precursor, the first thing I wanna tell everyone who wants to work in bankruptcy, the first thing you need to do is read the Bankruptcy Code, and I mean, read it from cover to cover. You can skip Chapter 11, you can skip Chapter 12, if you don't ever intend to practice in those areas. But read Chapter 1, 3, 5, 7, and 13, so that you understand the statutory background upon which you are going to be building your practice area because the bankruptcy court is bound by the code and everything you do is defined by the code. The next thing you're going to wanna read is the federal rules of bankruptcy procedure, because you need to know how you're going to do things and what you are allowed to do and how you are allowed to do it. Then read your local court rules, every single district has their own rules, in some district, every judge have their own rules. Some districts like to have their own forms that you have to use to do things, some districts give you very little guidance and tell you to basically make it up as you go along. Know the code, know the rules to the best you can, know your judges and that will take you very far in handling bankruptcy cases. So let's assume you've done all of that, you've opened up, you've hung out your shingle and you're saying, I'm going to take a bankruptcy case now, and your first client walks in the door. When you do that initial consultation, the first question out of their mouth is going to be, "Can I do a Chapter 7?" Unless they know that they need to file a 13, 'cause they're getting foreclosed on. Your job at that initial consultation is to figure out, what Chapter am I filing, 'cause that's going to determine several things. Yes, it's going to determine the Chapter, it's also going to determine your fees and how long you're going to be dealing with this client. First thing you look at is why is your client interested in filing. Your staff member will probably find that out, if you have one or you will find that out when you do your initial intake call because your client is going to say, "Hi, I wanna speak to you about bankruptcy." "I've got this going on." So why is your client interested in filing? Do they have mortgage, car, tax or support arrears? Are they drowning in credit card debt? Has a business collapsed? Why are they here? What's important to your client? So if you've got arrears on secured claims, tax claims or support debt, that's generally going to mean they're going to do a Chapter 13 case because you want to fix that problem. If your clients just got general unsecured credit card debt and they meet the other qualification criteria, they can get away with the Chapter 7, if they have the qualifications we talked about before. The next thing you're going to ask your client about is what kind of assets do they have? You wanna see if your client owns a home. If they own multiple pieces of real property. Do they have a lot of expensive jewelry? Do they have fancy cars that they own free and clear? All these things will go to whether or not you are going to be able to exempt those assets under your state law or 11 USC Section 522, as mentioned before, different states allow you to use either federal or state exemptions, and that's going to again, depend on your local jurisdiction. If your client have too much assets and they do not wanna lose the excess stuff, then they're going to be doing a Chapter 13 case. If they are all exemptible or the client doesn't care what happens to certain things, then Chapter 7 could work. Next, take a look at your client's income. Does your client make $250,000 a year with a household of two? That's going to probably be a Chapter 13 case. If your client is over median, then you're going to have to run the means test, and my suggestion on that is charge them a fee to run that means test. When you determine the income for the median, that actually means the debtor and their spouse, even if the spouse is not filing because that comes into the household and you look at the household income and budget. It may also include income that comes in from a child or a renter, that is often a difficult thing for clients to understand if their kids are contributing, that kid's contribution counts towards the household income. The next thing you're going to wanna do is try to create a rough budget for your client to determine whether or not there's going to be an appearance of abuse. So run the budget without debt service and see where they are. If your client will actually have $600, $700 left over at the end of the month, then they might need to do a Chapter 13 to avoid having the case converted and cost them extra money. And finally, the thing you wanna find out about is payments to family and friends. As I mentioned before, those could be considered what's called preferential payments, and you want to find out if they have them because they're going to wanna protect their family and friends. And if you have preferential payments that were made, a Chapter 7 trustee will chase that money down and your client's going to be very upset when their mom or their brother or their cousin gets sued by a trustee to recover money. If that's the case, you might wanna look at a Chapter 13. I've talked a lot about means testing, it is required pursuant to 11 USC Section 707 and Section 1322d. But the means test does two different things depending on what kind of Chapter you're doing. It'll determine if your client even qualifies to file for Chapter 7, and if your client's under median for some reason, it'll also determine what their time period is required to