The Surprising Benefits: Reinstating Your Driver’s License Suspended for Unpaid Tickets

You may be able to reinstate your license in spite of one or more unpaid traffic tickets. It mostly depends on the traffic laws violated. 

 

We’re deep into a series of blog posts about powerful, less familiar benefits of bankruptcy. One important one is getting your suspended driver’s license reinstated. Whether you can get your license reinstated through bankruptcy depends a lot on the reason for the suspension. Last week we covered suspensions for not paying a judgment from a motor vehicle accident while driving uninsured or underinsured. Today we cover suspensions for not paying one or more traffic tickets.

License Reinstatement Depends on Discharge of the Traffic Ticket(s)

Our last blog post showed how bankruptcy reinstates a license suspended because of an unpaid debt from an accident. These suspensions usually come from not paying a court judgment or debt from an uninsured motor vehicle accident. Usually such a debt can be legally written off (“discharged”) through bankruptcy. After bankruptcy takes away the reason for the suspension, the driver’s license can be reinstated.

It works about the same way with traffic tickets. If your license was suspended for not paying traffic tickets, a bankruptcy can sometimes discharge what you owe on those tickets. That could enable you to reinstate your license.

Not Available Under Chapter 7

Chapter 7 (“straight bankruptcy”) doesn’t work with traffic ticket suspensions. Chapter 7 doesn’t discharge “a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit.” See Section 523(a)(7) of the U.S. Bankruptcy Code.  A debt owed for a traffic ticket is a “fine” or “penalty” that you owe to the state, city or other local “governmental unit” whose police issued it to you. Because Chapter 7 doesn’t discharge traffic tickets, it cannot reinstate a driver’s license suspended for nonpayment of those tickets.

Need to File Under Chapter 13

However, Chapter 13 is different. It may be able to discharge the debt from your tickets. That’s because Chapter 13 does NOT exclude “a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit” from discharge. See Section 1328(a)(2) of the Bankruptcy Code. That Subsection lists the kinds of debts that Chapter 13 does not discharge. It refers to some but not all of the kinds of debts that Chapter 7 cannot discharge. The kinds of debts listed do NOT include the “fine” and “penalty” one referred to above—Section 523(a)(7). This means that Chapter 13 CAN discharge such “fines” and “penalties,” including certain traffic ticket debts. Since Chapter 13 can discharge traffic tickets, it may enable you to reinstate your license suspended for that reason.

Traffic Crimes vs. Violations or Infractions

Whether Chapter 13 can discharge the ticket debt depends on the nature of the law(s) you violated. Neither Chapter 7 nor Chapter 13 can discharge criminal fines or restitution. So the traffic ticket(s) must not be for a crime, but rather for a traffic violation or infraction. It can’t be for a misdemeanor or felony.

Chapter 13 specifically excludes from discharge “any debt… for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime.” See Section 1328(a)(3). So did your license suspension came from breaking a traffic law requiring you to pay restitution or a criminal fine? If so that restitution or fine could not be discharged in bankruptcy, thereby not enabling your license to be reinstated. But if your ticket(s) are from traffic violation(s) or infraction(s), those could be discharged and your license reinstated.

This Can Be Unclear and Feel Arbitrary

What’s the difference between a dischargeable non-criminal traffic violation or infraction and a nondischargeable criminal fine?  This is often not clear.  None of these words are defined in the Bankruptcy Code. Whether breaking a traffic law is considered non-criminal or criminal can be quite arbitrary. It can turn on the coincidence of the words used in your state’s statutes or your local jurisdiction’s ordinances.

Generally, the more serious a violation of the traffic laws, the more likely that violation would be considered criminal. On one extreme, parking tickets are most likely not criminal. On the other extreme are serious violations that would likely be considered criminal, such as reckless driving, hit and run, and evading arrest. Your bankruptcy lawyer has experience with your local and state jurisdictions’ laws to advise you in making this crucial distinction.

License Reinstatement Procedure

Assume that Chapter 13 would discharge your particular traffic ticket debts. Under Chapter 13 the discharge of your debts does not happen until the end of the 3-to-5 year case. You may or may not have to wait that long to reinstate your license. It depends on local procedures.

Those procedures involve a number of authorities—the state or local court imposing the traffic fine, the state motor vehicles department reinstating your license, and the bankruptcy court discharging the traffic fine debt.

Conclusion

So, no question, this is complicated. Your bankruptcy lawyer will help in two huge ways. First, he or she will advise you whether you will be able to reinstate your license. If so, second, your lawyer will be aware of policies and practices of each of the authorities (or can research this), and guide your case through them efficiently. Then your license will be reinstated as quickly as possible.

