GETTING THROUGH BANKRUPTCY

Who are the Players?

• Debtor

• Debtor’s Attorney

• Creditors

• Chapter 7 or 13 Trustee

• United States Trustee

• Judge

• Interested Parties

Bankruptcy: Why and what is it?

• Why? Because financial circumstances have deteriorated to the point where the debtor can
no longer meet prior financial obligations.

• A “Fresh Start” for the debtor.

• To provide an equitable distribution of a debtor’s assets among creditors.

Discharge

• Discharge essentially wipes out the debtor’s legal obligation to pay certain debt and
prevents creditors from taking actions on those debts to collect against debtor. Discharge applies
to both chapter 7 and 13 bankruptcies.

Non-Dischargeable Debt Examples

• Domestic Support Obligations

• Student Loans

• Certain fines – DUI’s and government fines such as traffic and parking tickets

• Taxes

o State income taxes are non-dischargeable.

o Most Federal income taxes are non-dischargeable with exceptions in 11 U.S.C. § 523.

Bankruptcy: What Chapter?

• Chapter 7 – “Liquidation”

o Debtor can keep exempt property.

 o Chapter 7 trustee must collect and reduce to money the “non-exempt” assets of the
bankruptcy estate for the benefit of creditors.

o No repayment plan.

o Typically, your bankruptcy case may last a few months.

o Potential discharge of most of your debts.

o Quicker, easier, and fewer court appearances.

• Chapter 13 – “Repay Debts”

o Debtor can keep exempt property.

o Repay over three to five years: discharge most of debts upon completing repayment Plan.

o Debtor must commit all disposable income to the Plan.

o Stop interest accruing on unsecured debt (i.e., credit cards, unsecured bank loan, etc.)

o May allow debtor to catch up on past due house and car payments known as “Arrearages.”

o Very complicated and time consuming.

What are Exemptions?

o State and Federal law allows the debtors to protect some property from creditors (and the
trustee) necessary for a debtor’s everyday living.

o Debtor must choose between state and federal exemptions – must either be all federal or
all state.

o Exemptions allow the debtor to keep the fair market value of various types of property up to
certain monetary limits stated in § 522 of the Bankruptcy code.

o Federal exemptions are the most liberal amounts.

o Michigan Homestead exemption (State exemption) is generally allows for the debtor to
carve out a larger portion of the equity in the debtor’s home when compared to the federal
exemption.

o Debtor must properly claim exemptions, and trustee and creditors may object to exemptions
claimed by debtor.

Overview

o Bankruptcy petition is filed, creating an “estate” that is administered by a Trustee who is

overseen by a Judge.

o Exemptions allow for the debtor to carve out the value of that property.
o If debtor cannot carve out the value of their property with an exemption, the trustee will
intercept the un-exempt property, putting it into the debtor’s estate, and disperse it amounts the
debtor’s creditor(s).

o Not part of the estate include wages received after bankruptcy petition is filed used for the
debtor’s own support.

o Bankruptcy filing triggers an “Automatic Stay” which provides immediate relief from
lawsuits, foreclosures, garnishments, etc.

o Prevents creditors from collecting on most pre-existing debts.

o The automatic stay is the bankruptcy code stop sign: it stops creditor collections by phone
or mail, garnishment of wages or bank accounts, or stopping foreclosure proceedings.

o With court approval, the debtor’s creditors on motion could get around the automatic stay
so that they can resume collections on the debtor’s secured debt.

o The automatic stay does not stop collections for criminal matters, divorce proceedings, or
domestic support obligations.

o If the automatic stay is violated by a debtor’s creditor(s) then the court must be made aware
of it in order to bring sanctions against the creditor.

o By filing a bankruptcy petition, a Notice of Bankruptcy filing will be issued to all interested
parties.

 It will contain the case number, Meeting of creditors place/date/time, names the case
assigned trustee, and presiding judge.

 It will only be mailed to parties listed on the debtor’s matrix.

 The notice of bankruptcy filing is the time-line for the debtor’s bankruptcy proceedings.

o Trustee convenes a “Meeting of Creditors” 30 to 40 days after the filing date of the
bankruptcy petition.

o In a chapter 7 bankruptcy, the debtor is potentially eligible for “discharge of debt” 60 days
after the Meeting of Creditors if the debtor is able to satisfy all his or her required “debtor duties.”

o There are many duties that must be satisfied.

o Step 1:

 Complete and full disclosure by the debtor of all assets and debts, including property that
the debtor doesn’t consider to be his or hers but in which the debtor has a legal interest.

 Full disclosure of transfers and/or sale of property.

• Examples of Assets include up-coming year tax refund, joint account holder on mother’s
bank account, deed with half interest to your brother who doesn’t live in the house and neither
does the debtor and co-signor’s on a vehicle for a friend.