be under Chapter 13. If your client is under median and wants to file for Chapter 13 or has to file for Chapter 13, they can do it in a three year plan. If your client is over median, then their applicable commitment period is five years, unless they're paying off a 100% of their debt. If the debtor is paying off a 100% of their debt, they can do it under five years, even if they are over median. The calculation of what your client's income is, for the purposes of determining whether or not they qualify under means testing is very simple. You take the last six months of all income received in the household, regular business income, wages, rents, everything except for social security income or railroad retirement benefits, you add it all together, and that means everyone including non-filing spouses and other contributors to the family budget. Take all that money, average it in over six months and then multiply it in by 12, that'll give you the calculated income for the means test. As mentioned before, the US trustee publishes a means test data, updated every quarter, if your client's number is under median, you qualify for seven or for a three year plan. If you're over median, you probably don't qualify for Chapter 7, and you're going to look at a 13 until you pass the actual means test, which is all that deductions that need to be done. This is where a lot of cases with clients can come as problems because if a client is convinced they qualify for Chapter 7, but yet they're putting in all kinds of overtime, that's going to bump 'em up and they're going to have to do a 13. It is where a lot of fights start and a lot of cases die before they are born. So now we wanna talk about a few issues involving your retention as a debtor's attorney. Under 11 USC Section 526, you are considered a debt relief agency and you are prohibited from doing a lot of things. Some of these are pretty obvious, but some of them are actually pretty bankruptcy specific. First and foremost, do not counsel your client to lie, this one should be pretty obvious. Next, do not misrepresent what services you'll perform for the debtor, if you aren't including certain extras, don't not do them. You must do what you promise you're going to do. Do not encourage your client to incur more debt in contemplation of a bankruptcy or to pay for your services. Something your client might ask is, "Hey, can I use my credit card to pay for my bankruptcy?" The answer to that one should be a hard no. And in fact, many credit card servicers or processors will not allow you to use their services, if you are a bankruptcy attorney. Next, 11 USC Section 527 will require you to provide certain disclosures to your client, those are set forth in Section 527 and need to be provided to your client upon their first meeting with you. Next, under section 528 of the Bankruptcy Code, you must execute a written contract within five days of any "assistance services" that clearly says, exactly what you're going to do and what you're going to charge for it. I usually give my clients a pre-consultation agreement that says what I'm going to do for the purposes of consultation, and then that gets superseded by the actual retention agreement that they get, if they decide to move forward with retaining my firm. Now the next issue in any bankruptcy case for all attorneys, otherwise you're working for public services, is getting paid. This has caused much writing to happen because in Chapter 7 you need to get paid upfront. You cannot charge for pre-petition work, after your case is filed. You can charge for post-petition work, but your local rules may tell you what your flat fee covers. So what you may think is post-petition work is technically included in your flat rate. There are some districts and an increasing number of them where what's called a bifurcation is allowed. In that case, you would do a skeletal or minimal upfront filing for a certain fee or even no money, and then your client will be charged a flat rate for post-petition work or theoretical post-petition work, but they can do multiple payments on that and do a payment plan with you, post filing. Your mileage may vary on these things, some districts allow it but require any post-petition agreement to be approved by the court. Some districts have a flat hard no way rule for this, you should be familiar with your local practices on this. Chapter 13 is the traditional way that attorneys can charge a portion upfront and have the rest get paid as an administrative expense in your plan. Many people will charge a relatively low amount upfront, which will conclude the filing fee and their expected costs, and then they'll file either a fee application or in some districts you have what's called the no look fee. That's a fee that is considered presumptively reasonable, and you will not be required to file an application to get that fee, it'll be put in your plan, and once your case is confirmed, the Chapter 13 trustee will just pay you. Something you should be aware of, if you're in a Chapter 13 and you do work that is not considered part of your no look fee, and that is otherwise allowed to be paid to you before you can either get paid by the debtor or add the money to your plan. You must file an application for compensation, if you collect money from a debtor without court authorization in a Chapter 13, be very, very, very wary because that money is subject to being disgorged and you could be sanctioned. Okay, so let's assume that not only have you been hired, you've been paid and now it's time to gather up your stuff and do your