 

Surprising Bankruptcy Benefits: Make Creditors Return Your Money

Bankruptcy doesn’t just stop garnishments and other collections. Sometimes you can make a creditor return money it recently took from you.

 

Bankruptcy’s “automatic stay” is one of the most immediate and powerful benefits of bankruptcy. It immediately stops almost all creditor collection actions against you, your income, and your assets. See Section 362 of the U.S. Bankruptcy Code.  

But it does not go into effect until the moment you file your bankruptcy case. What if a creditor garnishes or otherwise gets your money right BEFORE you file bankruptcy?

Sometimes the creditor can be forced to give up such recently received money as well.

The Law of Preferences

This happens through the surprising and easily misunderstood law of “preferences.”

This law says that if a creditor takes money (or some other asset) from you within the 90 days before you file your bankruptcy case, the creditor may need to pay it back. It has to do so if keeping that money results in that creditor receiving a greater share of its debt than the rest of your creditors would get out of your bankruptcy case. See Section 547(b) of the Bankruptcy Code.

That second condition would often be met, especially in a consumer Chapter 7 “straight bankruptcy case.” So, most money grabbed by an unsecured creditor within 90 days before your bankruptcy filing can be “avoided.” The creditor can be forced to return it.

For example, let’s say an aggressive unsecured medical debt collector garnishes your checking account. You’ve just deposited your paycheck and the creditor grabs $2,000. You owed $5,000 so this creditor just got paid 40% of its debt. Then you file your Chapter 7 case a day after the creditor garnished your money. Assume you owe a total of $75,000 in general unsecured debts. If in that Chapter 7 case—as in most—all your assets were “exempt” (protected), those debts would receive nothing. So, the garnished $2,000 would be a preferential payment that could be reversed. That’s because it happened within 90 days before filing and resulted in the creditor getting 40% instead of nothing.

(There are a number of other conditions and exceptions to a preference, but they often don’t apply to consumer cases. However, preference law can sometimes get quite complicated. You need to talk with your bankruptcy lawyer to find out if you really have an avoidable “preferential payment.”)

The Principles behind Preference Law

Preference law serves two principles important to bankruptcy.

First, bankruptcy law tries to discourage overaggressive creditors. The risk that a creditor would have to return money grabbed just before the debtor files bankruptcy is supposed to be a disincentive for such a money grab.

Second, a lot of bankruptcy law focuses on maintaining fairness among creditors. Similarly situated creditors should be treated the same. No playing favorites unless there is a legally appropriate reason to do so.  (On such reason would be if the debt is secured by collateral).

This fairness means that legally similar creditors need to be treated the same not just during your bankruptcy case but also shortly before the filing of your case. The period of fairness extends a bit before the bankruptcy filing so that overly aggressive creditors aren’t favored. Any available money or assets are spread among all the creditors more evenly and thus more fairly.

A Preference Benefitting You

It’s all well and good to punish a creditor for grabbing money from you shortly before you file bankruptcy. But what good does it do you if that money just goes to your Chapter 7 trustee?  The trustee would just distribute that money among your other creditors, right?

Generally, yes. But in many circumstances this preference money helps you very directly. Next time we’ll show you how.

 

A Dozen Surprising Benefits of Bankruptcy

Bankruptcy can go beyond giving you immediate and long-term relief from your debts. It comes with many other surprising benefits. 

 

The next 12 blog posts will be about some of the most powerful and surprising benefits of bankruptcy.

You’re likely considering bankruptcy because you’re financially overwhelmed and need relief. You need immediate relief from debt collection pressures. You need long-term relief from having to pay debts you can’t handle. Bankruptcy provides that immediate and long-term relief.

But bankruptcy can often also give you some other rather amazing benefits, beyond the basic relief you expect. The next dozen weekly blog posts will give you details about the following benefits:

1. Get Back Money Recently Paid to a Creditor

Through “preference” law you could get back money you’ve recently paid to a creditor—paid either voluntarily or not.  

2. Undo Judgment Liens on Your Home

Through judgment lien “avoidance” you can often permanently remove a judgment lien, a tremendous practical benefit.   

3. Get Back Your Driver’s License after an Unpaid Judgment

Reinstate your license if you lost it by not paying a debt from an uninsured or underinsured motor vehicle accident.

4. Reinstate Your Driver’s License from Failing to Pay Tickets

Reinstate your license if it had been suspended for unpaid traffic infractions.

