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.

 

The Debtor, Creditors, and Clerk in a Bankruptcy Case

Your bankruptcy case will make much more sense if you know the roles of the people involved, starting with debtor, creditors, and clerk. 

 

The Debtor

This is the “person” filing the bankruptcy case. An individual can file a case, as can a married couple. The “person” can also be a corporation, partnership, or some other kind of business entity. 

A sole proprietor business is not legally a separate person so it cannot file its own bankruptcy case. The sole proprietor files an individual case which includes the business.

A debtor has to qualify to file bankruptcy. Sometimes qualifying is very easy; sometimes it can be difficult. See Section 109 of the U.S. Bankruptcy Code on “Who may be a debtor.”

Also see Section 521 on “Debtor’s duties.” Your primary duty as the debtor is to deal honestly with the bankruptcy system to get the relief the system is designed to provide you.

The Creditors 

These are the businesses or individuals to whom the debtor owes a debt.  A debt is money owed based on some right to payment by the creditor.

A creditor’s right to payment is usually for a definite amount. It’s usually based on a contract or transaction with easily determinable dollar amounts. Likely you owe all or most of your creditors a definite dollar amount.

But a creditor’s claimed right to payment can also be “unliquidated”—for an unknown amount. An example is a debt owed to the creditor based on a personal injury the debtor definitely caused in a vehicle accident.

Or the debt can be disputed. An example is that same personal injury from an accident, when it’s unclear whether the debtor was at fault.

Debts owed to the creditor can be secured by collateral such as your home or vehicle, or whatever you purchased. Debts can also be secured involuntarily, such as an income tax with a recorded tax lien. One of the biggest areas of contention in bankruptcy is how collateral is treated between debtors and secured creditors.

Debts owed to the creditor are mostly not secured by anything—they are unsecured. The creditor has no lien on anything the debtor owns. But unsecured debts of different types can be treated very differently as well. Most unsecured debts are discharged—legally written off—in bankruptcy, but some are not. Child support, some income taxes, and most student loans are not.

Creditors are treated the same in bankruptcy, as long as the debts owed to them are of the same legal category. Otherwise, they can be treated very differently.

The Bankruptcy Clerk

The clerk takes care of most of the crucial but mundane operations of the bankruptcy system. The clerk’s office handles the clerical tasks within the bankruptcy court, most of which is now done electronically.

Your attorney files your case through a very secure internet connection with the clerk’s office. The clerk maintains your bankruptcy file, mails and sometimes electronically delivers most (but not necessarily all) of the important formal notices, runs the bankruptcy court calendar, and does lots other similar tasks.

If you are a debtor not represented by a bankruptcy lawyer, you would deal a fair amount with the clerk. As a debtor represented by lawyer, you would likely never deal directly with the clerk.

 

Property Exemptions for Married Couples

Couples can file bankruptcy separately or together. One of the factors of that choice is the amount of assets that can be protected.

 

Last week I introduced the issue about filing bankruptcy with or without your spouse by making clear that each spouse has a separate legal right to decide whether or not to file.

Each person needs to see clearly what the consequences of this choice are to them personally and to the two of them together. Then each gets to decide whether her or she wants to file a bankruptcy case or not, and if so whether to do so jointly with the other person.

In considering the consequences of filing separately or together, I gave the following list last time:

  1. the preservation of your assets
  2. protection from creditors’ collection activity
  3. dealing with the IRS and any other income tax authorities
  4. the discharge of your debts

Today’s blog post covers the first item on this list. 

Preserving Assets in Bankruptcy

Let’s first briefly look how your assets are protected in a consumer bankruptcy case. You are allowed to keep what you own through the power of property exemptions.

Most people who file a Chapter 7 “straight bankruptcy” case can keep everything they own because everything fits within the available exemptions. But in situations in which some assets don’t fit within the exemption categories and amounts, the bankruptcy trustee can take and sell those assets and pay the proceeds to the creditors.

Under Chapter 13 “adjustment of debt” cases the person filing can protect assets that are not covered by the available property exemptions by paying extra to the creditors over the course of a court-approved payment plan.

Filing bankruptcy alone instead of both filing jointly can effect on how well your possessions are protected by the property exemptions.

Doubling of Some but Not All the Federal and State Property Exemptions

Under the federal Bankruptcy Code each state has a choice. It can require its bankruptcy-filing residents to use that state’s set of property exemptions. Or the state can let its residents choose between the state’s exemptions and a federal set of exemptions.  