job. The first part of your job is going to be gathering documents. You have a duty of due diligence, you can't just let your client tell you stuff. You're going to sign this bankruptcy petition, and when you sign, you represent to the best of your information, that it's true and accurate after reasonable inquiry. And that's Rule 118 of the Federal Rules of Bankruptcy Procedure and Rule 9011, And you can look to the case of In re Dobbs, and also of course the Rules of Professional Conduct regarding candor to the court. What do you need to gather? Basic documents are going to be as follows, tax returns, bank statements, income information, that's going to be pay stub, social security statements, profit and loss statements, any way that shows your client gets money. You're going to need to gather up deeds to real property, you're going to want mortgage payoffs, insurance declarations, you will need a copy of your client's picture ID and their social security card. You wanna know all their creditors and anyone else who needs to know about the case. You're going to need to know about anyone who is a support obligee, even if your debtor is current on their child's support and alimony, you wanna know about retirement accounts, investment accounts, life insurance policies, title for vehicles that are paid in full, that's just the basics. You may need other information such as, lawsuits that your clients involved in, the list could go on forever. My strong suggestion, make a questionnaire for your clients for them to fill out and for you to work against. We have a 16 page document in my office that my clients get that has checklists and explanations, and my paralegal spends a lot of time, every single day of the week, explaining to clients precisely what we need them to provide. Once you create your questionnaire and document list, make your clients comply, do not make exceptions to it. Because the one time you allow a client to do what they feel like doing and not comply with what you tell them you need, that's going to be the one time that something goes horribly wrong and then you are going to be on the hook. The next thing you need to make sure your client does before you can file, is have them take two online classes. Before they file, they have to take a course called Credit Counseling, there are many, many agencies and non-profits that offer it. It should be a relatively inexpensive process, it costs anywhere between $10 to $50, depending on who you use, your client will get a certificate saying they've done it. When your client says, why do I have to do it? The answer is because Congress said so. After a client files, they must take what's called either Financial Management or Debtor Education. This is required to get your discharge, in Chapter 7 you must take it within 60 days after the meeting of the creditors. In Chapter 13, it should be taken any time before discharge. Some courts will require that you take the Debtor Education Course prior to the confirmation of the case, because the judge doesn't want you tracking down your client four and a half years later or two and a half years later, and having the client deny their discharge 'cause they didn't take the Financial Management Course. I have described these courses many times to my clients as mind numbing, but no one really cares what the answer is, honestly, to tell your clients to take it, just tell 'em they're required to do it, jump through the hoop, no one cares what the answers they give on these classes are. Some clients of mine have found extreme value to it in helping them understand their budget and how they live, for other clients where their situation is not just bad cash management, but things like support obligations or mortgage arrears or things like that, they find it less useful. So take it for what it's worth, you have to do it. Another note, your credit counseling must be done within six months of the date of filing, if your client has an expired course, it will be considered invalid and it will make your client's case subject to dismissal, if you file a case with an expired course certificate. Okay, so now you've gathered all your documents from your clients, they've done their credit counseling. How are you going to prepare your petition? My strong advice is do not DIY it. Yes, all of the bankruptcy forms are available for you on the bankruptcy court's website, just because they are available there, does not mean that you should use them for your preparation. Everyone who's serious about practicing bankruptcy law has software and the reason for that is it makes your life infinitely easier. Bankruptcy software will allow you to download credit reports and import them directly to your petition, which will save you hours of time. It allows for automatic calculation of means test qualification. It allows for easy calculation of whether or not there is a surplus in a budget. Most bankruptcy software also includes all the court forms for your local district, including Chapter 13 plan forms that you can work with. If you're doing it by yourself, one, you have to do everything actually by yourself, including all the means test calculations, which can be very hairy. And if you make a mistake on the means test, that could have very significant consequences for your client. And if you miss an asset or you don't value it or you don't apply the proper exemptions, which are all going to be in your bankruptcy software, there could be disastrous results for your clients. Many Pro Se debtors fall afoul of this because they use the forms online, they