5. Get Back Your Just-Repossessed Vehicle

Filing bankruptcy not only prevents vehicle repossession; it may be able to get your vehicle back to you after it’s already been repossessed.

6. Get Out of an Unaffordable Payment Plan with the IRS/State

Bankruptcy comes with a surprising array of tools to use against your tax debts, allowing you to prevent or get you out of an onerous monthly payment plan.

7. Prevent Debt Collections from Re-Starting after Being “Stayed”

Bankruptcy doesn’t stop or only temporarily stops certain select debts from being collected—such as child/spousal support arrearage, recent income taxes, student loans, and debts incurred through fraud. But there are tools bankruptcy provides for resolving special debts like these permanently.

8. Prevent an Income Tax Lien Recording and Its Potentially Huge Damage

An income tax lien can turn a debt that could be discharged—permanently written off—into a debt that you must pay in full. A timely bankruptcy filing can prevent this financial hit.            

9. Bankruptcy Can Often Reduce Some or All of a Tax Lien’s Financial Impact

In some situations a tax lien can be made either wholly or partially ineffective. Besides saving you lots of money you get the peace of mind that your home is not at risk.

10. Avoid Paying Your Ex-Spouse Most of Your Property Settlement Debts

Chapter 13 allows you to discharge—write-off—some or all non-support obligations of your divorce.

11. “Cram down” and Change the Payment Terms of Your Vehicle Loan

If your vehicle loan is more than two and a half years old, you can usually reduce your monthly payments and the total amount you pay on the loan.

12. Get Out of Your Vehicle Lease through Bankruptcy

Leasing is often the cheapest way to have a vehicle short term, but is actually usually the most expensive long-term. Bankruptcy can be the best way to get out of this expensive obligation.

 

Successfully Completing a Chapter 7 Case

Most bankruptcy cases are completed successfully. But you need to pay attention to a few crucial steps to make that happen. 

 

You’ve filed a Chapter 7 “straight bankruptcy” case, which stopped all creditor collections actions against you. About a month later you’ve gone through the Meeting of Creditors with the Chapter 7 trustee. Now within two more months you will very likely finish the case and get a discharge of your debts. “Discharge” is the legal and permanent write-off of most or all of your debts. You’re getting close. But now there are 5 things you need to watch out for to get that discharge and finish your Chapter 7 case successfully. We cover the first 3 of these today, and then the other 2 in our next blog post.

1) “Debtor Education”

You completed a “credit counseling” class before filing bankruptcy, usually online but sometimes by phone. Similarly, after filing you must also complete a “debtor education” class. Or as the U.S. Bankruptcy Code calls it, “an instructional course concerning personal financial management.” See Sections 111 and 727(a)(11) of the Bankruptcy Code.

This is also usually done online, by phone or even, rarely, in person). The procedure is similar to the earlier “credit counseling” you did before filing the Chapter 7 case. The information provided in “debtor education” may actually be helpful to you and your financial life going forward. 

No matter whether or not it is helpful, it’s mandatory. The law clearly says that if you don’t complete this requirement the court does not discharge your debts. It’s easy to forget; be sure not to.

2) Keep/Surrender Collateral

If you have any secured debts, you need to deal with the collateral. Your Chapter 7 documents included a Statement of Intention stating what you intended to do with the collateral securing each secured debt. You sign this document under penalty of perjury, and your lawyer sends a copy to every affected creditor. It gives you the following options:

  • surrender the collateral
  • keep it and “reaffirm” the debt,
  • keep it by “redeeming” the collateral
  • retain it some other way

It’s very important that you follow up on these intentions, especially if you want to keep the collateral. By law you have 30 days after the Meeting of Creditors to “perform [your] intentions with respect to such property.” Section 521(a)(2)(B) of the Bankruptcy Code. If that 30 days passes without you “perform[ing your] intentions,” the creditor can repossess or otherwise take back the collateral.

3) Address a “Dischargeability” Complaint

Most debts get discharged as long as they don’t fit some very specific categories. Examples of nondischargeable debts include child and spousal support and criminal debts. Others, such as income taxes and student loans, may get discharged depending on the circumstances. See Section 523 of the Bankruptcy Code for “Exceptions to discharge.”

As for debts that don’t fall within such non-dischargeable categories, creditors can still object to the discharge of the debt. Each creditor has until 60 days after the Meeting of Creditors to do so. Section 523(c)(1). Otherwise it forever loses its right to object.