Under the federal exemptions, two spouses filing bankruptcy together receive double the value of all the permitted exemptions that a single individual would receive. (See Section 522(m) of the Bankruptcy Code.) For example, there’s a $22,975 homestead exemption to cover equity in a home. That amount is doubled to $45,950 in a joint case filed by two spouses. (As of April 1, 2016 these amounts go up to $23,675 and $47,350, respectively.)

However, some state exemptions don’t increase the exemption amount at all for certain asset categories in a joint filing. For example, in Colorado an individual filing bankruptcy can exempt $60,000 of equity in a home (or $90,000 if the homeowner, his or her spouse, or a dependent are disabled or are 60 years old or more). When two spouses file a joint case, those amounts remain the same even though two people are involved. Note that Colorado requires its residents to use its exemptions so the federal ones aren’t available.

In some states the amounts are increased but not doubled. For example, in Oregon an individual’s homestead exemption is $40,000, with that exemption increasing only to $50,000 for a married couple filing jointly.  Note that Oregon allows its residents to use either it exemptions or the federal one. In this case the $50,000 joint homestead exemption is still higher than the federal $45,950 one.

Conclusion

The point is that there can be advantages and disadvantages within the specific property exemption statutes to one spouse filing individually vs. both filing jointly. Each spouse needs to be very clear about the property-preserving consequences of joining in the bankruptcy case.

 

Who Does What in a Consumer Bankruptcy Case?

The bankruptcy process makes much more sense if you know the players in the process and what they do.

 

You—the “Debtor”

The debtor starts a bankruptcy case by filing a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” A “joint case” is filed by you and your spouse together.

You have quite a different role in a Chapter 7 case vs. a Chapter 13 one. Chapter 7 focuses on who you are financially at the moment your case is filed. Chapter 13 also looks at that moment for certain purposes but mostly focuses on your finances throughout the 3 to 5 years that your payment plan lasts.

Which of these two options is better for you depends on your unique set of circumstances. For example, if you unexpectedly started making much more money a year after your case was filed, that would usually have no effect on your case if you had filed a Chapter 7 one because of its focus on the time of filing. However, in a Chapter 13 case that income increase would likely increase what you’d have to pay your creditors, or at least require you to pay the same amount more quickly.

On the other hand, because Chapter 7 is usually done and closed within about 4 months, it doesn’t protect your future income or newly acquired assets from debts which could not be written off in the case, such as certain taxes and child support arrearage. In contrast, Chapter 13 does protect such future income and assets. It allows you to pay these kinds of special debts based on your budget instead of leaving you at the mercy of those creditors’ aggressive collection powers.

Your Potential Challenger—the Trustee

Under both Chapters 7 and 13 most likely the person you and your attorney have the most contact with is the bankruptcy trustee. These are carefully selected and supervised individuals who are assigned to your case to take care of certain tasks. The trustee reviews and oversees your case, and can raise certain kinds of challenges. Although sometimes the relationship is adversarial, most of the time you and your attorney simply deal cooperatively with the trustee to make your case go smoothly.

The Chapter 7 trustee’s most important task is to determine whether or not he or she has the right to take anything from you—in other word whether everything that you own is “exempt” and you can keep it all. Usually you can.

The Chapter 13 trustee has two main tasks: to raise any appropriate challenges to your proposed payment plan, and then, once a plan is approved by the bankruptcy judge, to distribute payments you make under that plan to the creditors as directed by the plan.

Your Adversaries—the Creditors

Under both Chapter 7 and 13, your creditors can get involved in your case, although most don’t. Often you and/or your attorney don’t hear from any of them or only from one or two. They may be able to challenge your ability to discharge (write-off) debts, as well as raise various other objections. Creditors heard from most often are usually either 1) secured creditors (secured by a lien on something you own, such as your home or vehicle) or 2) special “priority” creditors, such as a taxing authorities or support enforcement agency.

The Enforcers—the U.S. Trustee

This is an office under the U.S. Department of Justice which administers and oversees the whole system. The Office of the U.S. Trustee oversees the individual Chapter 7 and Chapter 13 trustees. Usually this office stays in the background. If you and your attorney do hear directly from them they are usually raising some kind of concern that needs to be resolved.

The Paper-Pushers—the Bankruptcy Clerk

Your attorney filed the bankruptcy documents, almost always electronically from his or her office, at the court clerk’s office. The clerk’s office sends out the official bankruptcy court notices, schedules hearings and calendars deadlines, and takes care of other administrative tasks of your case.