don't understand what it means, they don't know how to do the calculations and they lose a lot of stuff and it is an absolute disaster. For a Pro Se who does it, they have no one to blame for themselves, but as an attorney, you owe it to your clients to have the tools, to do your job right. Most softwares do offer a trial where you can try it out and see if you like it, pick the software solution that matches your budget and your personal comfort level. In any case, what do you do with the software? First and foremost, you enter the client's personal data, all their assets, all their liabilities, if you are using software, which you should, use the import function to get all the debtor's credit report information in there. Every software package that I know of, does allow you to import credit reports, you're going to have to pay for it, but you should build that into your fees, and once you've got that, it makes life infinitely easier. You're going to plug in all the pay stubs and information to calculate your means test, you're going to fill out the statement of financial affairs. You're going to complete the Rule 2016, disclosure of your fees, make sure that when you do that Rule 2016 statement, it accurately reflects your fee arrangement and what is and is not included. So if you include adversary proceedings, which I suggest you don't, if you include loss mitigation, if your court offers it, if you include later post-petition motion practice, make sure it's included. By contrast, if those things are not included in your fee arrangement, make sure the Rule 2016 disclosure says so. A good way to make sure that everyone knows what's going on is to attach your retainer, it's not considered protected by privilege, and a lot of attorneys I know do actually attach them to make sure that the court, if there's ever a question, can see it and say that, "Oh, okay, this person attached the retainer." "It matches what the 2016 statement says. We're good." The final thing you're going to do as part of this is fill out what's called the Statement of Intentions in a Chapter 7 to reflect whether or not your client intends to reaffirm a secure debt, surrender the collateral in satisfaction of the secured debt or to exercise some other rights such as, what's called "Maintain and pay," which is not generally available, but it will sometimes be allowed in things like cars, where the lender does not actively reposess things, and retain and pay is the standard in Chapter 7, when it comes to real property. Now let's assume that you're going to do a Chapter 13 plan for a client. How do you draft your Chapter 13 plan? Your Chapter 13 plan must comply with 11 USC Section 1322, which does tell you what you must include. First things first, secured creditors can either be treated as follows, one, they get paid in accordance with their contract. So if your client is current on their mortgage, you don't need to cure any arrears, you're just going to pay them. Secondly, a secured creditor can be paid in full, and in fact, if the loan is technically fully matured, so your client's mortgage is matured, but they still owe money, you have to pay that often full through the plan, or you can have the lien cramdown or avoid it. If you are going to cram a lien down, which means you reduce the lien to the value of the property, which you cannot do with respect to a primary residence. But if your client has secured claims on other real property that you want to reduce to market value, if the value is less than the amount of that lien, if you cram it down, you have to pay that in full through your plan. You can also reduce some interest rates and do some other interesting things. Next, we deal with priority debts. As discussed above that's defined by 11 USC Section 507, that generally will include certain kind of taxes and domestic support obligations that does not include however, equitable distribution in a matrimonial matter. Equitable distribution is a general unsecured debt for the purposes of a Chapter 13 case. Administrative fees are also a priority debt, that means any portion of your legal fees that you have not received and the trustees fees, these all get paid in full. So if your client owes alimony and child support, they must pay that in full through the plan. And that's a very good reason to Chapter 13, to do it in a manner that the client can afford to do. Next, you have to look at the general unsecured creditors, they need to get what they would've otherwise gotten in Chapter 7. So you need to look at the available equity, your software will have what's called "A liquidation analysis function" many times, and you can use that to get an idea of what your general unsecured creditors have to get paid. Many times that's going to be zero, some judges won't let you pay nothing to your unsecured creditors, they're going to require that you pay 2%, 3%. Again, know your court, know your judge, know your local rules. The other thing you have to look at is your debtor needs to pay their "Disposable income" into the plan for the appropriate period, as the means test will provide, that's between three and five years, depending on if they're over or under median, unless your debtor's paying a 100% of the unsecured creditors. Some trustees have said and some judges say, that your client does need to pay all of their disposable income, even if they can pay less over the appropriate time period and they wanna do the full 60. I have had judges and trustees say to me that your client should be paying more because they do have more money available than