A creditor objects by filing a formal complaint at the bankruptcy court. These complaints are not very common. That’s because the law allows such creditor complaints only on some relatively narrow grounds. Generally, a creditor must prove that the debt was incurred through your fraud or misrepresentation, or involves your “willful and malicious injury” of a person or property. Subsections 523(a)(2)(4)(6). If the creditor does not file a complaint within the 60-day period, then your debts are usually discharged immediately thereafter.

 

Next time we’ll cover the two other steps you need to be aware of to complete your Chapter 7 case successfully.

 

The Confirmation Hearing in a Chapter 13 Case

The Confirmation Hearing is where the bankruptcy judge approves, or “confirms,” your Chapter 13 payment plan.” You seldom need to attend


The Chapter 13 Plan

As we said last week about the Meeting of Creditors, a Chapter 13 case is all about “the plan.” The plan is your financial roadmap during the 3 to 5 years that you are in the case. It’s put together by you and your bankruptcy lawyer, outlining what debts you’ll pay, how much, and when. (See this Chapter 13 Plan form.)

At the Meeting of Creditors your Chapter 13 trustee discusses the plan with you and your lawyer. Sometimes a creditor or two are also there. The Confirmation Hearing is a month or so later. By that time any concerns or objections raised at the Meeting of Creditors should be resolved. If so, the bankruptcy judge signs an order approving the plan. That plan may be exactly as you and your lawyer first put it together or may have some changes negotiated with the trustee and/or creditors.

You Seldom Go

You must attend the Meeting of Creditors, but almost never go to the Confirmation Hearing. You could go if you wanted. It’s a court hearing that anybody can attend. But there would almost never be anything you’d need to do there other than to observe what happens. In rare circumstances your lawyer will recommend or ask that you be there for some special reason. If you have any doubt be sure to ask.

The Straightforward Confirmation Hearing

The goal of the hearing is to get the judge’s approval of the plan. That’s formalized by the judge signing a document (usually prepared by your lawyer) called the Order Confirming Plan. The trustee often signs off on the plan beforehand. Sometimes that happens verbally at the Hearing, if there have been last minute negotiations or changes. (See this sample Order Confirming Chapter 13 Plan.)

At a straightforward Confirmation Hearing any trustee/creditor objections would have been fully resolved before the Hearing. So the trustee reports to the judge that either there were no objections to the plan or they’ve been resolved. So the judge reviews the plan and approves it, usually signing the Order Confirming Plan. At that point your plan becomes legally effective and in effect becomes the law of your case.  (Note that usually you have already been paying into your plan from when it was filed a couple months earlier.)

The Not-So-Straightforward Confirmation Hearing

For lots of reasons a Chapter 13 plan may not be ready for the judge’s approval at the Confirmation Hearing. For example:

  • The trustee may be objecting to an expense in your budget that you think is necessary and appropriate. The trustee wants to lower or eliminate the amount and increase your monthly plan payment. Your lawyer has tried to resolve this by negotiation but that’s not worked. So the bankruptcy judge needs to rule on it.
  • A secured creditor may be disputing the value of its collateral and so how much you should pay it.
  • A creditor could raise an objection for the first time at the Confirmation Hearing itself, one which cannot immediately be resolved. Creditors almost always raise any objections long before the Hearing, which happens about two months after your case filing. But their final deadline to object to your plan is at the Confirmation Hearing. So there are occasional surprises.

Plan Still Approved at the Hearing

The judge can sometimes make a ruling at the Confirmation Hearing, resolving whatever is preventing plan approval. Then the plan could still get confirmed, right at the hearing. Or sometimes the judge gives one of the parties a certain amount of time to object to a tentative ruling. If there is no renewed objection within that time, the judge would sign an Order Confirming Plan without any further hearing.

Or the judge could schedule an Adjourned Confirmation Hearing. This could happen, for example, after the judge tells an objecting creditor and you to try to settle the matter. If the parties do settle, they can report that to the judge at the Adjourned Confirmation Hearing. The judge could then confirm the Chapter 13 plan, with any agreed amendments, at the Adjourned Confirmation Hearing. Or that Hearing could possibly be cancelled if the parties filed appropriate paperwork at court beforehand.

Cases Requiring Special Adjudication

Sometimes the disputing parties are simply not able to settle their dispute among themselves. It’s too complicated for the judge to rule on it during the few minutes allotted at an Adjourned Confirmation Hearing. So the issue is addressed in a separate proceeding, with both sides making their arguments. This is a Contested Matter, or an Adversary Proceeding if it goes so far as requiring a trial. After the judge’s decision, he or she will either confirm the plan, or in sometimes instead dismiss the Chapter 13 case or change it into a Chapter 7 one.