The Deciders—the Bankruptcy Judges

One bankruptcy judge is assigned to each Chapter 7 and Chapter 13 case, but mostly they work behind the scenes. You seldom actually meet the judge or go to his or her courtroom in either a Chapter 7 or 13 case.

In most straightforward Chapter 7 cases a judge is hardly involved, except at the end of the case signing the discharge order releasing you from your debts. If you are “reaffirming” a secured debt—agreeing to be remain liable in return for keeping the collateral—you may have to attend a very short reaffirmation hearing with the judge. And in the relatively unusual situation of a creditor objecting to the discharge of its debt, the bankruptcy judge would decide whether the objection meets the limited conditions for a debt not to be discharged.

In contrast, a judge is much more involved in even a straightforward Chapter 13 case. You and your attorney propose a payment plan, which the trustee and the creditors review and may object to. So the judge needs to decide whether any such objections are valid and how they can be resolved. The plan, often with changes to meet any objections, must then be approved by the judge at what is called the confirmation hearing. Your attorney attends this hearing but you almost never need to. Because of how long a Chapter 13 case lasts, in most cases issues arise later that need the judge’s attention. For example, you may amend your plan if your financial circumstances change, which the judge must review and approve.

 

Bankruptcy Stops Ongoing Wage Garnishments and Prevents Future Ones

Bankruptcy is able to protect your paycheck because it is more powerful than most creditors’ garnishment court orders.

 

Bankruptcy Stops Wage Garnishments

A garnishment is a court order which requires your employer to pay a portion of your paycheck to a creditor and not to you. Usually a creditor can’t get a garnishment order without first suing you and getting a court judgment saying that you owe the debt.

A judgment is the court’s determination that you do indeed owe the debt, how much you owe, and the amount of any additional costs you must pay because of the lawsuit and judgment. A judgment enables a creditor to use various ways to get money or property out of you to pay the debt, with probably the most common one being wage garnishment.

Filing bankruptcy gives you the “automatic stay,” the federal law stopping virtually all collections. The automatic stay can stop the garnishment of your paycheck at any of the following stages of the process:

  • before the creditor files a lawsuit, by stopping that lawsuit from being filed in the first place, thus preventing the creditor from getting a garnishment order
  • shortly after a lawsuit is filed, by preventing that lawsuit from turning into a judgment, and again into a garnishment
  • immediately after a judgment is entered, by stopping the creditor from preparing and filing a garnishment order with the court
  • after a garnishment order is signed by the court where the judgment was entered, by defeating the garnishment court order with a more powerful bankruptcy “automatic stay”

So your bankruptcy filing stops present garnishments from being effective and prevents future garnishments from happening. It also stops new garnishments on a prior judgment, for example, when a creditor finds out about your new employer.

Garnishments Stopped Permanently

Bankruptcy stops most present garnishments and prevents future ones permanently. This happens when a debt is discharged (legally written off) in the bankruptcy case, as most debts are. Once a debt is discharged, under Section 524(a)(2) of the Bankruptcy Code an injunction is imposed against the collection of that debt every again, by any means including by garnishment. So in those situations the bankruptcy filing stops and prevents garnishment forever.

Garnishments Stopped Only Temporarily

Garnishments are only temporarily stopped by your bankruptcy filing if the debt is one of the special ones that are not discharged in a bankruptcy case, meaning that you would continue to owe them after the case is done (at least as long as you file a Chapter 7 “straight bankruptcy” case—some of these debts are paid off in a Chapter 13 “adjustment of debts” case). These special not-discharged debts includes certain taxes, most student loans, and a few other kinds of debts.

The automatic stay preventing the garnishment is in effect only from the time the case is filed until the entry of the discharge usually about three months later in a Chapter 7 case.  So, for example, if the IRS was garnishing your wages before the filing of your bankruptcy to collect on a tax that is not being discharged, the IRS would have to stop when you file bankruptcy because of the automatic stay. But that expires when the case is over so the IRS could resume garnishing then. But in the meantime that would give you time to make arrangements with the IRS for monthly payments on that debt, which you could hopefully afford to do after the discharge of your other debts.

Certain Rare Kinds of Wage Garnishments Not Stopped

Under Chapter 7, wage garnishment to pay child and spousal support obligations are not stopped by the automatic stay, for either current or back support. An ongoing garnishment for support will not be affected by a bankruptcy filing. And a garnishment for support could even start up for the first time during your bankruptcy case.