what I put forward in my plan, because they want to have the client use their "best efforts." That being said, the client does have up to 60 months to pay and they can do it, but some courts will give you trouble and will try to force a higher payment on your client, even if they would really rather pay less and they can pay a 100% in a longer time. Again, note that you can cure arrears on both secured and priority obligations, that's what's called cure and maintain. I've done this in many cases, you fix tax arrears, you fix alimony and child support, you fix mortgage arrears, and that is one of the primary reasons to file a Chapter 13 case. Another interesting fact is that you can actually sell property to fund your plan. Right now, especially as real estate prices are super high, many of my clients have actually had to modify their plans to sell real property in order to protect themselves and to fund their plan. Sometimes what your client needs is six months to a year to get their affairs in order, and then they're going to sell the real property, but they're facing foreclosure right now, and you need to give them a breathing space. You can do that by selling the property and as long as you do it within a reasonable period of time, not the full five years, but a reasonable period of time. Generally, if there's some equity there to pay everything off, your secured lenders aren't going to give you grief and you can actually get your client enough time to do what they need to do, which is a really fun and useful aspect of a Chapter 13. Okay, you've prepped the petition, maybe you've done a plan. Now, what are you going to do? Well, your client's going to have to sign it. Every bankruptcy petition is signed by the debtor in several places, it must be done before you file. If you do not have a signature on your petition, you are in very, very, very big trouble. Now the old rule was you had to physically witness your client signing the petition in front of you. As a matter of fact, one of my trustees, staff attorneys, used to look at the petition and recite on the record that he saw the petition, there was no case number printed across the top, it did not appear to be a photograph, and it was a wet signature, an original signature. If you filed a case without a wet signature, then they would make an ethics committee referral and it was bad. Once COVID hit, the wet signature requirement was relaxed partially, you could have a client sign it for you on Zoom and send it to you. And some courts have allowed electronic signatures to be permissible, not in my districts, but they have become permissible, some other places. Many clients still are uncomfortable being in person, but you still need to witness them signing and get the wet signatures. If you are willing to use Zoom with your clients to have signatures, this is actually a really useful tool. Zoom, Skype, Teams, they will allow you to record your session with your client, as long as the client consents. When I was doing these things and I still do them, I have the client on the screen with me and they will physically sign the petition in my virtual presence. So I'll have them review a page with me, pull up the signature page, sign it, hold it up to the screen, and I record that session and I upload it to their file. Then I have the client email me the signature pages and mail me the entire petition and plan, so I have the whole thing or they can drop it off at the office in the mailbox, but you get the idea. They have to sign it and you have to have the signature. If you didn't see the client sign the petition either on the screen or in front of you, do not file the case. If you don't have the signature copy in your office, do not file the case because you are subjecting yourself to significant penalties. And your job is not only to represent the client, but also to protect yourself. Always make sure you have a signature. Once your client's signed, you can file your case, that's done electronically, like all federal filings. Again, this is why you have the software because quite frankly, filing a case manually, in 12 years, I've never done it and I don't ever want to. It requires a lot of data inputs and frankly, it's way more trouble than it's worth. Just get the software, you hit a button on the software, it uploads everything, problem solved. Once your case is filed, the next thing that's going to happen is the meeting of creditors, that's going to be about 30 days after the filing, sometimes 28, but generally 30 days plus. What you're going to do is send all your trustee's documents to the trustee at least 10 days beforehand. You should know your trustee within 24 to 48 hours, after the filing, the court will electronically send you a notice, telling you who your trustee is. And most of your trustees will send you an email telling you how to get them the documents. The trustees all have portals for the most part, some of them still want you to mail them documents, but most trustees have electronic solutions where you can upload to their portal because it makes life easier for them, because they don't want to have dozens of envelopes hitting their office that they then have to sort through. They use the portals, there are categories, you upload your document to the appropriate category, and problem is solved and it's done. Once you've sent in the documents to your trustee or told them why the document they request doesn't exist, your meeting of creditors will happen. Your client will appear and be sworn in and answer various questions under oaths. Right