Most Chapter 13 Plans Get Confirmed

Most Chapter 13 plans do get confirmed, either at the initial Confirmation Hearing or within a few weeks afterwards. You and your lawyer need to prepare the plan carefully. Any objections should be addressed right away instead of waiting until right before the Confirmation Hearing. Of course you as the debtor need to do what your plan says you’ll do. If all these happen, very likely your plan will be confirmed and your case will be on its way.

 

The Trustee at the Chapter 7 “Meeting of Creditors”

At the “Meeting of Creditors” the bankruptcy trustee is mostly interested in your assets. Most often they’re all protected by exemptions. 

 

Last time we introduced the Chapter 7 “meeting of creditors” as mostly a meeting with your bankruptcy trustee. Often none of your creditors show up. So you and your bankruptcy lawyer often mostly just talk with the trustee for a few minutes.

So what do you talk about?

Assets and Discharge 

The U.S. Bankruptcy Code lists more than a dozen “Duties of trustee” in a Chapter 7 “straight bankruptcy” case. (See Section 704 of the Bankruptcy Code.) But at the Meeting of Creditors the focus is on two duties:

  • to “collect and reduce to money the property of the estate”
  • “if advisable, oppose the discharge of the debtor”

These sound more threatening than they usually are. We’ll explain the first one today; the second in our next blog post.

Asset Collection—Mostly Verifying There Are None

Chapter 7 is a liquidation type of bankruptcy. But most of the time you would have nothing to liquidate. That’s because everything you own (the property of your “estate”) is likely “exempt”—protected through property exemptions. Exemptions are categories of possessions and property that you are allowed to keep. Exemptions usually allow you to keep categories of assets up to certain maximum dollar amounts. (See Section 541 of the Bankruptcy Code on “Property of the estate” and Section 522 on “Exemptions.”)

One of the main things you’ll discuss with your lawyer at the beginning of your case is whether everything you own is exempt. (There are usually ways to protect those that aren’t, including by filing a Chapter13 case instead.) Assuming that all your assets are clearly exempt, very likely your trustee will agree. He or she will declare your case to be a “no-asset” case.

So at the meeting of creditors the trustee will mostly be going through the motions of verifying this. He or she will ask you a series of easy questions about what you own. These will mostly track the questions about assets that you answered in the paperwork you prepared with your lawyer. These are Schedules A and B about your real estate and personal property, and Schedule C about your exempt property. Your lawyer will prepare you for this, and will be there at the Meeting to help.

An Expected “Asset Case”

In some situations you may have one or more assets that you and your lawyer know are not exempt. You have chosen to offer the asset to the trustee because you don’t want it any more. An example might be a boat that you’ve gotten tired of paying the upkeep on.

The trustee than decides whether or not to accept the unprotected asset from you. He or she may decide it’s not worth enough to go through the trouble of transporting and selling the asset. The trustee has no obligation to take something just because it’s not covered by an exemption. In the example of the boat, if it’s in really bad condition the trustee may decide not to take it.

But if the trustee does accept the non-exempt asset, he or she will make arrangement to take and sell it. Out of the proceeds, after court approval the trustee pays the liquidation expenses and a fee to him- or herself. (See Section 326(a) on the “compensation of trustee” in a Chapter 7 case.)  The trustee then pays the remaining funds to your creditors.

The trustee pays the creditors in a specific order depending on the nature of the debt. Priority debts are paid first, and in a particular order. (See Section 507 of the Bankruptcy Code.) These include unpaid child or spousal support and recent income tax debts, for instance. Only if there is any money left over do your other, “general unsecured debts,” receive anything.

The Unexpected “Asset Case”

Sometimes—quite rarely—the trustee gets interested in an asset that you and your lawyer didn’t expect.

The trustee may believe that the value you place on something is too low. Or the trustee may find an asset that you had not disclosed. This could happen through the questions he or she asks you at the Meeting of Creditors. Or the trustee could learn about it through some other source.

Disputes such as these are usually resolved between your lawyer and the trustee. The asset at issue may be appraised, and the matter settled that way. Or it may have to be decided by the bankruptcy judge.

If after all this there is an unexpected unprotected asset, you have a number of options:

  • surrender the asset to the trustee for liquidation and payment to your creditors
  • pay the trustee for the right to keep the asset, with the funds going to your creditors
  • convert your case into a Chapter 13 one, paying enough into your payment plan to protect the asset

Conclusion

The Chapter 7 trustee has a number of duties, but dealing with assets is the primary one at the Meeting of Creditors. In most cases the focus is simply on verifying that all of your assets are protected by exemptions. But sometimes there are unprotected assets, either expectedly or—rarely—unexpectedly. If you are candid and thorough with your lawyer, it’s even less likely that the unexpected will happen.