However, a Chapter 13 “adjustment of debts” does stop garnishments for back child and spousal support, and provides a way to catch up on back support while under the protection of the bankruptcy court.  Even Chapter 13 does not affect garnishment for ongoing monthly support.

Present and Past Wage Garnishments

We’ve just covered the effect of bankruptcy on garnishments of wages due immediately after the bankruptcy filing or later. But what about garnishment orders that go into effect very shortly before filing bankruptcy? For example, what if you’re rushing to file bankruptcy after a judgment is entered, but your bankruptcy is filed and the automatic stay goes into effect a day or two after the garnishment order is signed but before any money comes out of your paycheck? And how about after the money has been paid by your employer to the creditor, days or even weeks before your bankruptcy filing? Under what circumstance could you possibly get that money back? My next two blog posts will get into these questions about very recent and past garnishments.

 

Ten Truths about Protecting Assets with Exemptions in Bankruptcy

Most of the time you get to keep whatever you own when you file bankruptcy. The following ten truths will give you the reassurances that you need and help you be aware of issues before they become problems.

Here’s how assets and exemptions work in bankruptcy:

#1.  Exemptions can be more complicated than they might seem:  The simple rule is that you get to keep everything you own as long as it all fits within “exemptions,” categories and amount of assets that you are permitted to have. But there is much more to protecting your assets than just matching assets to exemptions. Although some exemption categories are straightforward, important ones often are not. Some require knowing prior court decisions, and/or how the local trustees and judges are informally interpreting them.

#2.  Federal and state sets of exemptions:  Congress has left it up to each state whether to allow its residents to use a federal set of exemptions in the Bankruptcy Code for bankruptcies filed in that state, or instead require the use of a set of exemptions created by the state. You have to start by knowing which set of exemptions you are allowed to use. And if you are allowed to use either one, it’s not always clear which of the two sets would be better for you. (Outside of some very limited exceptions, you can’t pick and choose exemptions from both the federal and state ones.)

#3.  Which set of exemptions you must use can depend on how long you’ve lived in your present state:  If you have not been “domiciled” in your current state for two full years before filing bankruptcy, you can’t use the set of exemptions available to residents of your current state. You must use the state you were “domiciled” in during the 6-month period immediately before those two years. And there some other twists and turns in these rules. So depending on the exemptions available to residents of the two states, sometimes it make sense to hurry to file your case to take advantage of your prior state’s exemptions or else to delay filing to take advantage of your new state’s exemptions.  

#4.  If you have assets that are not covered by the available exemptions, you can often still protect those with wise pre-bankruptcy planning:  This is one of the most important reasons to meet with a competent bankruptcy attorney way before you are pushed into filing a last-minute bankruptcy. Because any transactions you get into involving your assets before filing bankruptcy can be scrutinized by the bankruptcy trustee and/or creditors, it’s crucial that you get thorough legal advice beforehand. And you should truly do this as soon as possible. Doing so can make the difference in protecting what’s important to you.

#5.  Some trustees are more aggressive about claiming your assets than others, and the value of your assets can be debatable:  Bankruptcy trustees make the first determination (subject to review by the bankruptcy judge) about whether your assets are worth what you say they are and whether any of your assets are not exempt—not protected.  And you often don’t know which trustee will be assigned to your case. They must follow the law, but they do exercise a lot of discretion. Plus sometimes the law is not completely clear, and the actual value of an asset can be anything but clear.

#6.  You must be thorough in listing assets AND exemptions:  If you aren’t thorough in listing your assets in your bankruptcy documents, that can jeopardize your whole case. In extreme cases it can potentially even lead to criminal charges against you by the U.S. Attorney for bankruptcy fraud. Even in less serious situations, if you don’t include an asset that would have been exempt you can lose the right to claim that exemption later. This can result in the trustee taking that asset from you, even if it could have been protected had your bankruptcy documents been more complete.

#7.  Even if you do have an asset that may be worth more than the exempt amount, the trustee will still not necessarily take it from you:  Trustees can decide not to pursue an asset that is not exempt, or a part of which is not exempt, for the following possible reasons:

1) the asset is not worth enough to justify the trustee’s efforts to collect or liquidate it;

2) the trustee is unwilling to pay the costs of collecting or liquidating it (such as the attorney fees required to chase down somebody who may owe you money and refuses  to pay); or

3) the asset comes with risks or other detriments which seem to outweigh its potential value (such as a parcel of land polluted by hazardous waste).