now, this is all done telephonically. I believe that it's all going to be going to Zoom, in the next several months, but that's up to The Executive Office of The US trustee. We'll see how that goes. The Office of The US Trustee does have a list of general questions, but your case trustee does have the ability to explore as they see fit and deviate from the standard list, in order to get information about the debtor and properly administer the case. The meeting of creditors, generally, should take about two to five minutes depending on your client's circumstances and what's going on. Some trustees like to take their time, some trustees want to blast through it as quickly as possible. The reason Chapter 7 trustees tend to want to move quickly is that they have very full calendars and they're only paid $60 per case, if the case has no assets. They're going to want to hopefully move on to a debtor who has assets that can be collected and liquidated for the benefit of creditors, and the trustee can then collect a commission on it. Your client who makes $20,000 a year and has nothing but a 1997 Pinto, has no value to your trustee. I should warn you however that many trustees do see themselves as "Guardians of the system," and if they think that your client is playing games or is abusing the system, they will make inquiry and they can refer it for further audit or further review. But as long as your client's been honest with you and is a good faith filer, there should not be a problem. I've only noticed trustees go after clients, where they are clearly lying or prevaricating, or hesitant and refusing to answer questions, that's when you're going to have problems with the trustee. Take the time to talk to your client before the meeting of creditors, if you can, and make sure that they understand what's going to be asked, and that way they'll be comfortable and confident, and have them call in a few minutes beforehand and listen to other cases. If the other attorneys aren't as good as you are, it makes you look great when you handle it like a pro, and also it lets the client understand the flow of the meeting, so that they are ready to go when they're called. In Chapter 13 cases, you have another hearing after the meeting of creditors, that's called Confirmation. When a plan is confirmed, that makes it final and binding upon both the debtor and creditors. I should note that your Chapter 13 plan payments pursuant to 11 USC Section 1326, must commence payment within 30 days of filing the case, so that payment's going to be due before the plan is confirmed, and probably also before their first meeting of creditors. Most states, the general rule is, that your plan payment is due on the first day, technically, of the month following filing, and that's the general thing that I tell my clients. If you file May 30th, your payment's due June 1, technically, but practically, as long as the trustee receives your payment by the end of the calendar month, they will be happy. Some trustees adhere very strictly to that 30 day due date but most trustees that I know will give you a little bit of leeway, as long as you make sure the payment posts by the end of the month. In order for your plan to be confirmed, you must ensure the following happens pursuant to 11 USC Section 1325. One, your plan must be feasible, that means your client has shown to the trustee's satisfaction and theoretically to the court, that the plan can be paid as you say you want to, and that your client can do everything that their plan says they're going to do. Unsecured creditors must get what they would've gotten in a Chapter 7 liquidation, that's 1325a, 4, talked about that. Look at your liquidation analysis, make sure your plan payments cover the base. Secured creditors either retain their lien and get paid outside the plan, the lien gets paid off, or the collateral is surrendered pursuant to 1325a, 5. All payments have to get made on a regular basis, that's generally going to be a monthly basis, that's almost always a monthly basis. Your debtor must have paid all domestic support obligations that have come due post petition, that's very, very important. If your client owes alimony or child support, they cannot slack, they must make those payments and they must certify to the court that they are making those payments. Next, very important. Your debtor must have filed all taxes that were due within the last four years, that's the statute. Here's the reality, your client cannot have any unfiled pre-petition taxes because your taxing authority is going to file a claim in the bankruptcy case, and it's going to be an estimated claim, saying that you owe x number of dollars because there is taxes that were not filed, and it's an estimate. The court and the trustee are going to require your client to get that fixed and file the returns, even if it was a return that was due 10 years ago, and the court will require that to be resolved before your plan can be confirmed. So your client must have all their tax returns filed in order to have their plan confirmed. Some other things about confirmation hearings, creditors can object. Most objections are from secured creditors who say that there are higher arrears than there were initially calculated. Sometimes they say that the proposed interest rate, if you're reducing the interest rate, is not good, but it's generally going to be secured creditors who object. Sometimes you're going to get an angry priority creditor such as a spouse or former spouse rather, who is going to say that the amount of arrears is under calculated and