Chapter 7: Step by Step Procedures
This outline attempts to set forth a step by step procedural road map toward a successful chapter 7 filing. Below, we attempt to give you some understanding of the essential steps we take in determining if a Chapter 7 is right for you. We have outlined these steps as follows:
- We determine if bankruptcy is the appropriate solution
- We determine if you can satisfy the means test
- We determine your asset exposure
- We look for “closet skeletons”
- We complete the petition and schedules and B22 form
- We file the case
- We prepare you for the 341 meeting
- We take you to ” the end zone”
- We conclude the case and get you on with your life
Let’s look at each of these steps:
Determining if bankruptcy is the appropriate solution
You may be an individual who has minimal debt and no exposure. Perhaps you are being harassed by only 1 or 2 creditors. Your assets may be judgment proof. Perhaps you are elderly and your credit standing is no longer of concern. Any number of factors such as these might suggest to us that the filing of a bankruptcy is effectively “overkill”. It might be that debtors such as these are better accommodated by counseling them on their rights under federal and state collection laws. These laws can include techniques for terminating or minimizing creditor collection calls and other harassing activities. While such techniques are beyond the scope of this outline, it is our ethical responsibility to avoid recommending bankruptcy as a remedy when less drastic measures might better serve you.
Assuming we have determined that it bankruptcy is an appropriate option for you, the threshold question becomes whether you are eligible to file from a jurisdictional point of view. The Bankruptcy Code defines who may be a debtor. It makes clear that a debtor must have resided in the jurisdiction in which he is choosing to file bankruptcy for the better part of the prior 180 days and must be resident in that jurisdiction on the date of filing.
Determining if you satisfy the “means test”
Before October of 2005, you were eligible for Chapter 7 if you lived in America and had a pulse. The Bankruptcy Reform act, or “BAPCPA”, introduced the concept of “means test eligibility”. The complicated road map for means test eligibility requires that we first determine “net disposable income” to compare it to the applicable household income threshold. Net disposable income is calculated by determining the debtor’s annual income minus his expenses. While that may sound simple, there is, of course, a complicated twist. Under the eligibility analysis, a debtor’s annual income is calculated using the average monthly gross income for the debtor for the six months ending on the last day of the month preceding the date of filing. Annual income is deemed to be the that number multiplied by 12. Thus, debtors with seasonal variances in income might be deemed to have higher income based on the timing of their filing!
As an example, presume a debtor in a family of three, and that his average monthly gross income for the prior six months was $5500, but his average gross income for the six months before that was only $4500. The means test eligibility cut off for a family of three in Florida on the date of this outline is $60,162 While it would appear that our debtors annual income was only about $60,000, the annualized analysis would attribute to him income of approximately $66000 (12 times $5500). Thus, at first glance, it would appear that our debtor is ineligible for chapter 7.
All is not lost, however, because we still have to deduct the debtors allowed expenses from the annualized income in order to get to the debtors net disposable income, or NDI, which is the figure that actually establishes eligibility.
In determining NDI, a debtor does not necessarily get to take advantage of all of her living expenses as deductions. The Bankruptcy Code defines a debtor’s allowed expenses (I. E. deductions) as median expenses defined under Internal Revenue Service collection standards or National Census Bureau statistics, with these standards varying by geographic region. These expenses tend to be archaic and unrealistic. For example, the allowed housing expense for a family of three living in Palm Beach County is $1,666!
For the purposes of our example let’s presume that after subtracting the allowed expenses from the debtors annualized income, the debtor falls below the means test eligibility threshold. This suggests that the debtor qualifies for chapter 7. If the debtor falls above the threshold, however, the debtor can still file chapter 7 but the case is considered to be a presumed “abuse” of the bankruptcy system. This, of course, opens up the proverbial “can of worms” as the debtor is likely to be subjected to proceedings designed to throw him out of the bankruptcy system.
There are other considerations related to chapter 7 eligibility. For example, if more than 51% of the debtors’ total debt obligations arose from the failure of the business, the means test eligibility standards do not apply (i.e. The eligibility analysis only applies to debtors with “consumer” debt).