#8.  If you have an asset that you want to keep that is not exempt, you can usually pay the trustee for the right to keep it as long as you can pay enough to do so within a few months:   Paying your bankruptcy trustee for the right to keep something you already own (such as a vehicle) may seem unfair, but that could well be better than losing it. If the alternatives would be either letting go of the vehicle or filing a 3-to-5 year Chapter 13 case to save your vehicle, then paying off the trustee over the course of a few months (after you’ve stopped paying your creditors) may well be your best option. 

#9:  Sometimes you don’t mind having the trustee claim an asset:  Under certain circumstances you may actually want the trustee to take a certain asset or two that are not exempt (protected). You may not need them—such as the remaining assets of a closed business—and you might actually be glad to hand the liquation task over to the trustee. This would particularly be true if the trustee would be paying a part of the proceeds of sale to a “priority” debt that you would have to pay anyway, such as taxes or back child support.

#10.  The difference in exemptions under Chapter 7 and Chapter 13:  Although the set of exemptions used in filing under both chapters is the same, the exemptions are used quite differently. Under Chapter 7, the exemptions determine whether you have any non-exempt assets for the trustee to take from you (and distribute among your creditors). Under Chapter 13, the exemptions are applied similarly but for the purpose of determining how much if any has to be paid to your creditors during the life of your Chapter 13 plan.

As you can see, there are many potential factors involved in protecting your assets in a bankruptcy case.  

 

More about Debts Whose Write-off Can be Challenged in Bankruptcy

It’s quite uncommon for a creditor to challenge your write-off of its debt. Here’s more about what happens if one does.

 

Last week’s blog post got into what happens when a creditor raises one of the few available arguments to try to prevent its debt from being legally discharged. (This is different from the debts that by their very nature are excluded from being discharged and so don’t need to be challenged—they simply are not written off—criminal fines, child and spousal support, for example.)

We learned last week that:

  • Most debts DO actually get discharged. In most consumer bankruptcy cases, no debts are challenged. That’s because the creditor would have to establish that the debt was related to a very specific kind of your bad behavior.
  • Your creditors have a very firm deadline—only about three months from the filing of your bankruptcy case—to raise such a challenge, or else completely lose the right to do so.
  • The challenge is raised by filing a “complaint” in the bankruptcy court by that deadline, stating the facts and law under which the debt should not be discharged. This begins an “adversary proceeding” which focuses on that one question.

In the unusual event that such a challenge is raised in your case, here are a couple more important things to realize about it.

Don’t Lose by Default

After a creditor does file a complaint trying to show that its debt shouldn’t be discharged, the single most important thing to realize is that it will automatically win if you and your attorney do not deal with it by the provided deadline. You do so by filing a formal answer at the court within that deadline or by getting back to the creditor to resolve the dispute. So if you get a complaint in the mail during your bankruptcy case, get in touch with your attorney right away. Sometimes you may be expecting it because of your prior discussions with your attorney.  Other times it’ll come unexpectedly. Either way, contact your attorney right away to work out your action plan.

Even if a Challenge is Raised, It Will Very Seldom Go to Trial

Adversary proceedings can go through all the steps of a conventional lawsuit. After your attorney files  an “answer”—a formal response to the allegation in the complain—there can be “discovery”—the process of exchanging relevant information and documents between the two sides, and possibly having one or more depositions, the questioning of witnesses under oath, which would usually focus on you and your alleged behavior in incurring the debt, since that is what usually determines whether debt can be written off or not. And there could be various kinds of motions, pre-trial hearings, and a full trial.

But for a very simple reason adversary proceedings rarely go through all these step and get to trial—the amount of money at issue usually does not justify the cost involved for either side to push the process that far.  So usually as soon as the two sides get a clearer picture of the facts—often involving nothing more than a few emails and letters between the two attorneys—there is usually a settlement. Often one side or the other sees that the facts are not as  good as it hoped and so that side sees that it needs to settle. The debtor may concede that his or her actions fit the legal standards to prevent the debt from being discharged. Or the creditor sees that it’s wasting its time and will dismiss the adversary proceeding. Most of the time there’s some give and take resulting in a sensible compromise and settlement.