Next week we’ll get into the trustee’s role in potentially challenging your right to a discharge of your debts.

 

The “Meeting of Creditors” in a Chapter 7 Case

No creditors come to most Chapter 7 “meetings of creditors,” and seldom more than one or two. But this short meeting is still very important.

 

In virtually every Chapter 7 “straight bankruptcy” case, you never go to court. But you DO go to a formal meeting, usually lasting 5 to 15 minutes, one that you absolutely have to attend. If you don’t your case gets thrown out.  (In extreme situations you and your bankruptcy lawyer may be able make special prior arrangements if you can’t make it, but it’s highly discouraged.)

This meeting is with your Chapter 7 trustee, but it is misleadingly called the “meeting of creditors.” It is sometimes referred to as the “341 hearing,” named after the Section 341 of the Bankruptcy Code which addresses it. If you understand what this meeting is about you won’t worry about it unnecessarily and will have a successful one.

It’s NOT What You Might Fear

This meeting is not one in which all your creditors attack you for filing bankruptcy. Although all creditors are given the opportunity to be there, most of the time most of them don’t go. As we said in the first sentence, often none of your creditors will go to it.

Why not? Because usually there is no reason for them to attend. The grounds for objecting to bankruptcy are very limited so most creditors can’t object. So they don’t waste their time.

The creditors that tend to be there are those which have collateral—such as your vehicle or furniture creditors. With them it’s actually often helpful to you that they are there, to make appropriate arrangements for the collateral. (Usually this is to do whatever you’ve decided to do about keeping or surrendering the collateral.) But with even these secured creditors usually these arrangements are handled more efficiently by phone or email so they don’t have to go to the meeting.

Troublemaking Creditors

Again, any creditor CAN be at the “meeting of creditors.” So if you have one who is personally angry with you—like an ex-spouse—he or she might attend.  Any creditor can ask pertinent questions, including ones that COULD be dangerous if you’ve been engaged in any fraud or other illegal behavior. That’s not common, but be sure to talk with your lawyer well in advance if you have any concerns. He or she will warn you if your circumstances raise any red flags, and will prepare you for the meeting.                                                                                 

Creditors can ask relevant questions. But the bankruptcy trustee in charge of the meeting usually won’t have the time or patience for irrelevant discussion. Your meeting will be just one of many packed into a tight schedule, about three or four cases every half-hour. That means each one lasts about 7 to 10 minutes. The trustee can’t get too behind on the meeting calendar.

Rarely, if there isn’t enough time for legitimate questions a second meeting of creditors can be scheduled. Or the conversation with a creditor might continue informally outside the hearing.

But, again, most meetings of creditors are quite short and uneventful. The biggest surprise for most Chapter 7 debtors is when there are no surprises and they can stop worrying about it.

Not a Court Hearing

There is one person who is NOT allowed to be at the meeting: the bankruptcy judge. As the Bankruptcy Code says: “The court may not preside at, and may not attend, any meeting under this [341] section… .” So the meeting is definitely not a court hearing.

Conclusion

At most Chapter 7 meeting of creditors there are no creditors, or at most one or two. It’s rare that a creditor will ask tough questions, but it can happen. Be sure to share any concerns with your lawyer so you won’t worry unnecessarily, and so you are prepared.

 

The Chapter 7 and 13 Trustees, and the U.S. Trustee

The Chapter 7 trustee decides whether to liquidate anything, the Chapter 13 oversees your case, and the U.S. Trustee is the enforcer. 

 

When you hear the term “trustee,” that could refer to various people or roles.

Some are not directly related to the bankruptcy process. For example, in many states the “trustee sale” is the final event of a home foreclosure. A trustee legally conducts the foreclosure instead of your lender.

More broadly, a trustee is a person given certain powers to administer property or to fulfill some other tasks on behalf of others.

In bankruptcy, a trustee gets assigned to your case when you file a Chapter 7 or Chapter 13 case. You and your bankruptcy lawyer will meet with that trustee briefly. Sometimes you’ll have more contact with the trustee, especially in a Chapter 13 case.  Generally speaking these trustees have certain powers over you and your property, and act on behalf of your creditors.

There is also the U.S. Trustee. He or she usually works behind the scene; in most consumer cases you’ll never meet this person.

