NYSBA Young Lawyers’ Section Annual Meeting



Chapter 7 Bankruptcy for the Insolvent Consumer and the Key Changes Brought by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

August 2007

By:

Fred Stevens

Fox Rothschild LLP

100 Park Avenue, 15th Floor

New York, NY 10017

Tel: (212) 878-7905

fstevens@

TABLE OF CONTENTS

I. Introduction To This Outline 1

II. Introduction to the Chapter 7 Process 2

III. Qualification to File – Reform Act Additions 5

A. Who May Be a Debtor? 5

B. The Means Test 6

1. Introduction 6

2. Persons Not Subject to the Means Test 8

3. The Calculations 9

IV. The Commencement of the Case 14

A. Required Filings - Generally 14

B. The Traditional Bankruptcy Filings (Non-Reform Act) 15

C. New Forms With the Reform Act 22

V. The Chapter 7 Trustee 24

VI. The Discharge 27

VII. Summary of Important Changes of the Reform Act 29

A. The Means Test 30

B. Prohibitions on Multiple Discharges 30

C. Credit Counseling and Debtor Education 31

D. Discharge of Debts 31

E. Limitations on the Automatic Stay 31

F. ATTORNEYS BEWARE 31

I. Introduction To This Outline

Chapter 7 of the Bankruptcy Code is entitled “Liquidation.” It is often referred to by the non-attorney public as “straight bankruptcy” or “simple bankruptcy.” Needless to say, chapter 7, like any legal process, can be extremely complex. However, a vast majority of individual chapter 7 cases (as opposed to business cases) result in very efficient and economical dispositions.[1] These cases are typically referred to as “no asset” cases. Only a small handful of cases result in a recovery of assets for the benefit of creditors. This outline focuses on the most common of all bankruptcy proceedings, the “no asset” chapter 7, and explains the most significant changes in the bankruptcy law (Title 11 of the United States Code enacted in 1978, with major changes in 1984, 1988 and 1994) brought by the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Reform Act”) (collectively, in its present form, referred to herein as the “Bankruptcy Code” or the “Code”).

Because many attorneys presume that chapter 7 is just a simple formulaic process, they often put their clients and other parties at risk. Every attorney planning to represent a prospective chapter 7 debtor should, at the very least, be able to identify the issues that may lead to the trustee’s recovery of assets, or the possible denial of the debtor’s discharge, and the key elements of the Reform Act. The attorney may then, at her discretion, (i) thoroughly research the issue so that she can properly advise her client, or (ii) refer the case to another attorney competent to handle the more complex issues. The changes implemented by the Reform Act have further complicated the chapter 7 process and increased the level of sophistication required of debtor’s counsel to successfully navigate the process.

Important Note – The Reform Act requires that you, as debtor’s counsel, certify as to the accuracy of the debtor’s petition as well as provide documents to the court and the case trustee. As a result, it is imperative that any attorney planning to represent a chapter 7 debtor be fully familiar with the law (as they should be anyway), and that the client interview and pre-filing phase of the case involve significant due diligence by the attorney, including document collection and review, making tricky calculations, and asking a number questions to determine whether the client is eligible for relief under chapter 7.

This outline is intended to provide an overview of the chapter 7 process for individuals, to highlight the key changes implemented by the Reform Act, and to provide some of the tools necessary to identify the issues that may lead to the trustee’s recovery of assets, or other types of bankruptcy litigation. This outline is divided into six parts that map the chronology of the chapter 7 process: (i) an introduction to the chapter 7 process; (ii) qualification for chapter 7 (New for the Reform Act); (iii) the commencement of the case; (iv) the role of the chapter 7 trustee; (v) the discharge; and (vi) miscellaneous standout changes implemented by the Reform Act.

II. Introduction to the Chapter 7 Process

The ultimate goal for a debtor in a chapter 7 case is to obtain a discharge of most or all of her debts, giving the debtor the “fresh start” envisioned by the Bankruptcy Code. The extreme relief granted by a chapter 7 discharge is to be afforded only to the “honest but unfortunate debtor.”[2] The debtor must first qualify to file under the Reform Act[3] and must then fulfill all duties set forth in section 521 of the Bankruptcy Code before a discharge will be awarded.[4]

Regardless of size or complexity, each chapter 7 case involves the appointment of a trustee, the trustee’s investigation as to whether the debtor has any assets or claims that can be pursued for the benefit of creditors, the U.S. Trustee’s review to ensure the debtor qualifies under the “means test”, a meeting of creditors, and a fair and adequate opportunity for creditors to be heard. A typical time line for a chapter 7 case would be:

1. February 1, 2006 – Debtor meets with her counsel and determines that she qualifies under the “means test”[5], and that she should file for relief under chapter 7;

2. February 5, 2006 – Debtor completes mandatory credit counseling[6];

3. February 6, 2006 – Debtor completes with her attorney and files with the court her voluntary petition and all required forms, schedules and statements[7];

4. February 7, 2006 – The United States Trustee appoints Jane Doe as the interim Chapter 7 Trustee of the debtor’s estate[8];

5. No Later Than 45 Days After the Petition Date – The Debtor must file all documents required to be filed pursuant to Section 521(a)(1)[9], or her case will be dismissed automatically on the 46th day[10];

6. February 15, 2006 – Debtor’s counsel provides all necessary documents to the Trustee and United States Trustee;

7. March 9, 2006 – Jane Doe qualifies and becomes permanent trustee of the Debtor’s estate[11] and conducts the Meeting of Creditors, and after the Debtor is thoroughly examined, the trustee closes the meeting[12];

8. April 15, 2006 – The debtor completes a debtor education class and files proof of same with the court.[13]

9. May 8, 2006 – Sixty days lapses from the date of the Meeting of Creditors. This marks the deadline for (i) creditors to object to the dischargeability of a debt[14]; (ii) parties to move to dismiss the case for substantial abuse[15]; or (iii) parties to object to the debtor’s discharge[16]; and

10. May 25, 2006 – Assuming the debtor has complied with all applicable provisions of the Bankruptcy Code and Rules, the bankruptcy court enters the discharge order.[17]

The chapter 7 trustee’s and United States Trustee’s role will be discussed in greater detail below. However, in order to put many of the discussions into proper context, we should briefly discuss it now. First, the chapter 7 trustee is a private party who sits on the panel of private trustees. The chapter 7 trustee is not an employee of the federal government. In general, the trustee must investigate the assets and financial affairs of the debtor, reduce any non-exempt property of the debtor to money, pursue any claims that the debtor may have under applicable law, or the trustee may have under the Bankruptcy Code, and distribute any recovery to the proper creditors. As previously stated, a vast majority of chapter 7 cases are “no asset” cases and do not result in a distribution to creditors. In such cases, the trustee’s investigation is normally limited to reviewing the debtor’s schedules and statements, and interviewing the debtor at the meeting of creditors.

The Office of the United States Trustee on the other hand is a division of the Department of Justice charged with the duty of overseeing the bankruptcy process. Unlike the bankruptcy judiciary, the United States Trustee will take and advocate positions. Although the United States Trustee performs many duties and functions in the bankruptcy system, in the “no asset” cases discussed herein, the United States Trustee’s principal role is to review petitions for qualification under the “means test” and for substantial abuse under section 707(b) of the Code, to monitor abuses by debtors’ attorneys and bankruptcy petition preparers, and to approve providers of credit counseling and debtor education.

III. Qualification to File – Reform Act Additions

A. Who May Be a Debtor?

Section 109(a) provides simply that any person who resides or has a domicile, a place of business, or property in the United States, may be a debtor under the Bankruptcy Code.[18] Section 109(h) was added in the Reform Action and requires that in order to file a petition, the debtor must complete a credit counseling course within 6 months of the bankruptcy filing.[19] The course must be given by an approved nonprofit budget and credit counseling agency and can be done over the internet or by telephone.[20] The following individuals are excepted from the credit counseling requirement: (i) individuals residing in districts where the United States Trustee has not determined that adequate counseling services are available; (ii) in emergency filings where debtor certifies that an emergency exists upon filing and completes counseling within 5 days of filing; and (iii) where a debtor is unable to complete the required counseling due to incapacity, disability, or active military duty in a military combat zone.

