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Bankruptcy Nuts ‘N’ Bolts

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Bankruptcy Nuts ‘N’ Bolts Bankruptcy Nuts ‘n’ Bolts June 11, 2015 Table of Contents Chapter 3 12:45-1:45pm Chapter 7: Filing Requirements, Assets and Exemptions, and Discharge Issues Alan J. Wenokur, Attorney at Law Electronic format only: 1. Article – Chapter 7 Overview CHAPTER 7 OVERVIEW Alan J. Wenokur Attorney at Law 600 Stewart St., Suite 1300 Seattle, WA 98101 206-682-6224 [email protected] Alan Wenokur has been a Seattle bankruptcy attorney since 1988, and a sole practitioner since 1991. He regularly represents debtors in Chapter 7 and Chapter 13 bankruptcy cases, typically in more challenging cases involving business debt or complex financial affairs. He represents creditors in all chapter proceedings. He also focuses on representation of Chapter 7 trustees in matters including undisclosed assets, fraudulent behavior, recovery of more speculative assets, and bankruptcy litigation. Mr. Wenokur is a member of the Washington State Bar creditor/debtor section, the American Bankruptcy Institute, and the US Bankruptcy Court local rules committee. He is AV-rated, and since 2012 has been regularly selected by his peers as a bankruptcy “SuperLawyer.” He speaks frequently at professional seminars, particularly on the role and responsibilities of debtor’s counsel in Chapter 7 cases. I. INTRODUCTION. II. THE FUNDAMENTAL CONCEPT OF CHAPTER 7 III. THE PARTIES. A. The Debtor B. The Creditors 1. Administrative expenses 2. Secured claims 3. Priority claims 4. General unsecured claims 5. The Debtor C. The Chapter 7 Trustee 1 D. The Professionals E. The United States Trustee F. The Bankruptcy Judge IV. THE BANKRUPTCY PROCESS A. Pre-filing--Information Gathering 1. The assets 2. The debts 3. Income and expenses 4. Documents B. The Schedules C. Credit Counseling Certificate D. Filing E. The Meeting of Creditors F. Financial Education G. The Trustee’s Activities 1. Liquidation 2. Avoidance actions 3. Lien avoidance H. The Creditors 1. Claims 2. Complaints regarding discharge 3. Relief from stay 4. Reaffirmations I. The Discharge V. NUTS AND BOLTS A. The Bankruptcy Courts B. Electronic Filing 2 C. Forms D. Motions and Notices E. Amendments F. Adversary proceedings I. INTRODUCTION. This outline will provide general information regarding bankruptcy under Chapter 7. It is intended to provide you with enough detail to give you a good basic understanding of the process, without snowing you under with too much information. Obviously, there are exceptions and nuances to just about everything described in this outline. The Bankruptcy Code, Federal Rules of Bankruptcy Procedure, and reported case law are the primary sources of information. All section references here are to the United States Bankruptcy Code, 11 U.S.C. § 101 et seq. All Rule references are to the Federal Rules of Bankruptcy Procedure. II. THE FUNDAMENTAL CONCEPT OF CHAPTER 7. Chapter 7 is a liquidating bankruptcy; an individual debtor cannot pay his or her debts, and seeks a fresh start. The goal is to wipe out, or “discharge”, most if not all debt, and keep most if not all property. The actual result depends on the type of debts and type and value of property held by the debtor. Fundamentally, Chapter 7 represents a forced imposition of a settlement of debt by the debtor on his or her creditors. The debtor offers up all assets that cannot otherwise be protected as exempt and that are not completely encumbered by security interests (more on each of these below), in return for relief from debt and a chance at a fresh start. Chapter 7 is available to individuals and to married couples, who would file a joint petition. It is also available to entities—that is, corporations, LLCs, partnerships, and unincorporated organizations such as nonprofits. Entity filings do not include the “fresh start.” The entity filing a Chapter 7 bankruptcy ceases to exist, gets no discharge, is not entitled to protect any property as exempt, and experiences the liquidation of all of its property. In each Chapter 7 case, a trustee is appointed, whose job it is to review the debtor’s petition and schedules and, if appropriate, liquidate any 3 non-exempt assets. If there are no non-exempt assets, the trustee issues a “no-asset” report, and takes no further action. III. THE PARTIES. A. The Debtor. The debtor is the person or entity that commences a case in Bankruptcy Court by filing a petition. A married couple may—but does not have to—file a joint petition as co-debtors. Unmarried persons may not file a joint petition. “Who may be a debtor” is outlined in Code § 109. In rare cases, an involuntary bankruptcy may be commenced by creditors, an event that is outside the scope of this outline. The debtor’s goal in Chapter 7 is a discharge, which is the debtor’s fresh start. The discharge is the court order stating that the