The Chapter 7 Trustee

Chapter 7 “straight bankruptcy” is a liquidation procedure, although in consumer cases usually no liquidation takes place. (Nothing of yours gets liquidated and sold to pay your creditors if everything you have is “exempt,” or protected.) The Chapter 7 trustee is the person who determines whether or not you have any assets to liquidate. In those cases in which the trustee sells debtor assets, he or she is also responsible to distribute the proceeds to the creditors as required by law.  

The Chapter 7 trustee presides at the so-called “meeting of creditors.” That’s usually the only time you’ll see him or her. This 10 minute or so meeting takes place within about a month after you and your bankruptcy lawyer file your case. At this short meeting the trustee will ask you some (usually quite simple) questions about your bankruptcy documents. Your lawyer will prepare you for them and help at the hearing as needed.  

The trustee is assigned to your case from a “panel” of potential trustees. Generally your lawyer can’t predict or influence who will be your trustee. 

See Section 704 of the U.S. Bankruptcy Code about the duties of a Chapter 7 trustee.

The Chapter 13 Trustee

Chapter 13 “adjustment of debts” is a procedure involving the court approval and the implementation of a payment plan. The Chapter 13 trustee administers and oversees the process.

This trustee has a number of roles. The primary one is to enforce your obligations under Chapter 13 law. For example, the trustee tries to ensure that you pay your creditors what they are entitled to. The trustee

  • reviews your proposed payment plan and other court-filed documents,
  • presides at your so-called “meeting of creditors”
  • can raise objections to your plan with the bankruptcy court as appropriate
  • after court approval of your plan, receives your plan payments and distributes them to the creditors as specified under the terms of the plan
  • files motions with the bankruptcy court if you are not complying with the plan
  • at the end of your case tells the court when you have successfully completed your plan obligations

Unlike the Chapter 7 trustees, there is usually a single “standing Chapter 13 trustee” assigned to all the Chapter 13 cases filed in a particular area. Since most handle a large volume of cases most of them have a staff of assistants. Your lawyer will very likely have a long-standing working relationship with the trustee and staff. You’ll know in advance who will be your Chapter 13 trustee.

See Section 1302 of the Bankruptcy Code about the duties of the Chapter 13 trustee.

The United States Trustee

The U.S. Trustee is the enforcer within the bankruptcy system—the watchdog over the bankruptcy process.” You generally hope to avoid hearing from the U.S. Trustee—it’s often not good news.

As described on its website:

The United States Trustee Program is a component of the Department of Justice that seeks to promote the efficiency and protect the integrity of the Federal bankruptcy system.  To further the public interest in the just, speedy and economical resolution of cases filed under the Bankruptcy Code, the Program monitors the conduct of bankruptcy parties and private estate trustees, oversees related administrative functions, and acts to ensure compliance with applicable laws and procedures.  It also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.

The main responsibilities of the local U.S. Trustee in consumer cases is to:

  • appoint and supervise Chapter 7 and Chapter 13 trustees
  • take legal action to prevent fraud and abuse of the bankruptcy system
  • investigate and refer matters to the appropriate enforcement authorities (as mentioned above) for criminal prosecution

See 28 U.S. Code Section 586 for the duties of the U.S. Trustee.

 

The Bankruptcy Clerk and the Bankruptcy Judge

Usually you have little or no interaction with the bankruptcy clerk or the bankruptcy judge, but they are both important in your case. 

 

Last week we told you about the debtor and different kinds of creditors in bankruptcy. Today we get into the bankruptcy court and bankruptcy judge. Again, it’s much easier to be comfortable with the process if you know who the main players are and what each one does.

Bankruptcy Clerk

The clerk is the person who, together with his or her staff, handles the clerical tasks of the bankruptcy court. Some of these tasks are quite important, affecting your interests and that of your creditors. It may seem to be “just paperwork,” but is still crucial for the smooth running of your case.

The clerk:

  • processes the paperwork that your lawyer files electronically at the start of your case and thereafter
  • maintains your bankruptcy file at court securely
  • mails out the official notices providing deadlines and certain hearings for you, creditors, the bankruptcy trustee
  • follows the many bankruptcy laws and official procedures in the processing of your case

Your bankruptcy lawyer interacts with the clerk and his or her staff to make sure that everything proceeds as it should. In most cases you will not have anything directly to do with them. 

Bankruptcy Judge

The bankruptcy judge is the person who ultimately has authority over your case. Every case is assigned to one judge. 