B. The Means Test

1. Introduction

Section 707(b) of the Bankruptcy Code always contained a provision which allowed the United States Trustee to make a motion to dismiss a case for “substantial abuse.” The old code never clearly defined substantial abuse and it was left to the United States Trustee to decide what constituted an abuse worth prosecuting[21], and up to the courts to define it[22].

The Reform Act changed Section 707(b) substantially to grant not only the United States Trustee the right to make a motion to dismiss for substantial abuse, but also the chapter 7 trustee and any other parties in interest.[23] Before, such right only belonged to the United States Trustee (and the court). In addition, for individual debtors with primarily consumer debts, Section 707(b)(2) presumes that an abuse exists if the debtor’s income and expenses do not fit within what appear to be an extraordinarily complex set of formulas and conditions[24]. Thus, it is incumbent upon debtor’s counsel to walk the debtor through what has become one of the most controversial and misunderstood sections of the Reform Act. At the end of the day, most attorneys agree that a vast majority of the debtors that filed under the old code still qualify under the means test. Many, however, do not.

Before jumping into the calculations under the means test, it is important to understand its intended purpose and what actually happens if the debtor does not fit within the parameters of the means test.

First, the means test says, in sum and substance, that if the debtor’s monthly budget surplus (calculated pursuant to certain standards which incorporate IRS statistics and allowances) is equal to or grater than certain statutory ceilings, the debtor’s case will be subject to dismissal. Put practically, if, over the next 5 years, the debtor has the ability to repay 25% of her debt, she should not be allowed to file under chapter 7.

Second, if the debtor fails the means test, it is not necessarily the end of the road. A party (such as the trustee, United States Trustee, or a creditor) must first make a motion to dismiss. Then, the debtor can choose to voluntarily convert her case to one under chapter 13, or the debtor can choose to defend the motion by claiming she has “special circumstances” that increase or decrease her expenses or income, respectively, such that she should qualify under the means test upon consideration of the special circumstances.[25]

2. Persons Not Subject to the Means Test

The debtor is not subject to the means test if:

➢ If the debtor’s debts are not primarily “consumer debt” as defined in Section 101(8)[26];

➢ If the debtor’s annual household income (to determine household income, see considerations in Section 3(a) below) is equal to or less than the state median income for a similar-sized household. For New York State, the following median incomes currently apply[27]:

|No. in Household |2005 Median Income |

|1 |$ 39,463 |

|2 |48,492 |

|3 |57,430 |

|4 |67,564 |

|5 |69,803 |

|6 |66,927 |

|7 |56,510 |

Or;

➢ If the debtor is a disabled veteran and the debt was incurred while debtor was on active duty, or performing homeland defense activity.[28]

3. The Calculations

a. Calculate Income

For the six (6) months ending on the last day of the month preceding the debtor’s bankruptcy filing, determine the debtor’s gross income by adding up all income received by the debtor. This should include anything that falls under the following categories:

➢ Regular contributions for household expenses (e.g., the debtor’s adult son gives the debtor $400 per month to live in the basement);

➢ Gross salary including that of a non-debtor spouse, if any, unless the couple is separated and can provide proof of separation (leave in all payroll deductions which will be taken out in the expense section in the following section);

➢ Rental income;

➢ Child support received;

➢ Regular contributions from co-occupants;

➢ Disability benefits;

➢ Pensions;

➢ Annuity payments; and

➢ Any other sources of income, taxable or not.

Only Social Security benefits are excluded.

Take the number derived above and divide by 6 for your Average Monthly Gross Income (to be used in the means test continued below), and multiply by 2 for your Annual Income (in order to compare to the state median incomes discussed in Section III(B)(2) above).

b. Calculate Expenses

First, determine the allowable living expenses according to the IRS National Standards. These expenses will be used regardless of the debtor’s actual expenses and are intended to include the following: food, housekeeping supplies, wearing apparel and services, personal care products and services and miscellaneous. The number depends on the debtor’s gross income and the number of people living in the household. The following chart sets forth those amounts in effect as of August 23, 2005[29]:

| |GROSS MONTHLY INCOME |

|Number of People in |Less than $833 |$833 to $1,249 |$1,250 to $1,666 |

|Household | | | |

|Richmond |$ 1,463 |$ 1,721 |$ 1,979 |

|Bronx |1,609 |1,892 |2,176 |

|Queens |1,621 |1,907 |2,193 |

|Kings |1,629 |1,916 |2,203 |

|Suffolk |1,684 |1,981 |2,278 |

|Nassau |1,913 |2,251 |2,588 |

|Rockland |1,933 |2,274 |2,615 |

|Westchester |2,361 |2,777 |3,194 |

|New York |3,547 |4,173 |4,799 |

Third, determine the allowable transportation expenses according to the IRS Local Standards. Again, it appears that these expenses will be used regardless of the debtor’s actual expenses and are intended to include the following: vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required vehicle inspection, parking fees, tolls, driver’s license and public transportation. Transportation costs not required to produce income or ensure health and welfare are not necessary. The number depends on the debtor’s region of residence and the number of vehicles in the household. The following chart sets forth those amounts in effect as of August 23, 2005 for the New York region[31]:

|OWNERSHIP COSTS |

|National |First Car |Second Car |

| |$475 |$338 |

|OPERATING COSTS AND PUBLIC TRANSPORTATION COSTS |

|Region |No Car |One Car |Two Cars |

|Northeast Region |$230 |$298 |$393 |

|New York |$302 |$384 |$479 |

Fourth, calculate all other actual expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides.[32] These expenses include:

➢ Health care: “Reasonably necessary” health insurance, disability insurance and Health savings account expenses, plus any prescription drugs, medical supplies, eyeglasses and contact lenses, and medical services;

➢ Accounting and legal fees for representing a taxpayer before the IRS;

➢ Charitable contributions (up to 15% before they can be challenged);

➢ Child care (baby sitting, day care, nursery and preschool);

➢ Dependent care (for elderly, invalid, or handicapped);

➢ Education (for physically or mentally challenged child; or as a condition of employment);

➢ Involuntary payroll deductions (FICA, Medicare, union dues)

➢ Life insurance (term policies only);

➢ Secured or legally perfected debts (must document);

➢ Taxes: Federal (FICA and Medicare), state and local tax payments;

➢ Priority claims as defined in Section 507 of the Bankruptcy Code;

➢ Family Violence Prevention costs;

➢ Other necessary expenses (if proven) add 5% of national standards for food;

➢ Other necessary expenses (if proven) add 5% of national standards for clothing;

➢ Elementary or secondary school expenses up to $1,500 per year per child; and

➢ Additional energy costs if documents.

c. The Means Test Calculation

Now, take the Gross Monthly Income and subtract the allowed expenses to derive the debtor’s Monthly Disposable Income. Compare the debtor’s Monthly Disposable Income, along with the debtor’s general, unsecured debt, to numbers in the following chart:

|Debtor’s General, Unsecured Debt |Maximum Monthly Disposable Income the Debtor may have to Qualify for |

| |Chapter 7 Without a Presumption of Abuse |

|$24,000 |< $100 |

|$24,001 - $39,999 |< Unsecured debt (240 |

|$40,000 or more |< $166.67 |

If the debtor does not “pass” the means tests, (i.e., according to the IRS National Standards and the Bankruptcy Code, she has sufficient funds to repay 25% of her debt back over the next five years), she still has the following options:

(i) If circumstances exist, file an affidavit of special circumstances as mentioned above before a party brings a motion to dismiss;

(ii) Prepare to litigate the presumption of abuse and to rebut the presumption under the “special circumstances” exception;

(iii) Find a non-bankruptcy alternative; or

(iv) File a chapter 13 petition and repay some or all of the debtor’s debt.

