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Sunday, December 20, 2009

Initial contact with attorney before bankruptcy filing

The number of times you meet with your attorney or his/her staff with vary a great deal depending on the practices of that particular office and how they run their calendar. We try to get it all finished up in 1 clients most often will download our document package for prospective clients from our website. Amongst other things the "meat" of it is a client worksheet, a budget to fill out and a document checklist so they know what to bring in for paperwork. However...some folks might just have one or two burning issues they need answered first so I have two ways that I do consults. If someone has just a few questions before they want to invest all the time in the work it takes to put all the information for a good thorough case analysis together...then we talk over the phone or they come into the office for 20 - 30 minutes. At that point if they determine it may make good sense for them to file we do a follow up consult. That consult is the same as the one that we do if someone from the get-go knows that they want to seriously pursue a bankruptcy filing. They fill out all the forms, gather the documents we've indicated we need and then come in for a thorough case analysis. I block them for two hours...sometimes they go longer if it a complicated chapter 13 or a business related case. Usually that is enough face time to go through it (or we often do it over the telephone if that is more convenient for our clients..either way works) all as long as my clients provide me the info. Then the need to meet again is fairly minimal. At the conclusion of the meeting we give them a "homework sheet" for whatever they may have forgotten to bring or if it appears we need more documentation. Then it's a matter of putting the draft together and emailing it to them for review. We also go over what to expect at the hearing at that time. However, during the interval between the time the case is filed and the hearing is held they get reminders on what to expect there both by email and telephonically by one of my staff the day prior to the hearing. That would be the typical track for clients and their main contact with the office. Of course, if there are other questions or concerns that crop up clients are free to call, send us inquiries via email and quite often they stop by with no need to schedule an appointment if it is just a quick question. That is the model we've come up with...the internet has made it significantly easier to communicate with clients and most of my folks have internet access.

Initial process or contact with your attorney's office for filing bankruptcy

Saturday, December 19, 2009

Contact with your bankruptcy attorney and staff

I follow a yahoo group where people filing bankruptcy post their comments. One such person recommend to another that they should rely on the attorneys secretary or receptionist. She has discovered that there is a reason we have a paid staff...we simply can't attend to every administrative detail of a bankruptcy case. Rely on staff for administrative questions should get directed to the attorney. Most attorneys are doing consults and attending hearings as well as other client matters during the day. My staff screens my calls pretty heavily and they get admonished when they get someone back to me who insists on "speaking with the attorney" and it turns out they want to know where parking is around the courthouse...that pretty much tears it for me. clients pay me a fee..but that doesn't mean 100% access all the time for every conceivable thing that comes up or every question they may have. My legal assistants are knowledgeable and experienced...more experienced than most of these "Johnny come lately" attorneys who just recently decided they should become bankruptcy attorneys since the economy is bad and they have a license to practice law. My 2 cents on that.

Tuesday, December 15, 2009

Preparation for creditor's meetings

When my staff or myself does a consult and case analysis we are very thorough and if my clients disclose to us everything then there shouldn't be anything unfamiliar or surprising at the hearing. Other than spending a few minutes discussing the general tenor of the hearing and some the the typical questions that are asked...and when I'm done going through that I say..."sounds familiar right...that's all the stuff we just went through"--my clients always say "yes..sounds familiar"--shouldn't be any surprises at the hearing. If there is that means I wasn't thorough...which doesn't happen or that my clients held something back...which has been known to happen on occasion and it isn't ever a good thing. All that being said...most chapter 7 341 hearings in consumer cases generally last a few minutes. Trustees and creditors are primarily interested in the nature, location and disposition of assets and trustee are especially interested in whether any assets are properly exempted or if there were any transfers/payments to friends or insiders that they can avoid. I generally have my clients show up a few minutes early so they can sit in on a hearing and they get a sense of what kinds of questions the trustee will ask. There are some stylistic differences between one here locally always is focusing on jewelry...she even has a jeweler's loupe to check the quality of diamonds (most trustees won't bother with that) as that's her thing.

Monday, December 7, 2009

Contingent remainder interests in bankruptcy Chapter 7 or chapter 13

I had a meeting this morning with a couple that needed to file bankruptcy. They are upside down on their home loan, tons of credit card debt, medical bills, significant tax liabilities for the past 3 years, recent loss of income, etc. At issue is that the wife has either a remainder interest in her parent's homestead (they quitclaim deeded the property to her but reserving a life estate), or she is a tenant in common/joint tenant on the property with them....they weren't certain.

In either situation that interest in real property becomes part of the bankruptcy estate. Since there is a significant amount of equity in the property in question in this instance there is a large amount of the equity that is not exempt and in chapter 7 the trustee would attempt to sell the interest....or would just keep the bankruptcy estate open until the property sold. Not likely the trustee would attempt a partition of the property and a forced sale for homesteaded residential property.