Another important consideration is the prospect that even the “below the threshold” debtor who seemingly qualifies for chapter 7 might have his case challenged as an abuse. Why might this be? Remember that the debtor gets to take advantage of certain expense limits that are defined by the Bankruptcy Code. If the debtors’ actual expenditures are less than the limits, it may be that the debtors actual net cash flow each month is positive. Debtors who are showing any ability to pay any amounts to their creditors may be subjected to an abuse challenge under certain circumstances.
Determining your asset exposure
It is irresponsible for your lawyer to recommend a chapter 7 bankruptcy if he or she does have absolute clarity as to the nature of your assets and a thorough understanding of the potential exposure of those assets to liquidation by the Bankruptcy Court.
The starting point for such analysis is the Bankruptcy Code. The code enumerates the types of assets that are “property of the estate”. In simplistic terms, property of the estate encompasses all legal or equitable interests of you that exist upon the date of filing, of every nature whatsoever. The few exceptions to these interests might include interests in which the debtor holds merely a bare legal title without any true ownership attributes, or property which the debtor acquires after the date of filing the case (and with respect to which the debtor had no entitlement before the filing). An example of the latter is the debtor’s post-petition wages.
Once you have determined all of the debtors interests that will have to be disclosed as property of the estate, you must next turn to an analysis of the debtor’s exemptions.
Determining the applicable exemptions
A chapter 7 debtor will emerge from the case with only his exempt assets, or his nonexempt assets which he has redeemed…i.e. bought back….from the estate. It is therefore imperative that you have a clear understanding on what you stand to retain, and what you will lose through the bankruptcy filing.
The statutory framework that determines the exemptions to which a debtor is entitled is, at the threshold level, governed by the debtors “longevity” in the jurisdiction in which you are filing the case.
The Bankruptcy Code that dictates the exemptions that will be available to you. For example, for a debtor to take advantage of the exemptions available to residents of his state, the debtor must have resided in the state for the better part of the last 730 days. Thus a debtor who has lived in a particular jurisdiction for less than two years cannot take advantage of the exemptions that would apply to that jurisdiction, and must instead utilize the exemptions in the State where he spent the better part of the 180 days preceding the 730 days. This would seem to present an interesting dilemma. Most state’s exemption laws afford the benefit of those laws only to residents of that state. Debtors filing inside the 730 days therefore may find themselves unable to take advantage of any exemptions!
A comprehensive discussion of exemptions is beyond the scope of this assignment, and a filing should not be undertaken without a thorough understanding of these concepts. At minimum, however, it is essential to understand issues surrounding the declaration of a homestead exemption.
Understanding the debtor’s homestead status
The basic concept is this: a debtor’s homestead exemption is limited to $125,000 if he has not owned the home for at least 1215 days prior to the bankruptcy filing. Of course, there are exceptions. If the equity above $125,000 was transferred from another Florida residence acquired before the 1215 days, the debtor did not need to own his current residence for 1215 days.
Nor can any debtor claim in exemption in his residence that exceeds $125,000 (no matter how long has lived in it) if he has:
• Any debt related to a violation of federal or state securities laws
• Any debt related to fraud, deceit or manipulation in a fiduciary capacity
• Any debt related to a civil Civil Rights violation debt
• Any debt related to any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual within the last five years
….Unless such a debtor can show that the excess value above $125,000 is reasonably necessary
for the support of the debtor and any dependent of the debtor
There are several unanswered questions that are likely to be determined as the code is deciphered. For example: in a joint filing, do the husband and wife of both get a $125,000 exemption such that the total exempt value is $250,000? What about the debtor whose equity appreciation during the pendency of the case brings him above the $125,000 limit? These and other questions will be resolved over time.
Finding the “closet skeletons”
One of the common mistakes made by novice bankruptcy lawyers is the failure to gain some historical perspective on the client’s financial life. Actions taken by debtors in the months and years leading up to a bankruptcy filing can have a monumental impact on the outcome of the case.
No case should be filed without first understanding whether the debtor has made any “preferential payments”. These are defined as payments to family members, business partners, or other parties whom the code defines as “insiders” . Such transfers are subject to recovery by the bankruptcy trustee. As such, an untimely bankruptcy filing can have serious implications for parties other than you.
Furthermore, the failure to disclose these preferences, as well as any number of other prepetition financial issues, can jeopardize your discharge.