4. The U.S. Trustee’s Obligations

Section 704(b)(1) mandates that the U.S. trustee review all materials filed by the debtor and, not later than 10 days before the first meeting of creditors, file with the court a statement as to whether the debtor’s case would be presumed to be an abuse under Section 707(b).[33] That notice will be made available to all creditors and parties in interest. Note however, that the Code does not mandate that any party actually file a substantial abuse motion upon a presumption of abuse. Thus, in theory, the presumption of abuse can be present, but no party will prosecute the motion. Be careful however, as the Code provides that an attorney’s signature on a petition is a certification that the debtor’s case is not an abuse under Section 707(b). Thus, if the attorney signs and a chapter 7 trustee or the U.S. Trustee prosecutes a successful substantial abuse motion, the attorney can be liable for the other party’s attorneys fees.

IV. The Commencement of the Case

A. Required Filings - Generally

An individual chapter 7 case is commenced by the filing of a petition with the Bankruptcy Court.[34] The filing of a voluntary petition constitutes an order for relief. Generally, upon the commencement of the case, creditors are immediately enjoined from commencing or continuing any acts to recover their claim against the debtor or her property. This automatic injunction is called the automatic stay, or the bankruptcy stay.[35] During the pendency of the case, any rights or remedies a creditor may have against the debtor, or her property, must be exercised in the manner prescribed by the Bankruptcy Code.

The debtor must file with the Court lists which include all of the debtor’s property, all creditors, any executory contracts and unexpired leases, and the debtor’s monthly budget of income and expenses. The debtor must also file a statement of financial affairs which details key information about the debtor’s financial history.[36] In addition, the Reform Act requires that a number of other forms and schedules be filed. The debtor and her attorney should thoroughly analyze all of the questions and required disclosures on the schedules and statements.

B. The Traditional Bankruptcy Filings (Non-Reform Act)

First, we discuss the schedules and statements which have always been a part of the bankruptcy process (and still contain the vast majority of the salient information concerning the debtor). The following is a list of those required schedules and statements, what they entail, common pitfalls, and their implications:

i) Schedule A: Real Property. This schedule must include a description and location of the debtor’s real property, the nature of the debtor’s interest in the property (joint tenant, tenants by the entirety, fee simple, etc.), the current market value of the debtor’s interest in the property without deducting any secured claim or exemption, and the aggregate amount of any liens, claims and encumbrances against the property.

▪ Chapter 7 trustees will almost always ask for substantiation of the debtor’s claimed valuation of real property. The attorney should direct the debtor to obtain an appraisal prior to the filing and provide a copy of the appraisal to the trustee before, or at the latest, at the meeting of creditors. Documentation supporting the claimed amount of liens, claims and encumbrances should also be provided in the same manner.

ii) Schedule B: Personal Property. Schedule B divides personal property into thirty-three separate categories, the last being the catchall “other property,” which mandates that no property go unlisted. This schedule should include the type of property, its description and location, its current market value and the debtor’s interest in the property without deducting any secured claim or exemption. This is an all inclusive list and everything and anything should be disclosed.

Historically, Schedule B is a common place for errors. Be aware of the following in order to prevent some of the most common errors and avoid prejudicing your client:

▪ Every interest in property must be disclosed on either Schedule A or B.

▪ There is no de minimis value for property to have to be listed on the schedules. Even if it is obviously worth nothing, it should still be listed. I once heard a chapter 7 trustee complain that a debtor failed to list property. He then instructed the attorney to amend schedules. The attorney argued that his client did not have to list property if it was not worth $600 or more, and refused to make the amendment. Needless to say, the trustee made a motion to dismiss the debtor’s case.

▪ A cause of action is an asset. If your client has or could have a personal injury, medical malpractice, or other type of claim to recover damages, this must be listed. Until the trustee makes a determination as to whether to retain the lawsuit, or abandon it, it is property of the estate. Debtors constantly fail to list these assets, often because the property category is difficult to interpret. This excuse is hardly acceptable for a layman, but is certainly unacceptable for a debtor who is assisted by an attorney.

▪ Property values should reflect the amount that could be reasonably expected if the property were sold in a reasonable yet expedited manner. It does not have to reflect the price that an asset would attain if it were sold in the best possible conditions.

▪ 10 cents = cash on hand.

A pet cat = an animal.

An expected $100 tax refund = other debt owing debtor.

A corporation commenced that never did business = a business entity.

= intellectual property.

A copyrighted song never recorded = a copyright.

Although it is fair to reasonably conclude that these assets are either exempt, or will not be liquidated by the trustee for the benefit of creditors, they still must be listed. The trustee, not the debtor or the debtor’s attorney, is charged with the responsibility of determining whether an exemption is proper, or whether it is in the best interest of creditors to retain and liquidate property of the estate. The debtor needs only to list everything and cooperate with the trustee’s inquiry. The debtor’s attorney needs to take all reasonable steps to be sure that the debtor has listed everything.

iii) Schedule C: Property Claimed as Exempt. Exempt property is property that the debtor is allowed to retain and the trustee may not liquidate for the benefit of creditors. This is not to say that if a portion of an asset is exempt, the trustee may not liquidate it, but the trustee would have to return the cash equivalent of the allowed exemption to the debtor from the proceeds from the sale. While section 522 of the Bankruptcy Code provides for exemptions, it also charges states with the right to “opt out” of the Federal exemptions and set forth their own exemptions. New York State has opted out. The following are commonly claimed New York State exemptions:

▪ Homestead Exemption: N.Y. C.P.L.R. § 5206 permits each debtor who has an interest in their primary residence to exempt $50,000 in equity. Note that if the debtor claims this exemption, she cannot claim any cash or liquid account exemptions.

▪ Cash, Bank Accounts, Tax Refunds: N.Y. Debtor & Creditor Law § 283 permits each debtor to exempt up to $2,500 of these assets.

▪ Household Goods and Furnishings & Wearing Apparel: N.Y. C.P.L.R. § 5205 permits each debtor to exempt up to $5,000 worth of these assets. Note that the actual statute limits the application of this exemption in a broad brush stroke. For instance, only one television can be claimed as exempt, and DVD players, VCRs, CDs, DVDs, and computers are not exempt.

▪ Automobile: N.Y. Debtor & Creditor Law § 282 permits each debtor to exempt up to $2,400 in equity for one automobile.

▪ Pension, Profit Sharing, 401(k), Keogh, IRA, ERISA and Annuity Plans: These are all generally exempt, provided the debtor cannot withdraw from them prior to retirement with incurring tax penalties. The attorney should carefully review the plan offering documents, and all applicable exemption statutes to reach a conclusion regarding the application of pension plan exemptions.[37]

▪ Personal Injury: N.Y. C.P.L.R. § 5205 permits each debtor to exempt up to $7,500 in awards, or expected awards, due to personal bodily injury.

▪ Working Tools: N.Y. C.P.L.R. § 5205 permits each debtor to exempt up to $600 worth of tools and professional publications used in the debtor’s profession.

▪ Wedding Band: N.Y. C.P.L.R. § 5205 permits each debtor to exempt up to $5,000 for their wedding band. Note that a technical reading of the law dictates that engagement rings are not subject to any exemptions.