In a chapter 13 case the issues are different and the focus is on the payout to the unsecured creditors. In order for a plan to meet muster and be confirmed by the court the debtors must meet the standards of what is known as the "Best Interest of the Creditors Test". This basically means that over the course of however many months the plan term is set for that the distribution to the unsecured creditors must equal or exceed the amount of money that they would have gotten had the debtors filed a chapter 7 case and the assets that are not exempt were liquidated and the proceeds paid on their claims. When doing this analysis there are no deductions for cost of sale, etc. So in a hypothetical situation where there is $70,000.00 in non-exempt assets (as there potentially was in the scenario presented in my office today) that means that the unsecured creditors must receive at least that much over the course of the plan. Typical maximum length 60 month plan...figure in some attorney fees, the trustee's administrative fee (currently 9.4% in MN) plus the debtor's had some taxes to pay (about $35K) that meant for them a plan payment of about $2,000.00 per month. Not a typical payment in a "normal" chapter 13 case. However...there is no "normal"...all chapter 13 cases and plans are tailored to the debtor's individual circumstances. This scenario is a prime example where the payment is what I call "reverse engineered". In other words it isn't a simple equation of what they make, what their reasonable and necessary living expenses are and what is left over is the "disposable income" available to fund a plan payment. In this situation the plan has to do certain things and as in many similiar circumstances the budget (within reasonable parameters and never involving "sum certain" types of expense or income) is manipulated to arrive at the result required in order to get the plan my clients need to get the relief they need.

Friday, December 4, 2009

Personal bankruptcy Chapter 7 and small business debt

In the course of handling many personal bankruptcy cases for small business owners over the years I've often run across clients who misunderstand the dynamic between their debt, their business's debt and how the two are treated in a personal bankruptcy case.

In most instances the great majority of small business owners have personal liability for their business debt. The majority of lenders want someone on the hook especially in small business situations as most small companies or small business enterprises are under capitalized. The lender will take personal guarantees in order to minimize the risk.

In a personal chapter 7 bankruptcy case any business debt that the debtor is personably liable for is discharged or wiped out in the personal bankruptcy case. This is in regard to any unsecured debt. Any debts that are collateralized are, of course, subject to the terms of the security agreement as those debts are not discharged in bankruptcy cases. While a debtor's personal liability is discharged the business entity itself is still liable for the business debt whether the business is a sole proprietorship, a corporation, an LLC, a partnership...whatever. Some have assumed that once they did a personal business case that the debt was discharged in it's entirety as to both them personally and to the business entity itself. Not so. One cannot file a bankruptcy case and absolve anyone or anything else of it's liabilities. In order for the business enterprise to shed it's debt the business must file bankruptcy as well. There are a couple of schools of thought on whether that makes any sense.

Some would say that if it is a business that is no longer functioning and has no assets to speak of...why bother? Let the creditors pursue a defunct business all it wants. They will still come up empty. Others would say it makes sense to file a bankruptcy for the defunct business for a couple of reasons. In Minnesota, the state that I practice in, there is a statutory framework for dissolving a corporation I think it expensive and cumbersome. I am assuming other states also have a similar statutory process for that as well. In my estimation a bankruptcy filing does everything we need to do in order to close it up and settle the creditor claims quicker, easier and cheaper. Second, although the business may not have any assets and it would be fruitless for creditors to pursue the business there is always the problem of who the creditors are going to be hassling while they and their lawyers are going through what they think they need to do in order to do what they think will help them in the collection process. The business owner is usually the registered agent for the business. That person is the person who is going to get the dunning letters, the collection calls, etc. He or she is also going to be the one being served the summons and complaints to initiate a lawsuit and will be the one who is tapped on the shoulder when the creditor is engaging in discovery to determine whether there are assets that they can execute on in order to satisfy their claims...which means attending depositions, answering interrogatories, etc. None of which is very comforting or a good use of time.

Most of my clients choose to file both personal and business bankruptcy cases. They do so in order to put all of the stress and troubles related to the business debt issues behind them. A bankruptcy filing for a failed business is a relatively seamless and orderly way to put all creditors on notice that there are no assets as all the business's assets (if any remain) are scheduled on the paperwork filed with the bankruptcy court for all to see. If the creditors have claims they file those with the bankruptcy court and will take part in the distribution of any remaining assets (again...if there are any) under the supervision of the interim trustee appointed by the United States Trustee's Office to adminster the case. It is a nice, clean and tidy way to clear up the debt and take care of any remaining creditor issues. Generally speaking it is a matter of money. Those that can afford to file both cases generally will do so. In my opinion it is a good expenditure....lots of bang for the buck considering the peace of mind that it will bring.

Tuesday, December 1, 2009

Student Loans in Chapter 7 bankruptcy

Most people are aware that student loans are no longer dischargeable in chapter 7 bankruptcy case. The old rule prior to 1998 had been that if they were at least 7 years old from the date they were first due in repayment that they could be wiped out. That changed and with limited exception they can no longer be discharged. The exception to the rule against those debts being discharged is found in 11 USC 523(a)(8). In the Eight Circuit the court applies a "totality of the circumstances" test do determine if an individual meets the requisite "undue hardship" entitling him to a discharge of the student loan debt.