• What happens to Secured Debt?

o Liens survive bankruptcy.

o Trustee can only liquidate non-exempt equity in property which is subject to a lien.

o Trustee may sell the non-exempt equity back to Debtor (so that is how debtors end up
keeping their own property).

o Step 2:

 A Credit Counseling Course must be completed within 180 days before filing for bankruptcy
and a certificate of course completion must be filed with the court.

• Must be completed by an authorized credit counseling agency.

• May be completed by phone or internet.

• May cost the debtor money if not waived by the court.

• If the debtor has an “emergency filing” then the debtor must file the certificate and exhibit
D no later than 14 days after the initial petition has been filed.

 File all court-required documents within the required time periods (see checklists).

• Initial Filing:

o Bankruptcy Petition and Bankruptcy Coversheet

o Exhibit D with attached Certificate of Credit Counseling

o Declaration of Social Security Number

o Creditor Matrix – a typed mailing list of names and addresses of creditors

 A typed mailing list of creditor names and addresses

 Puts them on notice of the bankruptcy filing.

o Bankruptcy Petition Preparer Disclosure (if any)

 Bankruptcy petition preparers are individuals who are paid in order to help prepare the
debtor’s bankruptcy documentation. They are strongly discouraged because they are not lawyers,
they are not authorized to practice law, they give bad legal advice, and they charge fees more than
the court authorized amount of $100. Bankruptcy petition preparers generally tell their “clients” to
not disclose the fact that they were used to prepare the debtor’s paperwork. The debtor will
commit perjury when not disclosing the fact they used a bankruptcy petition preparer when asked
by the court or trustee. The case will be dismissed without a discharge if they do not disclose. The
debtor will not get into trouble if they disclose the fact they used a bankruptcy petition preparer.

o Declaration under Penalty of Perjury without an Attorney

o Submit the Debtor’s Application and Proposed Order to the Judge to waive filing fee’s

• Remaining Filing Documents must be filed 14 days after initial filing:

o Means test – Chapter 7

 This test requires an analysis of the last 6 months of the debtor’s income prior to filing their
bankruptcy. It will determine if the debtor’s bankruptcy filing is an abuse of the Bankruptcy Code.

 Must use IRS standards stating the median for similar individuals in the community.

 This will determine if the debtor will qualify for a chapter 7 or 13. If the debtor does not
qualify, then they will have to use the Statement of Monthly income and Calculation of Commitment
Period and Disposable Income form for a chapter 13 bankruptcy.

o Statement of Monthly Income and Calculation of Commitment Period and Disposable Income
– Chapter 13

 This form will determine if the debtor will have to make structured plan payments to
creditors for three or five years in length.

 This form will also help determine the amount of “disposable income” the debtor has to pay
into the chapter 13 plan.

 The chapter 13 plan will decide which creditor gets paid and when. It must be confirmed by
the bankruptcy court. It is the most complicated time-consuming portion of a chapter 13 plan and
may require multiple rounds of negotiation and modification during pre- and post-confirmation.

 The payment order must be submitted to the presiding judge who may sign off on it after
which it will be sent directly to the debtor’s employer.

 May also require wage deductions to fund the plan. It will allow the trustee to make
payments to the debtor’s creditors according to the plan over the length of the plan.

o Schedules of Assets and Liabilities

 What is owned and who is owed.

 Schedule A – Real property examples of debtor’s primary residence, rental properties or

timeshares.

 Schedule B – Personal property examples include cash on hand, bank accounts, household
goods and items, tax refunds, clothes, jewelry, automobiles, security deposits, hobby equipment,
etc.
 Schedule C – Property claimed as exempt using either Federal or State, but not both.
Typically the most difficult schedule to determine.

 Schedule D – Secured property includes lender balances owed on mortgages, automobiles,

statutory liens on debtor’s residence (e.g., water bills).

 Schedule E – Creditors holding unsecured priority claims include unpaid taxes to the IRS or
Michigan Treasury department, Child Support, etc.

 Schedule F – Creditors holding unsecured non-priority claims include a debtor’s general

creditors including for example AT&T, Discover card, or other revolving credit.

 Schedule G – Executory Contracts and Unexpired Leases include apartment or car leases, or
a contract for funeral services, etc.

 Schedule H – Co-Debtors include persons that you are in debt with.

 Schedule I – Current INCOME of Debtors

 Schedule J – Current EXPENDITURES of Debtors

 Declaration Concerning Debtors Schedules allow the debtor to state under penalty of perjury
that the information he or she provided are true and accurate to the best of their knowledge.

o Statement of Financial Affairs

 Specific narrative questions about debtor financial affairs, history, and use of property over
the last several years depending on the question.