New York’s exemption statutes are voluminous and should be reviewed in their entirety. This is one place that the attorney, rather than the debtor, is more qualified to determine the application of exemptions. If mistakes are made on this schedule, it is most surely as a result of the attorney’s misunderstanding of, or misapplication, of allowed exemptions.

iv) Schedule D: Creditors Holding Secured Claims. This list contains all of the creditors who were secured, including their names, address, the nature and value of the lien, the property which the lien secures, and any unsecured portion of the claim.

v) Schedule E: Creditors Holding Unsecured Priority Claims. Section 507 of the Bankruptcy Code sets forth the priority in which creditors will be paid if the trustee recovers property and makes a distribution. Examples of priority claims are back child support, alimony, maintenance, and certain taxes.

vi) Schedule F: Creditors Holding Unsecured Non-Priority Claims. This is typically where a vast majority of the individual debtor’s creditors are found. This list includes most credit cards, overdraft checking accounts, and personal loans.

Practice Tip: All debt must be listed. The debtor cannot pick and choose which creditors to list and which to omit. If the debtor owes money to a friend or family member, it must be disclosed. Also, as with all debt schedules, there is an appropriate place to indicate if the debt is contingent, disputed and/or unliquidated. Even if the debtor does not believe that she owes a certain creditor, if someone has or could make a claim, it must be listed.

vii) Schedule G: Schedule of Executory Contracts and Unexpired Leases. The debtor must identify other parties to any uncompleted or existing contracts or leases. In most individual cases, this consists of leases of apartments and automobiles.

viii) Schedule H: Co-Debtors. This schedule includes those individuals or entities that are jointly and severally liable in obligations of the debtor or who have guaranteed obligations of the debtor.

ix) Schedule I and J: Current Income and Expenditures. This is a list of the debtor’s current monthly income and expenses. As it stands, even though the means test requires the application of the IRS allowed numbers, these schedules still require an accurate depiction of the debtor’s actual income and expenses.

x) Statement of Financial Affairs (“SFA”): The SFA contains many questions designed to result in the disclosure of important information about the debtor and her financial past. Many of the questions on the SFA are difficult to understand, and their purpose is not always evident to the layperson or inexperienced attorney. The SFA asks questions that answer the following questions:

▪ What is the debtor’s income structure like for the two years preceding the filing?

▪ What has the debtor been doing with her money? Is there an unexplained loss or diminution of assets that gives rise to an objection to discharge?

▪ Has the debtor been using her limited assets to pay some creditors while neglecting others before filing for bankruptcy? Did any creditors unfairly benefit from aggressive collection tactics, thus depriving other creditors from their fair share of the debtor’s assets? Can the trustee recover these “preference” payments for the benefit of all creditors?[38] Example - Debtor legitimately owes her father $10,000. Debtor repays the debt just before filing for bankruptcy.

▪ Has the debtor been involved in litigation before filing for bankruptcy? Did the debtor receive an award from a concluded lawsuit before filing? Did pre-petition litigation prompt the bankruptcy filing?

▪ Did the debtor lose any property by repossession, foreclosure or returned merchandise to a secured creditor? Should there be a residual left after the sale of the asset and payment of the secured claim that can be used to distribute to creditors?

▪ Did the debtor assign property or the right to receive property to another person or entity? Did this assignment prevent creditors from getting money or property that they would otherwise be entitled to? Can the trustee avoid this assignment and recover the property for the benefit of creditors?[39]

▪ Has the debtor given away or transferred property for less than its fair market value? Can the trustee recover that property for the benefit of creditors?[40]

Example: I once heard a pro se debtor testify at a 341 meeting that he transferred his house into his wife’s name so that “creditors could not get it.” Rarely are fraudulent conveyances this blatant. In this particular instance, the debtor did not even realize that he had done something wrong. Perhaps he would not have decided to file for bankruptcy had he consulted with an attorney.

xi) Chapter 7 Statement of Intentions: If the debtor has a secured claim, the debtor must file a statement of her intention with respect to retaining the secured property or surrendering it to the creditor. This provides enough information for the trustee and the secured creditor(s) to determine the debtor’s intention as to the secured property. The debtor will be obligated to perform those intentions within 45 days of the filing of the statement.

xii) Statement Pursuant to Bankruptcy Rule 2016(b): Every attorney for a debtor must file a statement including (i) whether the attorney has shared or agreed to share compensation with any attorney outside of her firm, (ii) the amount of agreed upon compensation, (iii) the services to be performed by the attorney, and (iv) the source of the compensation.

xiii) Creditor Matrix: The debtor must file a separate list of the names and addresses of her creditors plus any other parties who should be given notice of the debtor’s bankruptcy filing.

xiv) Local Bankruptcy Rules: The attorney should be familiar with the local rules of the Court in which she practices. Some courts require the filing of additional forms and disclosures. In the Eastern District of New York (Kings, Queens, Richmond, Nassau and Suffolk Counties), every debtor is required to file a separate form disclosing prior filings.[41] Every attorney in the Eastern District is required to file a detailed accounting of the services performed prior to the filing.[42] In the Southern District of New York (New York, Bronx, Westchester, Rockland, Dutchess, Putnam, Orange and Sullivan Counties), and most other districts now, you are required to electronically file the debtor’s petition, schedules and statements and provide copies of those papers to the chapter 7 trustee appointed in the case and the U.S. Trustee.[43]

C. New Forms With the Reform Act

The following is a list of schedules, statements and other forms now required to be filed with the court pursuant to various portions of the Reform Act:

i) Certification Regarding Bankruptcy Information: Debtor’s attorney must file a certification stating that the client has received the information notice required by Section 342(b).[44]

ii) Income Information: Debtor must file copies of all payment advices or other evidence of payment received in the 60 days before the petition date (typically, the debtor’s pay stubs).[45]

iii) Calculation of Income and Means Test: Debtor must file an itemized statement calculating monthly net income and detailing the means test calculation.[46]

iv) Statement Regarding Increase in Income: Debtor must file a statement disclosing any reasonably anticipated increase in income or expenditures over the 12-month period following the date of the filing of the petition.[47]

v) Credit Counseling Certificate – Debtor must file a certificate from the approved nonprofit budget and credit counseling agency that provided the debtor services under Section 109(h) describing the services provided to the debtor.[48]

The following items must be provided to the chapter 7 trustee not later than 7 days before the date first set for the first meeting of creditors:

i) Tax Returns – Debtor must provide a copy of her federal tax returns for the most recent tax year ending immediately before the commencement of the case.[49]

V. The Chapter 7 Trustee

The chapter 7 trustee’s duties are set forth in Section 704(a).[50] As previously stated, the trustee is generally required to investigate the financial affairs of the debtor, liquidate the non-exempt property of the debtor’s estate, and distribute the proceeds to the holders of allowed claims. Since this outline focuses on the “no asset” case, we will limit our discussion to the activities that must be performed by the trustee in every case, rather than the liquidation and disposition of property, the pursuit of claims, and the distribution to the holders of allowed claims.

In the typical “no asset” case, the trustee must perform an investigation to determine if any assets exist that can be liquidated for the benefit of creditors. This investigation is normally limited to two activities: (i) a thorough review of the debtor’s schedules and statements; and (ii) examining the debtor at the meeting of creditors. Both the debtor’s disclosures on the schedules and statements, and her testimony at the meeting of creditors, are under oath. They constitute sworn testimony, and thus, should be able to be relied upon by the trustee in performing her duties.

Although used conservatively, the trustee has broad investigative powers.[51] Almost anything that may arguably assist the trustee in her investigation is discoverable and should be provided if requested. The American system of justice is, by its very nature, adversarial. The “no asset” chapter 7 case should be an exception to this rule in the vast majority of cases. Most often, the trustee believes that the debtor should receive a discharge. Some attorneys operate under the presumption that the trustee is on the opposite side of the bar and should be opposed at every turn. However, this is rarely the case. Developing a general policy of cooperation, respect and courtesy is the best way to make the chapter 7 process go smoothly for you and your clients. This is not to say that the debtor and the trustee do not have distinctly different roles, or that their paths cannot cross, but it is to say that each party should respect the goals or statutory duties of the other, and cooperate wherever possible.