In very rare cases, where there is either enough money at stake, or else one or both sides are unreasonable and insist on getting a decision from the judge (there is no jury), the dispute can go to trial. If so such trials usually last a half-day or a day, very seldom longer. At the end of trial the bankruptcy judge decides whether the debt is discharged or not.

It is Still a Relatively Quick Procedure

Because dealing with a creditor’s challenge can get expensive quickly, you hope to avoid getting one. But it may help to recognize that the bankruptcy court is a relatively fast and efficient forum for dealing with these because:

1) If a creditor does raise a challenge, the issues are narrow and so the fight is usually focused on just a few critical facts. Less facts in dispute makes for a more streamlined process.

2) Adversary proceedings move along fairly quickly. Compared to most state court and regular federal court litigation which often takes a couple of years, these kinds of adversary proceedings are often resolved in a matter of a few weeks, or very seldom more than a few months.

3) Bankruptcy judges deal with these kinds of challenges all the time, so they are extremely familiar with them. Compared to conventional trial courts where the judges often deal with complicated facts and a wide range of legal issues, adversary proceedings are quite straightforward.

Having a creditor object to the discharge of a debt can significantly complicate a Chapter 7 or Chapter 13 bankruptcy case. But these disputes are usually settled relatively quickly. You can help this happen by telling your attorney in advance about any threats to challenge your discharge told to you by any creditors. And then if a complaint is filed, work closely with your attorney to resolve it as quickly as possible.

 

Debts Whose Write-off Can Be Challenged in Bankruptcy

Occasionally the bankruptcy court may need to decide whether you can discharge a debt which the creditor doesn’t want to be discharged.

 

One of the realities about filing a consumer bankruptcy case is that while many or even most cases are straightforward, a case can be more challenging if there is an aggressive creditor who challenges the write-off (“discharge”) of its debt. Most cases have no creditors raising such challenges. That’s because most creditors accept your bankruptcy filing as a normal part of their business. But sometimes creditors take it personally and/or believe that they have legal grounds to prevent their debt from being discharged.

This blog post and the next one are about what happens when a creditor raises such a discharge challenge. The topic here is not about debts which will clearly not be discharged because they fit certain special criteria, like recent income taxes or court ordered child or spousal support obligations.  Instead this is about debts that would normally be discharged unless the creditor can prove that the debt arose out of some bad behavior by you, usually involving some sort of fraud, theft, or similar behavior.

These Debts are Discharged Unless the Creditors Objects

Before you file bankruptcy, a creditor’s representative or collection agent may tell you that the debt can’t be discharged in bankruptcy, or that they will challenge you if you file bankruptcy. Most of the time they’re just playing games, a part of their attempt to persuade you to pay them. It is important to tell your attorney about any threat like this so that he or she can determine whether the threat has any legal basis. If it was an empty threat, that will help you not worry unnecessarily about it. And if the threat does have a possible legal basis, your attorney will be better prepared for the creditor’s challenge if it does in fact come.

It’s important to realize that even if a challenge has possible legal merit, the creditor may not pursue it for practical reasons. Creditors have good reason to hesitate putting out more money—in filing fees and attorney fees—to try to have the debt not be discharged, only to lose that battle. The law has a “presumption” that your debts will be discharged, so the burden is on the creditor to show that a debt should not be.

Creditors Have a Strict Deadline to Raise Such Challenges

And creditors have a very limited timeframe to make this challenge. As long as you appropriately listed the creditor in the bankruptcy documents, any creditor that has any objection to the discharge of its debt must formally file an objection with the bankruptcy court or forever lose its ability to do so. It must do so within 60 days of your meeting with the bankruptcy trustee; since that usually happens about a month after your case is filed, within about 3 months after filing you will know if there will be any such challenges.

The “Adversary Proceeding”

Sometimes the creditor contacts your attorney in advance about an intended challenge, usually because it’s hoping to settle the matter by getting you to agree to pay part or all of the debt.

But much of the time the creditor simply files a formal complaint at the bankruptcy court. This begins what is in effect a highly focused lawsuit, called an adversary proceeding. Its only purpose is to determine whether the creditor can prove the facts that the law requires to be proven for the debt to be excluded from discharge.

To be clear, the issue is usually NOT whether you owe the debt in the first place—it’s usually assumed that you do owe the debt. Rather the issue would be whether, for example, you incurred the debt by falsifying a credit application, or by coercing a relative to change their will on your behalf… fraudulent behavior of this sort.

 

There will be more in the next blog in a week about what happens in these adversary proceedings.