You are not likely to meet your judge in any straightforward Chapter 7 or 13 case. If you do it would usually be for a very specific purpose. For example, in a Chapter 7 case you might need to attend a short “reaffirmation” hearing. In a Chapter 13 case you might need to attend a payment plan “confirmation” hearing. But again, in most cases you’ll never see your judge. The most you usually see of him or her is a signature on official documents.

These judges are officers of the federal court system, but they are not full federal judges. Technically they are “judicial officers of the United States district court.” There are between 1 and 4 federal “districts” in each state, to which bankruptcy judges are assigned. Most federal districts have multiple bankruptcy judges, although some with smaller populations have only 1. Unlike regular federal judges who are appointed for life, bankruptcy judges are appointed to terms of 14 years. See 28 U.S. Code Section 152.

If there is any dispute in your case, the judge resolves such disputes. In Chapter 7 cases he or she decides whether a debt should be discharged (legally written off) or not if that is in dispute. In Chapter 13 cases the judge decides on the terms of your Chapter 13 plan, if you and the Chapter 13 trustee or a creditor disagree. 

The decision of the bankruptcy judge can be appealed, either to a local federal district judge or sometimes to a regional 3-judge Bankruptcy Appellate Panel. That very seldom happens because of the time and expense involved.

 

Who Does What in Your Bankruptcy Case?

The key players in bankruptcy are the debtor, creditors, the bankruptcy clerk and judge, and the bankruptcy trustee and the U.S. Trustee. 

 

Bankruptcy can be confusing. It helps to know the main players and what each does. We’ll cover the first two listed above today. Next time we’ll cover the rest.

Debtor

The debtor is the person or business entity filing the bankruptcy case.

The debtor has to qualify to file bankruptcy. Sometimes qualifying is easy, sometimes it’s harder. The qualifications are different for Chapter 7 “straight bankruptcy” than they are for Chapter 13 “adjustment of debts.” The “means test” is most important in Chapter 7, while in Chapter 13 having “regular income” and not too much debt.

A debtor has a number of “duties.” These mostly involve honestly completing some forms for the bankruptcy court and attending a so-called “meeting of creditors.” You’re also required to “cooperate as necessary” with the bankruptcy trustee and the U. S. Trustee. (We’ll get into this more coming up when we tell you about the different trustees).

The debtor’s most important job is to be honest and responsive. You need to do this first with your bankruptcy lawyer, so that the lawyer can advise and protect you. Then, through the lawyer’s guidance, do the same with the bankruptcy court and the other players in the process.

See these Sections of the U.S. Bankruptcy Code: Section 109 on “Who may be a debtor,” and Section 521 on “Debtor’s duties.”      

Creditors

The creditors are of course the businesses and individuals to which the debtor owes debts.

Creditors participate in your bankruptcy case, or often don’t participate, mostly based on the kind of debt owed.

Creditor’s debts are either secured or unsecured. “Secured” means that the debt is legally tied to something you own. That gives the creditor the right to take that something from you if you don’t pay the debt. A debt can be secured by something you bought at the time you created the debt, like a vehicle loan. It can be secured by something you owned beforehand, like a personal loan secured by your possessions. Or it can be secured by operation of the law, like an income tax or judgment lien. A creditor has more leverage over you if its debt is secured and you want to keep that “security.” See Section 506 of the Bankruptcy Code on “Determination of secured status.”

Unsecured debts can be “priority” or “general unsecured.” “Priority” debts are legally favored for various reasons. The main examples among consumer debts are recent income tax debts and any child or spousal support. “Priority” debts generally get paid in full before anything gets paid on “general unsecured” debts under various bankruptcy procedures. See Section 507 on “Priorities.”

For most people most of their creditors have “general unsecured” debts. Those are all debts that are either not secured or not “priority.” They include most credit card balances, medical bills, personal loans, bounced checks, utility bills, vehicle loan deficiency balances, unsecured personal loans, and countless other kinds of unsecured obligations.

Creditors Getting Involved

Creditors can theoretically be involved in the bankruptcy process in a lot of ways. However, they tend to be less involved than you expect. They often decide that getting involved is not worth their cost or effort. Secured creditors do tend to get involved so that you make appropriate arrangements depending on whether you want to keep their “security.”

Sometimes other creditors have grounds to challenge your ability to “discharge”—legally write off their debts.  Your lawyer will inform you if there seem to be any such grounds. Be sure to tell him or her if you have any creditors who may have an emotional stake in your financial life (such as ex-spouses or ex-business partners.) These sometimes get involved in your case, whether doing so would financially benefit them or not.