Since the meeting of creditors is often times the only personal interaction between trustee, the debtor and debtor’s counsel, it is important that the meeting go as smoothly as possible. Debtors’ attorneys should keep the following in mind with respect to the meeting of creditors:

i) Social Security Cards. A debtor must provide a government picture identification (drivers license, non-driver ID, or passport) and proof of their social security number. Technically, the only acceptable proof of the social security number is the social security card. Some trustees will accept other forms of proof such as health insurance Ids, and correspondence from taxing authorities. If your client cannot offer proof of their social security number, the meeting will be adjourned and you will have to make another appearance. It is a good idea to inform your client of the importance of and need to produce the social security card in writing. That way, there can be no debate if your client has to pay for an additional appearance.

ii) Be prepared. It should not be a shock if the trustee asks for (i) an appraisal for real property, (ii) a bluebook value for a car, (iii) the name and address of debtor’s personal injury attorney. In fact, it can be reasonably assumed that the trustee will absolutely want to see items such as these. Providing these documents to the trustee before the meeting is a good way to facilitate a smooth process.

iii) Of-Counsels. Many attorneys routinely hire of-counsels to represent their clients at the meeting of creditors. This practice can also be very economical for the solo-practitioner who cannot spend time away from her office. Although there have been initiatives to limit attorneys’ ability to do this in the past, this is still an allowed practice. For the following reasons, concerns and considerations, I will not send an attorney who does not appear on the letterhead of my firm to represent a client at a meeting of creditors, and attorneys should consider these reasons before deciding to engage in the routine use of of-counsels:

▪ Although the meeting of creditors is routine to attorneys, it is often frightening and stressful to the debtor clients. A client should have the attorney that they are familiar and comfortable with to guide them through this stressful event.

▪ It is embarrassing for the client to meet their attorney by having the attorney call out their name in a room full of people.

▪ Unless specifically mentioned on the policy, of-counsels are normally not covered by a firms’ malpractice insurance.

▪ Is the attorney sure that the of-counsel they have chosen will convey a positive message about the attorney, her practice and the quality of her work?

Although the trustee’s line of questioning will be tailored depending on the information contained in the schedules and statements, the debtor’s prior answers to questions, and the trustee’s individual style, an attorney can generally expect the trustee to ask the following questions:

i) General Introductory Questions and the Oath- State your name, address and social security number for the record. The trustee will then take the debtor’s oath. If the debtor cannot take an oath for religious reasons, the trustee will ask if the debtor will promise or affirm to tell the truth. Have you ever filed for bankruptcy before? Why have you filed for bankruptcy?

ii) Verification Questions - Have you read and do you understand the bankruptcy information sheet? (This sheet is posted on the wall at every 341 meeting room. The attorney should instruct their client to read it and ask them any questions that they may have about it). Is this your signature on page 2 of the voluntary petition? Have you read these schedules and statements? Are there any changes that you wish to make?

iii) Assets - Is this a list of all of your assets? Have you ever owned any real property, cooperative apartments, condominiums, houses, timeshares or undeveloped land? Are these all the bank accounts that you have? What is the most amount that you have had in a bank account in the past two years? Are you suing anyone, or could you sue anyone for personal bodily injury, medical malpractice, or for any other reason?

iv) Debt - Have you listed everyone that you owe money to including friends and family members? Generally, what did you purchase with the borrowed funds? Do you plan to repay any of these debts, or sign any reaffirmation agreements?

v) Statement of Financial Affairs - Have you repaid a debt of $600 or more in the last 3 months? Have you repaid a debt to a friend or family member in the last year? Have you sold, given away, or transferred any real estate, or other property worth $1,000 or more in the last six years? Have you owned or operated your own business in the last six years? Have you transferred any money or property pursuant to a divorce settlement or decree in the past six years? Do you have a safety deposit box?

VI. The Discharge

There is a presumption that every debtor who fulfills her duties under the Bankruptcy Code is entitled to a discharge. Discharge is the legal embodiment of the idea of the fresh start; it is the barrier that keeps (most of) the old creditors from reaching the debtor’s new assets and income. Section 727(b) of the Bankruptcy Code states that:

Except as provided in section 523 of this title, a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter, and any liability on a claim that is determined under section 502 of this title as if such claim had arisen before the commencement of the case, whether or not a proof of claim based on any such debt or liability is filed under section 501 of this title, and whether or not a claim based on any such debt or liability is allowed under section 502 of this title.

11 U.S.C. § 727(b).

Required Debtor Education – New Under the Reform Act – Section 727(a)(11) mandates that debtors complete a debtor education class and file proof of same in order to obtain a discharge.[52] The debtor will only be excepted from this requirement if she resides in a jurisdictions where the United States Trustee has determined that the approved instructional courses are not adequate.

Assuming the debtor has followed all the rules, what can prevent the debtor from receiving a discharge? Assuming the debtor has basically fulfilled her duties, there are two common ways the debtor can be prevented from receiving her discharge. First, as discussed at length above, the United States Trustee, or any party in interest in cases where the debtor “fails” the means test, can make a motion, pursuant to Section 707(b), to dismiss the debtor’s case for substantial abuse. Common grounds for making a motion to dismiss are:

i) The debtor fails the means test, and thus, has, according to the federal standards, sufficient disposable income with which to either pay her debts in a reasonable period of time, or pay a substantial portion of her debts in a chapter 13 plan. This was actually a common cause for bringing substantial abuse motions even prior to the Reform Act[53]; or

ii) The debtor has an extremely high amount of debt, and it is apparent from the facts and circumstances of the case that the debtor never had any intention of repaying it, and has no reasonable excuse for having accumulated the high amount of debt.[54]

Second, the trustee, the United States Trustee, or a creditor of the debtor, can object to the debtor’s discharge. This objection is in the context of an adversary proceeding (or discreet lawsuit commenced under the umbrella of the debtor’s bankruptcy case). The grounds for an objection to discharge are found in Section 727(a). Some of the more common grounds are:

i) The debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated or concealed property of the estate[55];

ii) The debtor does not have books and records from which the debtor’s financial condition or business transaction might be ascertained[56];

iii) The debtor knowingly made a false oath or account in connection with her case[57]; or

iv) The debtor has failed to explain a loss of assets.[58]

As stated in Section 727(b), Section 523 describes certain debts which will survive the debtor’s bankruptcy and will not be subject to the discharge. In certain cases, the creditor must formally object to the discharge of its particular debt. In other cases, the debt is automatically excepted from the discharge. The following are debts automatically excepted from the discharge:

i) Certain taxes and other debts owed to governmental agencies[59];

ii) Alimony, maintenance and child support[60];

iii) Student loans[61]; and

iv) For death or personal injury caused by the debtor’s operation of an automobile while under the influence of drugs or alcohol.[62]

A creditor whose debt would otherwise be dischargeable, may sue to object to the dischargeability of its debt if:

i) The creditor extended credit to the debtor based upon false pretenses, a false representation, or actual fraud.[63] This typically occurs when a debtor has intentionally overstated her annual income in order to obtain credit, or the debtor incurs debt that she should reasonably be able to foresee not being able to repay.

ii) The creditor’s claim is for over $500 and was for luxury goods or services purchased by the debtor in the 90 days prior to the petition date, or for $750 or more in cash advances taken within 70 days prior to the petition date.[64]

VII. Summary of Important Changes of the Reform Act

This section is not intended to give attorneys a thorough review or analysis of the changes in the Code brought by the Reform Act, and should not be relied upon by attorneys. Rather, it is intended to alert attorneys to certain important changes in the Bankruptcy Code, so that if relevant to the attorneys practice, the attorney can inquire further.