 It will also ask for information the debtor’s history of engaging in business enterprises.

o Cover Sheet for Amendments

 The debtor can amend if they make a mistake on their filed documentation. They may add,
exempt, correct mistakes, make additions or deletions. The debtor will be charged a $26 fee for
making changes to the creditor matrix.

 If changes are additions are made, the creditor must be given the notice of bankruptcy
filing, the schedule they are listed on, and the cover sheet for amendments.

o Statement of Intent

 Refers to secured debt and leased property

 The statement of intent will show the debtors creditors intentions with secured property
and/or leased property, i.e., the debtor will either re-affirm the debt, let it go, or retain the property
and continue making payments.

 The debtor must send notice to each creditor the debtor has listed on the statement of
intention form.
o Re-affirmation Agreements

 Creditors will send these “contracts” reaffirming the debtor’s pre-existing debt and liability
obligation(s). Usually, these are based on the debtor’s statement of intentions.

 By re-affirming the pre-existing debt, the debt will not be discharged in bankruptcy.

 The debtor must go to court so that the court may determine if the re-affirmation agreement
presents an undue hardship, i.e., whether the debtor can pay the re-affirmed debt even after
bankruptcy discharge.

 If he debtor defaults, the creditor will have the ability for collections, garnishments, or
repossession of the specified collateral.

 A reaffirmation agreement may be good for a automobile loan.

 If the debt is re-affirmed the debtor has the right to cancel at any time before the
bankruptcy court enters the discharge order, or before the expiration of the 60 day period that
begins on the date it is filed with the court, whichever occurs later. Notice of the cancellation must
be in writing and sent to the specified creditor.

 Do not forget about the second round of counseling called the Financial Management Course
and file the official Form 23 after the meeting of creditors.

o Step 3:

 Transmit required documents, i.e., copies, to the Trustee at least seven days prior to the 341
Meeting of Creditors, including:

• Past two years of Federal and State tax returns

o If the debtor does not have these records, they may order a copy or transcript by using IRS
forms 4506 or 4506-T.

• All pay stubs received during the 60 days prior to the petition being filed.

o All evidence of income will include the debtor’s paystubs, a printout of income from their
human resources department, unemployment income, self employment income, social security
income, social security disability, gambling or lottery winnings.

• If employed, unemployed, or self employed, must file a Declaration explaining the source of
the income.

• Copies of certificates of title to vehicles, the vehicles market value (e.g., may use Kelly blue
book), and the current debt owed on the vehicle if any. May obtain certificate of title from the
secretary of state office.

• Statement of Retirement accounts (e.g., Individual Retirement Accounts, 401(k), 403(b)), life
insurance policies, credit card statements, stock certificates, and all records disclosing business
interests (e.g., articles of incorporation, bylaws, operating agreement, etc.)
• Copies of Deeds to Owned Properties and Mortgage(s) (need to also include the latest
property tax statement detailing the state equalized value and the current balance owed to the
creditor(s)).

o The deed and mortgage must have the liber and page number, i.e., recorded form where
they me obtained at the register of deeds office in the country where the property is located.

o The deed and mortgage must have a legal description.

• Divorce Judgments and Domestic Support Obligation Information.

• Documents evidencing joint account holders on property.

• Any other evidence the trustee may require. Good idea is to contact the case assigned
trustee’s office and find out exactly what the trustee wants. Deliver the documents directly to
trustee.

o Step 4:

 Attend and testify – under oath – at the 341 Meeting of Creditors.

• The 341 Meeting of Creditors, is not a court proceeding, rather it is where the debtor meets
the case assigned trustee, testifies under oath ,and engages in a question and answer session
regarding the accuracy of the submitted information to the court and trustee.

• Good rule of thumb is for the debtor to review all documents filed with the court and those
required documents given to the trustee on the night before the meeting of creditors.

• The U.S. trustee and the debtor’s creditor(s) may also be in attendance asking questions at
the 341 meeting of creditors

• In order for the debtor to participate in the meeting of creditors they must have a
government issued photo ID (e.g., driver’s license) and their social security card.

• The debtor will read and attest that they understand the “Trustee bankruptcy information
sheet,” which is essentially another notice to the debtor telling them what constitutes the various
bankruptcy chapters.

• Good rule of thumb is for the debtor to bring all original documents submitted to the trustee
seven days earlier so that all interested parties may review them.

 Adversary Proceeding is where the U.S. trustee, case assigned trustee, or creditor(s)
contests the information the debtor provided and/or attested to in their bankruptcy disclosures.
That is, the adversary proceeding will be based on challenges to discharge by instigating litigation
arising out of the original bankruptcy case filing by the debtor. This is a costly, time consuming
process that may cost the debtor the possibility of the discharge entirely.