The bankruptcy laws render some types of obligations ” non-dischargeable”. No lawyer should undertake the representation of a debtor in an individual bankruptcy proceeding without becoming familiar with these laws. The following basic questions that should be considered in the context of an individual bankruptcy proceeding:
• Did the debtor incur a debt through false pretenses, false representations or actual fraud?
• Did the debtor incur a debt through the use of a statement that was materially false regarding the debtor’s financial condition
• Did the debtor commit embezzlement, larceny, or a fraud or defalcation while acting in a fiduciary capacity?
• Is there any debt related to a domestic support obligation?
• Did the debtor inflict a willful or malicious injury?
• Did the debtor commit a violation of State or Federal securities laws?
• Did the debtor conceal, transfer or remove any property within a year of the date of filing of the petition, or after the filing?
• Did the debtor conceal, destroy, falsify, or fail to keep or preserve books and records from which to determine the debtor’s financial condition?
• Did the debtor lie on his bankruptcy schedules?
• Has the debtor failed to explain any loss of assets?
• Has the debtor received a discharge under another bankruptcy proceeding within eight years before the filing of the current case?
• Creditors may pursue the denial of a debtor’s discharge or may challenge the dischargeability of a particular debt through the use of an adversary proceeding. Adversary proceedings are governed by Bankruptcy Rules 7001 et seq.
Complete the petition and schedules and B22 form
The following documents are necessary to successfully commence a chapter 7 filing:
• Bankruptcy petition
• Bankruptcy schedules
• B22 form
• Declaration of perjury
• Certificate of completion of credit counseling course
• Current Tax returns
File the case
If your lawyer is attempting to file a bankruptcy case in the 11th Circuit, he or she must do so by electronic filing. To do this, the lawyer must have been certified as an electronic filer in the particular federal district in which you are choosing to file.
Once a case has been filed, the order for relief is immediately entered, a panel trustee is assigned to the case, a case number issued, and the automatic stay goes into effect.
Within a few days, the court will promulgate a notice of commencement. It sets forth most of the significant information regarding the case, including discharge and exemption objection deadlines, as well as the date that you will be required to appear before the bankruptcy trustee….an event known as a “341 meeting”.
No later than seven days prior to the 341 meeting the debtor must file his individual 1040 tax returns for the prior two tax years. The Bankruptcy Code seems to suggest that the failure to do this must result in the dismissal of the case. It is important to note that federal privacy laws require that the debtors Social Security Number be deleted from the tax returns before filing the copies with the court.
Make sure that you attend the 341 meeting on time and that you have reviewed the “Statement of information of the United States Trustee”, a copy of which your lawyer should provide in advance. It is prudent for your lawyer to counsel you as to the likely topics of inquiry and to give you a sense of comfort in what is likely to be you a highly stressful event.
Heading to the end zone
Following the 341 meeting, the lawyer should make arrangements for you to take the requisite financial education course. This must be completed within 45 days of the 341 meeting, and the certificate of completion filed with the court.
It is possible that you will be required to attend a bankruptcy deposition, known as a “2004 examination” – – referencing bankruptcy rule 2004. As with any deposition, it is your lawyer’s duty to anticipate the areas that will be the subject of inquiry and to properly school you.
The trustee may be requiring you to turn over nonexempt assets or maybe expecting you to provide additional documentation regarding you’s financial affairs. You may also be required to engage in dialogue with the trustee regarding the payment for or “redemption” of any nonexempt assets (or asset value) that you wishes to retain. The failure to completely and diligently cooperate with the bankruptcy trustee is one of the surest ways to jeopardize your discharge.
Concluding the Case
You may be asked by one or more creditors to sign a reaffirmation agreement. The wisdom in signing these is suspect but in some circumstances may be your only option to preserve your interest in secured collateral. The statutory requirements for a proper reaffirmation agreement are extensive and complicated and are set forth in section 544.
At some point subsequent to the discharge objection deadline, you (in the absence of an objection) will receive a final discharge in the mail. It is important that it is explained to you that the receipt of a discharge does not signify the closing of your case. The case is not closed until the trustee has fully administered all assets. A discharge would not, therefore, preclude a trustee from continuing to pursue you or others for the recovery of estate property.
Please call us to discuss these or any other matters.