A. The Means Test[65]

B. Prohibitions on Multiple Discharges

Debtors who previously received a discharge under chapter 7 or 13 may be ineligible to receive another discharge as follows:

➢ A debtor who received a discharge in a prior case under chapter 7 or 11 must wait 8 years from the prior filing date to be eligible for a discharge under chapter 7;[66]

➢ A debtor who received a discharge in a prior case under chapter 7 or 11 must wait 4 years from the prior filing date to be eligible for a discharge under chapter 13;[67]

➢ A debtor who received a discharge in a prior case under chapter 13 must wait 2 years from the date he or she received a discharge in a prior chapter 13 case to be eligible for a discharge again under chapter 13;[68]

➢ For a debtor who received a discharge in a prior case under chapter 13, and now seeks a discharge under chapter 7, the time period between filings is determined by the percentage paid to unsecured creditors as follows:

▪ For debtors who paid 100 percent of allowed unsecured claims in the prior case, there is no minimum time period before a subsequent chapter 7 case may be filed;

▪ For debtor who paid at least 70 percent of allowed unsecured claims in the prior case, there is no minimum time period if the plan was proposed by the debtor in good faith, and was the debtor’s best effort; and

▪ Debtors not qualifying under (1) or (2) above, must wait 6 years before filing a chapter 7 case to qualify for a discharge.[69]

C. Credit Counseling and Debtor Education[70]

D. Discharge of Debts[71]

E. Limitations on the Automatic Stay

Section 362 of the Bankruptcy Code, as amended by the Reform Act, expands the circumstances in which the automatic stay does not apply and provides new subsections where the stay is limited. The following bullet points summarize the changes:

➢ Domestic Relations – Section 362(b)(2) states that the automatic stay does not apply to numerous types of domestic relations actions against the debtor.[72]

➢ Pension Plan Obligations – Section 362(b)(19) provides that the automatic stay does not apply to the withholding and collection of wages for repayment of loans made by retirement plans established by the debtor’s employer.[73]

➢ Judgment of Eviction – The Reform Act contains limited restraints on the effect of the automatic stay in cases where the landlord has obtained a judgment of possession prior to the petition date.[74]

➢ Prior Dismissals – The Reform Act contains significant limitations on the application of the automatic stay in cases where the debtor has had one or more bankruptcy filings dismissed in the year prior to the filing.[75]

F. ATTORNEYS BEWARE

The most controversial element of the Reform Act, at least as far as attorneys are concerned, is that it places a significant (and arguably unfair) burden on the debtor’s attorney to perform an independent investigation and, in a sense, certify that the statements made by the debtor in her petition, schedules and statements, are true and correct. Attorneys are anxiously waiting to see how the bankruptcy courts will apply these heightened standards before deciding whether they wish to continue practicing in the consumer bankruptcy arena.

The following bullet points summarize the new duties and liabilities of debtor’s attorneys:

➢ The court may order the debtor’s attorney to reimburse the chapter 7 trustee for reasonable attorneys’ fees and costs for successfully prosecuting a section 707(b) motion to dismiss or convert if the court finds that by filing the bankruptcy petition, the attorney violated Fed. R. Bankr. P. 9011;[76]

➢ The court may also impose civil penalties payable to the chapter 7 trustee or United States Trustee, if the court finds that the debtor’s attorney violated Fed. R. Bankr. P. 9011;[77]

➢ A signature of an attorney on a petition, pleading or motion shall consisute a certification that the attorney:

▪ Has performed a reasonable investigation into the circumances that gave rise to the petition, pleading, or motion;

▪ Determined that it is well grounded in fact; and

▪ Is warranted by existing law or a good faith argument for the extension, modification, or reversary or existing law and is not an abuse under Section 707(b)(1) (Note that this is a certification that the attorney has performed the means test and that the calculation is correct).[78]

➢ The signature of an attorney on the petition shall constitute a certification that the attorney has no knowledge after an inquiry that the information in the schedules filed with such petition is incorrect.[79]

What? Right now, in the wake of the effective date of the Reform Act, attorneys are desperately trying to figure out what the foregoing actually means. Here are some tips:

➢ Collect hard data supporting your client’s statements. For example, if your client provides you with a list of debt, request supporting documents, including billing statements and a credit report. Collect bank statements and other documents and review for consistency with your client’s statements.

➢ Review everything and ask questions. For example, if your client does not disclose an interest in an IRA, 401(k), or pension plan, but you see deductions for one on her pay stub, ask your client about it.

➢ Do not file a case that fails the means test, and until the courts have spoken on this issue, consider carefully whether you should file an “aggressive” case that pushes the envelope on Section 707(b).

-----------------------

[1] About 96% of chapter 7 cases are closed without any funds collected and distributed to creditors by the assigned chapter 7 trustee. Bankruptcy By The Numbers - Chapter 7 Asset Cases, Ed Flynn, Gordon Bermant, and Karen Bakewell, ABI Journal, Vol. XXI, No. 9 (December/January 2003).

[2] Grogan v. Garner, 498 U.S. 279, 286-87, 112 L.Ed. 755, 111 S. Ct. 654 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 78 L.Ed. 1230, 54 S. Ct. 695 (1934)). In re Murray, 249 B.R. 223, 231 (E.D.N.Y. 2000).

[3] The Reform Act imposes a number of new requirements upon the debtor, including, but not limited to: (i) the debtor’s income and expenses must fit with certain set parameters (the “means test”; see section 707(b)); (ii) the debtor must complete a credit counseling course within 6 months of the filing (see section 109(h)(1)); and (iii) the debtor must receive mandatory debtor education prior to discharge (see section 727(a)(11)).

[4] Section 521 of the Bankruptcy Code states, in relevant part, that the debtor shall:

(1) file a list of creditors, . . ., a schedule of assets and liabilities, a schedule of current income and current expenditures, and a statement of the debtor’s financial affairs;

(2) if an individual debtor’s schedule of assets and liabilities includes consumer debts which are secured by property of the estate —

(A) . . . the debtor shall file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property; . . .;

(3) if a trustee is serving in the case, cooperate with the trustee as necessary to enable the trustee to perform the trustee’s duties under this title;

(4) if a trustee is serving in the case, surrender to the trustee all property of the estate and any recorded information, including books, documents, records, and papers, relating to property of the estate, . . .; and

(5) appear at the hearing required under section 524(d) of this title.

[5] See Section III(B) below, and 11 U.S.C. § 707(b)(2).

[6] See Section III(A) below, and 11 U.S.C. § 109(h).

[7] See 11 U.S.C. §301, 303(b). Note that petitions for relief under chapter 7 can be filed voluntarily or involuntarily. A vast majority of cases are commenced voluntarily by the debtor. This outline does not discuss the events surrounding an involuntary petition.

[8] See 11 U.S.C. § 701(a) – Interim trustee.

[9] See Section IV(C) below for a full discussion of the filings required by 11 U.S.C. § 521(a)(1).

[10] See 11 U.S.C. § 521(i)(1).

[11] See 11 U.S.C. § 702(d) – Election of trustee.

[12] See 11 U.S.C. § 341(a) – Meeting of creditors and equity security holders.

[13] See 11 U.S.C. § 727(a)(11).

[14] See 11 U.S.C. § 523(a) – Exceptions to discharge; Fed. R. Bankr. P. 4007(c).

[15] See 11 U.S.C. § 707(b) – Dismissal; Fed. R. Bankr. P. 1017(e)(1).

[16] See 11 U.S.C. § 727(a) – Discharge; Fed. R. Bankr. P. 4004(a).

[17] Id.

[18] See 11 U.S.C. § 109(a).

[19] Section 109(h) of the Bankruptcy Code provides that:

(1) Subject to paragraphs (2) and (3), and notwithstanding any other provision of this section, an individual may not be a debtor under this title unless such individual has, during the 180-day period preceding the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency described in section 111(a) an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.

(2) (A) Paragraph (1) shall not apply with respect to a debtor who resides in a district for which the United States trustee (or the bankruptcy administrator, if any) determines that the approved nonprofit budget and credit counseling agencies for such district are not reasonably able to provide adequate services to the additional individuals who would otherwise seek credit counseling from such agencies by reason of the requirements of paragraph (1).