• The debtor, by disclosing all assets and liabilities, filing all required documents to the court
and complying with the trustee requests for documentation increases the chances for not facing an
adversary proceeding.
• Examples of challenges in step 5.

o Step 5:

 Receive discharge order unless challenged by U.S. Trustee, case assigned Trustee, or
creditor(s).

• Examples of Trustee Challenges:

o Preference payments – 90 days for creditors and 1 year for insiders

 If discovered, the trustee can pull back the payment and put it into the estate for the benefit
of the creditors.

 Debtor will not want to engage in this prior to filing because it may also be seen as fraud.

o Transfers of property

o Non-disclosure of assets

o Improper exemptions

o Bad faith

• Examples of Discharge Challenges

o Fraud

o Concealment of assets

o Unlisted debts

o Unpaid taxes

o Embezzlement

o Willful and Malicious actions

 Dismissal of a Case

• A case can be dismissed upon motion of a party in interest, the U.S. Trustee, the case
assigned trustee, or a creditor for many different causes.

• Debtor will no longer have the protection of the automatic stay.

• Court will no longer have jurisdiction over the debtor or the debtor’s assets.

• It’s as though the case was never filed.

o Step 6:
  For chapter 7 bankruptcy: complete Financial Management Course no later than 60 days
after the “first-scheduled” meeting of creditors date.

 For chapter 13, this should occur one month prior to the last scheduled plan payment
(Remember, this will depend on whether the debtor is in a three or five year plan).

 Financial Management course may be completed by phone or internet and will cost the
debtor money to complete.

 Upon receiving the course certificate, debtor must complete Official Form 23 using
information from that certificate and file it with the court. Once filed, it will be evidence that the
debtor(s) has completed their financial management course.

• If this is not filed, the debtor’s case will be closed without a discharge.

• If the case is closed without a discharge, the debtor will have the opportunity to re-open
their case and file their Form 23 within 14 days. To reopen the case, the debtor will have to pay
$260.

 Good rule of thumb is to complete this course with the same company they received their
credit counseling from. Remember, the credit counseling and financial management course will
cost the debtor money (unless, in limited circumstances, the debtor has obtained a waiver of filing
fee and previously sent that order to the authorized counseling agency)

o Documents Retention

o Order of Discharge: the court mails this document to the debtor after the court discharges
the debtors debts. The debtor can use this order to rebut an attempt at collections or assignment
of collections (which arose pre-bankruptcy) that were discharged in their bankruptcy. This is the
most important document they must keep.

 Debtor will remain liable for re-affirmed debts or their debts incurred after the discharge
order is created.

o Keep all documents for five years.

Consequences of Bankruptcy?

o Stays on credit report for ten years

o Makes it more difficult to obtain credit and results in higher interest rates if debtor does
obtain credit

o May lead to increased insurance costs

o It is a matter of public record

o May have to disclose it to potential employers

General Rule?

o Disclosure, disclosure, disclosure

 o Failure to disclose may result in criminal proceedings, penalties, or case dismissal.

Limited Help Available?

o Pro Bono Attorneys at:

o Legal aid and Defender offices

o Neighborhood Legal Services

o Eastern District of Michigan Bankruptcy Court Pro Bono Panel

 Only for specific types of Adversary Proceedings related to discharge and non-
dischargeability of certain debts (i.e., which generally are for Fraud, embezzlement, and/or
misrepresentation).

Recap – How to make the process easier

o The debtor should collect all documentation described in the meeting of creditor’s checklist.

o These documents should be organized.

o The debtor should download all required documents as described in the chapter 7 (or
chapter 13) document checklist read through all the questions in their entirety prior to filing in the
information.

o They should contact an authorized credit counseling and financial management provider.
They must complete credit counseling before the day they file their bankruptcy petition.

o They should then file all documents, after accurately completed, with the court. The matrix
must be typed.

o They must disclose the fact they used a bankruptcy petition preparer if one was used.

o They can use the Cover sheet for amendments for mistakes made in the documentation filed
with the court.

o The debtor will get a Notice of bankruptcy filing from the court as well as the creditors and
interested parties listed in their documents (i.e., using the matrix).

o The debtor must get court approval for re-affirmation agreements. They have a limited time
and manner in which to cancel.

o The debtor must give copies of documents used to for their bankruptcy paperwork seven
days before the 341 meeting of creditors. This may be mailed, faxed, or handed to the case
assigned trustee.

o Once the meeting of creditors is complete, the debtor should complete their financial
management course as soon as they are able and file the Form 23 immediately.
o Assuming no challenges to discharge, i.e., adversary proceedings, are instigated, the debtor
may receive a potential discharge of their debt and liabilities approximately 60 days after the
meeting of creditors. The debtor must keep the order of discharge for 5 years.

o Complete, full, and accurate disclosure while following these steps will increase the debtor’s
chances for a discharge.

o Good rule of thumb, the debtor should be frugal and live within their means.