that will have to be addressed, cured by pretty much amending your plan to say, that they get paid, what they want to get paid. You may have the Internal Revenue Service or your state taxing authority object because you missed a tax year or because you're not paying them enough, again, these need to be addressed. Usually you can modify, sometimes you can stipulate, to modify a plan to address the issue, it depends on your district. For example, in the district of New Jersey, we can resolve most plan objections by doing a stipulation or a consent order, allowing for things to happen. In other districts, such as the Southern District of New York or the Eastern District of New York, you have to amend your plan. Again, know your rules, know your local practice. Let's talk about one or two things that can absolutely kill your plan. The biggest one is going to be domestic support obligations not getting paid. If your client's not paying their domestic support obligation or can't afford to pay their domestic support obligation, your plan's going to be killed, that's going to kill your plan, that's going to destroy your case. Make sure when it comes to domestic support obligations, your client understands they need to pay and they need to be current, courts do not mess around with this. That's the major thing, most other things can be fixed. All right, you've gone through confirmation and the court has agreed and the trustee has recommended your plan for confirmation. My experience has been that generally it's the trustee that's going to have the most weight and the trustee will generally do the recommendation, at which point the court will issue the order. Confirmation binds all creditors and the debtor to the terms of the plan. Post confirmation, if you want to modify your plan, you may need to file a motion, again, know your local practice. In New Jersey, we just file an amended plan and the court schedules it, in New York, you file a motion to modify with a proposed plan and then the motion will allow for that new plan that you propose, to go into effect. If all goes well in your case, in Chapter 13, you're going to go into a monitoring status where you just keep an eye on things, make sure nothing happens and send tax returns to the trustee, until your client has completed their plan payments. I often tell my clients that they don't want to hear from me during the interim period between confirmation and completion of their plan. If they hear from me, that usually means something's gone wrong and we need to fix it. I often tell clients that they do not want to be top of mind with me when I file their case because if they are top of mind, that means bad things are going to happen. Once your plan is confirmed, you must impress upon your clients that they need to comply with the terms of it, and if they have problems complying with the terms of the plan, they need to contact you so that you can modify the plan to address that issue. Remember that three to five years is a long time and life does happen and you need to be ready to accommodate that for your clients. Some courts let you charge for that kind of work, some courts don't. So how do you actually get this discharge, we keep talking about? In Chapter 7, it's pretty simple. You file your case, you give the trustee everything they ask for, you show up at the meeting of creditors, you complete the debtor education course and file the appropriate form, and the court will automatically enter a discharge about 60 days after the meeting of creditors. Unless for some reason, there's an extension of time to object. It's a pretty automatic situation. Chapter 13 requires a few more hoops. You file your case, you give the trustee their documents, you appear at the meeting of creditors and you get plan confirmation. Next, your client needs to make all the required payments under your plan. In some courts, you have post confirmation documents that are required to be filed, again, that's going to depend on your district. You need to complete the debtor education and file what's called Form 23, which is the same form as you file in Chapter 7. And then your discharge will enter, after all your plan payments are made, you've filed all your documents and the trustee does a closeout audit to ensure that all payments have been made and that all checks have cleared. And then some districts will require a motion to enter your discharge, my districts do not, but some may. So to summarize, this is your timeline for a bankruptcy, in case a client says, "Well, how long does this take?" Everything starts from the filing date. So you have your case being filed, about 30 days later of meeting of creditors in a Chapter 7, 60 days after that meeting of creditors, discharge is entered and the case is closed. In Chapter 13, you have 30 days from filing to the meeting of creditors, then there's about 30 days from the meeting of creditors to confirmation. If confirmation is adjourned to fix things, you repeat that 30 day cycle as needed, generally. No one's going to do a two week cycle, unless it's just something very minor. Three to five years from filing, that's when your discharge gets entered. Thank you for listening to this presentation, I hope you find it informative and that you're interested in perhaps taking on some bankruptcy cases. It's an incredibly rewarding area of law. I have found over the last 12 years of doing it, that my clients really benefit from it. And it's one of the few areas where you can really get clients what they need, as well as most of the time exactly what they want.