The court is fairly strident in not allowing student loans to be discharged and I've always told my clients that if you can work don't get your hopes up for an undue hardship as it isn't going to matter what size your student loan debts may be. Case in point is the recent case Eud. Credit Mgmt. Corp. v. Jesperson, 571 F.3r 775 (8th Cir. 2009) wherein the court denied a discharge under the applicable "undue hardship" standard where the debtor had accumulated student loan debt of over $304,000.00. Quite a hardship in any one's book I'd say to even contemplate paying back a student loan debt of that size. However, the debtor was in good health and able to earn an income as a licensed attorney. The primary focus of the court's opinion was the "ICRP", the income contingent repayment plan that is authorized by Congress under the William D. Ford Direct Loan Program that provides that if the borrower has not repaid the loan in full under that plan at the end of twenty-five years the unpaid portion of the loan would be cancelled. The court held that if the debtor's budget allowed him to make payments under that plan whilst still being able to maintain a minimum standard of living that the debtor's student loans would not be discharged under the prevailing statute and the totality of the circumstances test when applied to his particular circumstance. The lower court had taken the same issues into consideration and had found differently, stating that the debtor would be, in effect, be sentenced to 25 years in a debtors' prison without walls. The higher court overturned the lower court decision also citing the facts that the debtor's budget had underestimated his income and overestimating his reasonable and necessary living expenses concluding that there would be a surplus of at least $900 a month available to pay on his debt. The court of appeals also disagreed with the lower court where it had found that it was unlikely that the debtor's rate of pay would increase in the future. Taken altogether it appeared to the judges on the court of appeals that this was not a case that lent itself well to discharge of the student loan debts the sheer magnitude of the size of the debt notwithstanding and not enough to tip the balance in the debtor's favor in this particular case.

This case taken in isolation is, of course, rather extreme in it's facts...not many have that huge a load of student debt. However, it has set a precedent and anyone attempting to argue that their loans should be discharged simply due to their sheer size will need to have other mitigating circumstances to prove the meet the requsites for the standard of "undue hardship". Job loss, disability, advanced age, other physical or mental incapacity, etc. are the situations that lend themselves best to bolster the argument.

Monday, November 30, 2009

Preferential payments and papertrails in chapter 7

In chapter 7 bankruptcy cases the trustee assigned the case lives for finding preferential payments paid to creditors on antecendent (old) debt; especially if they are payments to friends or family members or even debts that the debtor paid for someone else on their behalf. Also they search for transfers to other parties of any asset for which the debtor received less than fair consideration or value (such as selling your car to your brother for a dollar). The reason they are so into this is because while he or she is recovering the funds for the benefit of the bankruptcy estate and ultimately for a distribution of a dividend to any of the bankrupt's creditors the trustee is entitled to keep 25% of whatever they recover plus any costs, fees or disbursements.

I had a hearing in front of a trustee this morning where my client had a somewhat unusual situation. Prior to filing his bankruptcy case he sold his house. At the closing the buyers mentioned some minor hail/storm damage to the property. One of the parties also had some experience in insurance matters. He suggested that my client put in a claim for the damage...which he agreed to do. He also agreed to pay any funds that the insurance company might disburse on the claim to the new buyers when the funds came in. The claim was paid and the debtor--my client--remitted the funds to the buyers. The funds actually came in about 6 months after the property was sold due to delays in processing the claim. The trustee asserts this is a preferential and avoidable payment or a transfer for less than fair consideration just prior to the bankruptcy filing.

As the debtor's attorney in this matter I do not represent the creditor or person that the funds were transferred to by my client and could not due to a potential conflict of interest. However, there are arguments that the creditor may voice to contest the trustee's claim that it was an avoidable preferential payment under the bankruptcy code.

The argument if that this payment was part and parcel of the agreement and was paid in the ordinary course of business once the funds were actually paid to my client by the insurance company on the claim. That, I would believe defeat the trustee's threatened action to avoid the transaction. However, it appears that the whole arrangement was something that came up spur of the moment at the time of the closing and it was not memorialized in writing. Therefore, at this point all that is apparent and that can be documented is that the debtor paid out a check in excess of $6,000.00 to someone who may or may not have been a creditor or, alternatively, was given something for nothing. The transfer for less than fair consideration is a bit of a problem if the tranferee would ultimately be considered not to be a creditor. However all that could or will pan out the point is that my assessment would lead me to the conclusion that any claim the trustee may have on those funds could have been avoided if the reason for the payment had been memorialized in writing at the time of closing rather than just a verbal agreement. My client today thought that he would go back and write something up. No can do. Can't create an agreement after the fact. Perhaps an affidavit to show the intentions of the parties would help. Most likely the trustee will make the demand and the parties will settle the matter rather than litigate considering the lack of a writing showing what the terms of the agreement were at the time it was made.

Sunday, November 29, 2009

Minnesota Bankruptcy

In a conversation with the chief clerk of bankruptcy court for the District of Minnesota last week the filings of new cases are up tremendously and they are exceptionally busy as a result. Many new lawyers with little experience are getting into the field of bankruptcy to the detriment of their clients. Experienced legal representation matters in bankrutpcy as in all legal matters. People considering bankruptcy should check the credentials of their prospective attorney and make sure that he or she has had many years representing consumers in all manner of bankruptcy cases.