(B) The United States trustee (or the bankruptcy administrator, if any) who makes a determination described in subparagraph (A) shall review such determination not later than 1 year after the date of such determination, and not less frequently than annually thereafter. Notwithstanding the preceding sentence, a nonprofit budget and credit counseling agency may be disapproved by the United States trustee (or the bankruptcy administrator, if any) at any time.

(3) (A) Subject to subparagraph (B), the requirements of paragraph (1) shall not apply with respect to a debtor who submits to the court a certification that--

(i) describes exigent circumstances that merit a waiver of the requirements of paragraph (1);

(ii) states that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services referred to in paragraph (1) during the 5-day period beginning on the date on which the debtor made that request; and

(iii) is satisfactory to the court.

(B) With respect to a debtor, an exemption under subparagraph (A) shall cease to apply to that debtor on the date on which the debtor meets the requirements of paragraph (1), but in no case may the exemption apply to that debtor after the date that is 30 days after the debtor files a petition, except that the court, for cause, may order an additional 15 days.

(4) The requirements of paragraph (1) shall not apply with respect to a debtor whom the court determines, after notice and hearing, is unable to complete those requirements because of incapacity, disability, or active military duty in a military combat zone. For the purposes of this paragraph, incapacity means that the debtor is impaired by reason of mental illness or mental deficiency so that he is incapable of realizing and making rational decisions with respect to his financial responsibilities; and "disability" means that the debtor is so physically impaired as to be unable, after reasonable effort, to participate in an in person, telephone, or Internet briefing required under paragraph (1).

11 U.S.C. § 109(h).

[20] For a list of approved agencies, see the U.S. Trustee’s website at .

[21] For example, prior to the implementation of the Reform Act, the Region 2 United States Trustee spearheaded the Office of the United States Trustee’s Civil Enforcement Initiative in the Eastern District of New York and aggressively pursued the dismissal of ‘abuse cases. See Office of the U.S. Trustee Launches Civil Enforcement Initiative, J. Christopher Marshall, United States Trustee, Boston Bar Newsletter, June 25, 2002, No. 2. The Civil Enforcement Initiative: A Review of the First Ten Months and a Look at the Next Stage, Antonia G. Darling and mark A Redmiles, ABI Journal, Vol. XXI, No. 7 (September 2002). Information related to the United States Trustee prosecution of these cases is also available on its website at .

[22] See e.g., In re Edwards, 13 C.B.C.2d 255, 257 (Bankr. S.D.N.Y. 1985) (substantial abuse would exist when the debtor’s petition and schedules “fail to reflect a need for the relief being sought because they do not reflect that the debtor is now suffering or will suffer in the near future from any meaningful economic hardship.”)

[23] 11 U.S.C. § 707(b)(1).

[24] Section 707(b)(2)(A) provides that:

(i) In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor's current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the lesser of--

(I) 25 percent of the debtor's nonpriority unsecured claims in the case, or $6,000, whichever is greater; or

(II) $10,000.

(ii) (I) The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor's actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case, if the spouse is not otherwise a dependent. Such expenses shall include reasonably necessary health insurance, disability insurance, and health savings account expenses for the debtor, the spouse of the debtor, or the dependents of the debtor. Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts. In addition, the debtor's monthly expenses shall include the debtor's reasonably necessary expenses incurred to maintain the safety of the debtor and the family of the debtor from family violence as identified under section 309 of the Family Violence Prevention and Services Act, or other applicable Federal law. The expenses included in the debtor's monthly expenses described in the preceding sentence shall be kept confidential by the court. In addition, if it is demonstrated that it is reasonable and necessary, the debtor's monthly expenses may also include an additional allowance for food and clothing of up to 5 percent of the food and clothing categories as specified by the National Standards issued by the Internal Revenue Service.

(II) In addition, the debtor's monthly expenses may include, if applicable, the continuation of actual expenses paid by the debtor that are reasonable and necessary for care and support of an elderly, chronically ill, or disabled household member or member of the debtor's immediate family (including parents, grandparents, siblings, children, and grandchildren of the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case who is not a dependent) and who is unable to pay for such reasonable and necessary expenses.

(III) In addition, for a debtor eligible for chapter 13, the debtor's monthly expenses may include the actual administrative expenses of administering a chapter 13 plan for the district in which the debtor resides, up to an amount of 10 percent of the projected plan payments, as determined under schedules issued by the Executive Office for United States Trustees.

(IV) In addition, the debtor's monthly expenses may include the actual expenses for each dependent child less than 18 years of age, not to exceed $1,500 per year per child, to attend a private or public elementary or secondary school if the debtor provides documentation of such expenses and a detailed explanation of why such expenses are reasonable and necessary, and why such expenses are not already accounted for in the National Standards, Local Standards, or Other Necessary Expenses referred to in subclause (I).

(V) In addition, the debtor's monthly expenses may include an allowance for housing and utilities, in excess of the allowance specified by the Local Standards for housing and utilities issued by the Internal Revenue Service, based on the actual expenses for home energy costs if the debtor provides documentation of such actual expenses and demonstrates that such actual expenses are reasonable and necessary.

(iii) The debtor's average monthly payments on account of secured debts shall be calculated as the sum of--

(I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition; and

(II) any additional payments to secured creditors necessary for the debtor, in filing a plan under chapter 13 of this title, to maintain possession of the debtor's primary residence, motor vehicle, or other property necessary for the support of the debtor and the debtor's dependents, that serves as collateral for secured debts;

divided by 60.

(iv) The debtor's expenses for payment of all priority claims (including priority child support and alimony claims) shall be calculated as the total amount of debts entitled to priority, divided by 60.

11 U.S.C. § 707(b)(2).

[25] See 11 U.S.C. § 707(b)(2)(B) (Special circumstances may include a medical condition or a call or order to active duty in the Armed Forces).

[26] Section 101(8) of the Bankruptcy Code defines consumer debts as “debt incurred by an individual primarily for a personal, family, or household purpose.” 11 U.S.C. § 101(8).

[27] Current census information available at and .

[28] See 11 U.S.C. § 707(b)(2)(D).

[29] The numbers used were obtained from the Internal Revenue Services website at , and were last updated on August 23, 2005.

[30] The numbers used were obtained from the Internal Revenue Services website at , and were last updated on August 23, 2005.

[31] The numbers used were obtained from the Internal Revenue Services website at , and were last updated on August 23, 2005.

[32] See Internal Revenue manual 5.15.1.10 at .

[33] 11 U.S.C. § 704(b)(1). Section 704(b) and (c), which are part of the Reform Act, set forth the noticing requirements with respect to cases that are presumptively fraudulent under the means test, providing as follows:

(b) (1) With respect to a debtor who is an individual in a case under this chapter--

(A) the United States trustee (or the bankruptcy administrator, if any) shall review all materials filed by the debtor and, not later than 10 days after the date of the first meeting of creditors, file with the court a statement as to whether the debtor's case would be presumed to be an abuse under section 707(b); and

(B) not later than 5 days after receiving a statement under subparagraph (A), the court shall provide a copy of the statement to all creditors.

(2) The United States trustee (or bankruptcy administrator, if any) shall, not later than 30 days after the date of filing a statement under paragraph (1), either file a motion to dismiss or convert under section 707(b) or file a statement setting forth the reasons the United States trustee (or the bankruptcy administrator, if any) does not consider such a motion to be appropriate, if the United States trustee (or the bankruptcy administrator, if any) determines that the debtor's case should be presumed to be an abuse under section 707(b) and the product of the debtor's current monthly income, multiplied by 12 is not less than--

(A) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner; or

(B) in the case of a debtor in a household of 2 or more individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals.

