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Bankruptcy Facts

The date the bankruptcy petition (“Petition”) is filed is called the Petition Date which is important for various reasons. When you file your Petition you are required to file a statement of financial affairs (SOFA) and schedules of all your assets and all your liabilities.  You must list all your creditors and all your assets, you cannot pick and chose who you file bankruptcy against.  All disclosure materials you file in connection with your bankruptcy case are under oath and therefore must be consistent with any other statements you have made under oath such as in tax returns or in testimony at arbitrations or trials.  If you make any false statement or misrepresentation in connection with your case, ie you fail to list a creditor or any property like a car, boat or shares of stock in the company, a creditor or the bankruptcy trustee can file an objection to your discharge so that you don’t get a discharge of any of your debts.  An objection to your discharge as a whole is different from a creditor objecting to the dischargeability of that particular creditor’s debt only.  This difference is discussed further below.

When your case is filed a chapter 7 case, a Trustee is appointed to administer the bankruptcy estate.   At the time of filing, the Petition date, all of your debts and all of your non-exempt property go into the bankruptcy estate.  You have certain exemptions under state law that you can apply to certain of your property so it does not go into the bankruptcy estate.  We will discuss how to apply the available exemptions to your property so the Trustee won’t try to sell it.   The Trustee, or any creditors, have 30 days after the meeting of creditors in your bankruptcy case to file objections to your exemptions. The Trustee’s job is to sell your non-exempt property making a pool of money which he can distribute to your creditors according to the priorities set forth in the Bankruptcy Code.  The Trustee and his attorneys and accountants get paid first, secured creditors get paid from the liquidation of their collateral, certain taxes and domestic support obligations have a high priority and general unsecured creditors get paid last.  After the trustee has liquidated all your non-exempt property he will investigate whether to file suit against you or any 3rd parties to recover more money for the benefit of the creditors of the estate.

The Trustee can sue to recover Preferences from any creditor who generally received more than $1000 in payments during the 90 days prior to filing the Petition subject to many defenses.  The 90 day “look back” period is extended to 1 year as to insiders of a corporate debtor, or relatives of an individual debtor.  Therefore it is important to review your records to see if you have repaid any debts to creditors in the ninety days before you file your Petition or if you have repaid any debts to relatives in the year prior to filing the Petition.  If so, you may not want to file, or delay filing your Petition thereby preventing the Trustee from suing your creditors or relatives.

The Trustee, or creditors, may also sue to recover Fraudulent Transfers (“FTS”)  FTS occur when you transfer any money or property to a third party and you receive back from that person or entity less than fair equivalent value for what you transferred.  The classic example is the husband transfers his house to his wife without receiving the fair market value from her in return.  The husband’s bankruptcy trustee, or a creditor outside bankruptcy, could sue the wife for a FTS and recover the value of the house.  Also transfers of money or property with the “actual intent to hinder, delay or defraud creditors” can be attached as FTS and the value of the money or property transferred can be recovered by the initial transferee and even subsequent transferees.

Since we know that the Trustee may file FTS claims and creditors may file claims objecting to the dischargeability of debts or your discharge as a whole, it is important that you understand the procedure.  A chapter 7 trustee or creditors could file an Adversary Proceeding in the bankruptcy court asserting FTS or objections to discharge/dischargeability.  An adversary proceeding is a separate lawsuit inside the bankruptcy case.  The Trustee or creditors file a Complaint and you must file an Answer or other responsive pleading and then conduct discovery which usually last 3 months.  After discovery is complete, the Bankruptcy Judge conducts a trial and determines the validity of any FTS or dischargeability claim asserted..  Depending upon the claims asserted, an adversary proceeding could be removed for trial by jury in the federal District Court.

Once the Trustee has pursued all preferences, FTS and other avoidance actions (the Trustee can also file turnover actions against 3rd parties to force them to turnover property that the Trustee feels belongs to the estate) he will make distributions to creditors and close the case providing there are no objections to the dischargeability of any of your debts nor any objections to your discharge as a whole, so you don’t get a discharge of any debts.  First it is important that you know the definition of getting a discharge.  A discharge doesn’t magically make all your debts disappear, a discharge acts as an injunction against the collection of discharged debts.  If a creditor attempts to collect a discharged debt the remedy is for breach of the discharge injunction.

Some debts are not dischargeable.  Income taxes generally older than 3 years, property taxes older than 1 year, withholding taxes, domestic support obligations, any damages arising out of a willful and malicious injury like a drunk driving accident, any debt arising out of false statements on a credit application or personal financial statement, and debts arising out of fraud, defalcation and embezzlement are non-dischargeable.  These are objections to the dischargeability of specific debts. (Objection to Dischargeability of Debt)  The Trustee, or creditors, can also file an objection to your discharge as a whole so you don’t get a discharge from any of your debts. (Objection to Discharge)

The grounds for an Objection to Discharge are generally (1) making any false statement or misrepresentation in connection with your bankruptcy case.  We must be very careful that all of the information contained in your bankruptcy disclosure documents is full, complete and accurate.  The income for various years must match the information on sworn tax returns.  You must list all your assets and all your liabilities.  The Trustee may search any or all State Public Records to see if you have failed to disclose ownership of cars, boats, stock in corporations, or failed to list all companies that you have been an officer, director or 5% shareholder in during the past 6 years.  When we list the amount of money in bank accounts we must make sure that the amounts listed match account statements as of the Petition Date; (2) trying to conceal, hide or secret any property from the Trustee;  (3) transferred any property within 1 year of the Petition Date with the intent to hinder, delay or defraud creditors, (4) concealed, lost, destroyed, or misplaced any financial records.  This is a big one.  If the Trustee asks you for any financial records do not say anything except (“I WILL GET THOSE FOR YOU”) whatever they ask for we will find it or reconstruct it.

After filing your bankruptcy Petition you will be required to attend a Section 341 meeting of creditors at the federal courthouse in your District.  You must bring a picture ID and your social security card, or some evidence of your social security number, to give to the Trustee for identity theft purposes.  I will attend the creditor’s meeting with you and assist in answering any questions asked by the Trustee or creditors.  The Trustee or creditors can ask any questions concerning any of your assets or liabilities.  Your testimony is under oath and should match any other sworn statements you have made including those in your Petition and SOFA.  The Trustee and creditors have 60 days after the 341 meeting of creditors to file a Complaint Objection to Discharge and/or an Objection to the Dischargeability of a Debt which as we have discussed commences an Adversary Proceeding.

In the Bankruptcy Court any creditor or the Trustee can seek to have you produce any documents which relate in any way to your assets or liabilities.  In addition, any creditor or the trustee can take your deposition, or Rule 2004 Examination, and ask you any questions about any assets or liabilities.  The scope of 2004 Examinations is very broad.

Under the Bankruptcy Reform Act of 2005, you are required to take a credit counseling course before you file an individual bankruptcy case, and a financial management course after the Petition is filed.  If you fail to file a certificate of completion of the financial management within 45 days following the Section 341 meeting of creditors, the Court will not issue you a discharge.