debtor is legally excused from all prepetition debt (that is, debt which the debtor incurred prior to the moment of filing the petition) that is otherwise dischargeable in bankruptcy. The concept of dischargeability is discussed below. Entities such as corporations and LLCs are not entitled to a discharge in Chapter 7. Entities that are no longer doing business generally do not file a Chapter 7 petition and will die a different kind of death, through expiration of state registration, going out of business sale, return of assets to secured lenders, etc. There nevertheless may be good reasons for an entity to file a Chapter 7, such as to permit an orderly liquidation of assets supervised by a bankruptcy trustee, or where a bankruptcy filing may result in payment of priority debts such as tax debt that the company principal may be liable for and particularly wants to see paid. B. The Creditors. “Creditor” is very broadly defined in the Bankruptcy Code. A creditor is anyone with a claim against the debtor. A “claim” is a right to receive a payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. § 101(5). In other words, anyone claiming any right to payment of any kind, even if that right is disputed or speculative, is a creditor. For that reason, a debtor should list in the schedules all persons who may have a claim, even if the debtor believes no such right exists. How a creditor fares in a Chapter 7 bankruptcy proceeding depends on what kind of claim that creditor possesses. There are four main types of claims: 4 1. Administrative expenses. These are expenses incurred postpetition and during the administration of the bankruptcy estate. § 503. They include the claims of the trustee and the professionals hired by the trustee, and any costs of liquidation such as storage fees and sales expenses. Except for a limited priority given to domestic support obligations, all administrative expenses are paid before any prepetition creditors are paid. All administrative expenses must be approved by the court. 2. Secured claims. Secured creditors include real estate loans, car loans, purchase money security interests, mechanics’ liens, judgment liens, etc. A secured claim is effective in bankruptcy only if the creditor has properly perfected its interest under applicable law. An unperfected secured claim is not enforceable against a Chapter 7 bankruptcy trustee. The bankruptcy discharge only affects a creditor’s in personam rights against the debtor. It does not typically affect any in rem rights against the collateral. As a result, secured creditors have heightened protection in bankruptcy because of their perfected interest in the collateral held by the debtor. If the debtor does not maintain payments, the creditor will ultimately be able to assert its rights against the collateral under applicable law. If the trustee sells the asset, the secured creditor ordinarily gets paid in full with interest, and the bankruptcy estate takes the balance. Unless the trustee sells the asset, the secured creditor will typically need to look to its collateral and will not be entitled to any distribution in the bankruptcy case. Trustees typically will not sell fully encumbered property in Chapter 7. That said, trustees have been making a decent living over the last few years conducting short-sales of overencumbered non-homestead real property with the consent of the secured creditor and permission of the Bankruptcy Court. In the case of secured consumer loans, such as car loans, the debtor and creditor may enter into a “reaffirmation agreement” creating a new, postpetition obligation of the debtor to make payments on the loan that is unaffected by the debtor’s discharge. § 524. In the absence of a reaffirmation, the creditor may (but will not always) have the right to repossess its collateral. Where the value of the collateral has declined, a debtor may be able to reduce the amount of the secured claim to the value of the collateral. This right, however, is not available to modify liens secured by principal residences. Thus underwater or entirely undersecured consensual liens on 5 residences may not be modified through a Chapter 7 case. A debtor also may not reduce or “cram down” the value of liens secured in automobiles, if they have been financed within 910 days prior to the bankruptcy filing. The Code gives the Bankruptcy Court the ability to make rulings regarding the validity and extent of secured claims. § 506. Debtors and creditors alike can take advantage of judges knowledgeable in all aspects of commercial law in order to litigate disputes over issues arising in secured claims. While consensual liens are favored in bankruptcy, nonconsensual liens such as judgment liens are disfavored. Judgment liens and non- purchase money liens may be stripped off property (i.e., “avoided”) if those liens interfere with the debtor’s exemption claims.
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