(c) (1) In a case described in subsection (a)(10) to which subsection (a)(10) applies, the trustee shall--

(A) (i) provide written notice to the holder of the claim described in subsection (a)(10) of such claim and of the right of such holder to use the services of the State child support enforcement agency established under sections 464 and 466 of the Social Security Act for the State in which such holder resides, for assistance in collecting child support during and after the case under this title;

(ii) include in the notice provided under clause (i) the address and telephone number of such State child support enforcement agency; and

(iii) include in the notice provided under clause (i) an explanation of the rights of such holder to payment of such claim under this chapter;

(B) (i) provide written notice to such State child support enforcement agency of such claim; and

(ii) include in the notice provided under clause (i) the name, address, and telephone number of such holder; and

(C) at such time as the debtor is granted a discharge under section 727, provide written notice to such holder and to such State child support enforcement agency of--

(i) the granting of the discharge;

(ii) the last recent known address of the debtor;

(iii) the last recent known name and address of the debtor's employer; and

(iv) the name of each creditor that holds a claim that--

(I) is not discharged under paragraph (2), (4), or (14A) of section 523(a); or

(II) was reaffirmed by the debtor under section 524(c).

(2) (A) The holder of a claim described in subsection (a)(10) or the State child support enforcement agency of the State in which such holder resides may request from a creditor described in paragraph (1)(C)(iv) the last known address of the debtor.

(B) Notwithstanding any other provision of law, a creditor that makes a disclosure of a last known address of a debtor in connection with a request made under subparagraph (A) shall not be liable by reason of making such disclosure.

11 U.S.C. § 704(b).

[34] See 11 U.S.C. §301, 303(b). Note that petitions for relief under chapter 7 can be filed voluntarily or involuntarily. A vast majority of cases are commenced voluntarily by the debtor. This outline does not discuss the events surrounding an involuntary petition.

[35] See generally, 11 U.S.C. § 362. Note that the Reform Act contains numerous exceptions to where the automatic stay applies in certain types of actions, and for debtors who have had other bankruptcy cases pending in the year prior to filing.

[36] See Fed. R. Bankr. P. 1007 to 1009.

[37] The following New York State statues provide for exemptions on certain pension type accounts, and should be reviewed in their entirety before any decisions are made regarding the application of any exemption to any particular asset: N.Y. Debt. & Cred. Law §§ 282(iii)(2)(e) and 283(1); N.Y. Civ. Prac. Law & Rules § 5205; N.Y. Ins. Law § 4607; N.Y. Retire. & Soc. Sec. Law § 110; and N.Y. Unconsol. Law § 13.

[38] See 11 U.S.C. § 547.

[39] See 11 U.S.C. §§ 541 to 550.

[40] See 11 U.S.C. §§ 544 and 548.

[41] U.S.B.C. E.D.N.Y. Local Rule 1073-2(b). This is in addition to the normal disclosure of prior cases required on page 2 of the voluntary petition. Copies of the local rules can be accessed over the internet by (i) for the Eastern District of New York at and (ii) for the Southern District of New York at .

[42] U.S.B.C. E.D.N.Y. Local Rule 2017-1.

[43] The Bankruptcy Court for the Southern District of New York’s procedures for electronically filed cases are set forth on General Order M-242, which can be accessed over the internet at .

[44] See 11 U.S.C. § 521(a)(1)(B)(iii)(I). Section 342(b) of the Bankruptcy Code provides that:

Before the commencement of a case under this title by an individual whose debts are primarily consumer debts, the clerk shall give to such individual written notice containing--

(1) a brief description of--

(A) chapters 7, 11, 12, and 13 and the general purpose, benefits, and costs of proceeding under each of those chapters; and

(B) the types of services available from credit counseling agencies; and

(2) statements specifying that--

(A) a person who knowingly and fraudulently conceals assets or makes a false oath or statement under penalty of perjury in connection with a case under this title shall be subject to fine, imprisonment, or both; and

(B) all information supplied by a debtor in connection with a case under this title is subject to examination by the Attorney General.

11 U.S.C. § 342(b).

[45] See 11 U.S.C. § 521(a)(1)(B)(iv).

[46] A copy of the official form is available at .

[47] See 11 U.S.C. § 521(a)(1)(B)(v).

[48] See 11 U.S.C. § 521(b)(1).

[49] See 11 U.S.C. § 521(e)(2)(A)(i).

[50] Section 704(a) of the Bankruptcy Code provides that:

(a) The trustee shall--

(1) collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest;

(2) be accountable for all property received;

(3) ensure that the debtor shall perform his intention as specified in section 521(2)(B) of this title;

(4) investigate the financial affairs of the debtor;

(5) if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper;

(6) if advisable, oppose the discharge of the debtor;

(7) unless the court orders otherwise, furnish such information concerning the estate and the estate's administration as is requested by a party in interest;

(8) if the business of the debtor is authorized to be operated, file with the court, with the United States trustee, and with any governmental unit charged with responsibility for collection or determination of any tax arising out of such operation, periodic reports and summaries of the operation of such business, including a statement of receipts and disbursements, and such other information as the United States trustee or the court requires;

(9) make a final report and file a final account of the administration of the estate with the court and with the United States trustee;

(10) if with respect to the debtor there is a claim for a domestic support obligation, provide the applicable notice specified in subsection (c);

(11) if, at the time of the commencement of the case, the debtor (or any entity designated by the debtor) served as the administrator (as defined in section 3 of the Employee Retirement Income Security Act of 1974) of an employee benefit plan, continue to perform the obligations required of the administrator; and

(12) use all reasonable and best efforts to transfer patients from a health care business that is in the process of being closed to an appropriate health care business that--

(A) is in the vicinity of the health care business that is closing;

(B) provides the patient with services that are substantially similar to those provided by the health care business that is in the process of being closed; and

(C) maintains a reasonable quality of care.

11 U.S.C. § 704(a).

[51] See e.g., Fed. R. Bankr. P. 2004.

[52] See 11 U.S.C. § 727(a)(11). For a list of authorized providers, see the United States Trustee’s website at .

[53] S. Rep. No. 65, 98th Cong. 1st Sess. 54 (1983). See also In re Kelly, 841 F.2d 908, 915, 18 C.V.C.2d 560, 568 (9th Cir. 1988) (court found substantial abuse when debtor, an attorney, had $1,000 per month to pay creditors and could afford to pay 99% of his debts within three years).

[54] The U.S. Trustee’s Civil Enforcement Initiative under the direction of Assistant United States Trustee Diana Adams in the Eastern District of New York created a simple model for screening cases for substantial abuse: any cases with less than $10,000 in assets and more than $100,000 in unsecured debt should be reviewed.

[55] See 11 U.S.C. § 727(a)(2).

[56] See 11 U.S.C. § 727(a)(3).

[57] See 11 U.S.C. § 727(a)(4).

[58] See 11 U.S.C. § 727(a)(5).

[59] See 11 U.S.C. § 523(a)(1),(7), (14) and (18).

[60] See 11 U.S.C. § 523(a)(5) and (15).

[61] See 11 U.S.C. § 523(a)(8).

[62] See 11 U.S.C. § 523(a)(9).

[63] See 11 U.S.C. § 523(a)(2)(A).

[64] See 11 U.S.C. § 523(a)(2)(C).

[65] See Section III(B), supra.

[66] See 11 U.S.C. § 727(a)(8).

[67] See 11 U.S.C. § 1328(f).

[68] Id.

[69] See 11 U.S.C. § 727(a)(9).

[70] See Sections III(a) and VI, supra.

[71] See Section VI, supra.

[72] See 11 U.S.C. § 362(b)(2).

[73] See 11 U.S.C. § 362(b)(19).

[74] See 11 U.S.C. § 362(b)(22) and (l).

[75] See 11 U.S.C. § 362(c)(3).

[76] See 11 U.S.C. § 707(b)(4)(A).

[77] Id.

[78] See 11 U.S.C. § 707(b)(4)(C).

[79] See 11 U.S.C. § 707(b)(4)(D).

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download