Understanding the Chapter 7 Bankruptcy Trustee

Chapter 7 bankruptcy trustee

 

If you file for Chapter 7 bankruptcy, you will probably never sit in a courtroom, or appear before a judge.  Oh, you’ll have a judge, you just won’t ever meet them.  The only person, aside from your attorney, you will ever meet is likely to be your bankruptcy trustee.

At the outset, you should know that most chapter 7 trustees are not government employees.  You can think of them more like contractors.  They get appointed to cases randomly, and their job is two-fold: they ensure that you are eligible for relief and not attempting any fraud on your creditors of the Court, and they examine your assets to see if there is anything to distribute to your creditors.

One of the best ways to explain their motivation is to examine how they get paid.  Trustees receive a small flat fee (in our district, $60) for each case they administer.  They also receive a “cut” of any assets they liquidate, based on a complex compensation scheme.  Most trustees I know tell me that they don’t make any money on “no-asset” cases, which are cases in which they simply get the standard fee.  Their real compensation comes off high-value, complex cases in which they administer assets.

After your case is filed, the trustee is randomly assigned.  The first contact with them will generally come from your attorney, who is required to turn over certain documents in advance of the Meeting of Creditors.  That meeting will be the first time you meet the trustee. I have previously written about this meeting, click the link to read more about it.

When I explain chapter 7 bankruptcy to potential clients, I often use the analogy of a “snapshot.”  That is because we examine a snapshot of your financial situation, both assets and debts, on the date your case is filed.  You can think of the trustee as your photographer (see, now the image makes sense).  They are the ones actually looking at the situation and assessing the state of your finances on the date you filed your case.

It is also important to remember that the trustee is NOT an adversary.  In fact, as a debtor you and your attorney have a duty to cooperate with them.  That is not to say we don’t fight with trustees- we often do!- but most of the time the situation speaks for itself, and the debtors know exactly what to expect.

This is also one part of the bankruptcy process in which it helps to have an experienced attorney.  A good attorney who practices in the district will have a good working relationship with all of the trustees, and can help the case administration go much more smoothly.  The importance of trust and rapport between your attorney and the trustee cannot be overstated.  One long-serving trustee told me that the single most important thing on any bankruptcy petition she examines is the name of the attorney preparing the documents.

Bankruptcy trustees are not judges; often, they are not even attorneys.  They are appointed administrators, and their job is to examine your case, make sure no funny business is going on, and see if there are any non-exempt assets they can liquidate.  They are also real people, and most are reasonable and easy to work with.  They are not your enemy in the bankruptcy process, and you certainly should not be afraid to meet them.

~Andrew

Understanding the Meeting of Creditors

Bankruptcy Meeting of Creditors

In a typical bankruptcy case, the only thing the debtor has to “go and do” is attend the Meeting of Creditors, known among attorneys as the “341 hearing.”  Attorneys have the annoying habit of naming things after code sections; it’s what makes us special.

The first thing you should understand about this meeting is that it is a misnomer: it is very unlikely that any of your creditors will attend.  They were all invited, but unless they have specific questions, they usually rely on the trustee to make an examination.

While there is some variety among districts and individual trustees, most Meetings of Creditors take between three and five minutes.  The trustee will swear in the debtors, check their photo identification and social security card, and ask two types of questions.

The first type of question is highly-scripted, and is asked of every debtor.  If you have the opportunity to observe any hearings before yours, you will already have heard them.  “Did you read and sign the bankruptcy petition and schedules?  Was all the information in those schedules true, complete, and accurate?  Did you list everything you own?  Did you list everyone to whom you owe money?”  There are approximately twenty such questions asked of all petitioners.

The second type of questions vary from case to case, and are those asked by the trustee to clarify or investigate specific items from the petitions.  Remember, the trustee has already made an initial review of the bankruptcy petition, the schedules, and the tax return and pay stub information provided in advance of the hearing (aka “the 521 documents:”  see, attorneys are weird).

There are two primary reasons for holding this meeting.  The first is to get you on the record stating that all the information you submitted to the Court is true.  The second is to investigate potential assets or issues raised by your filing.  For the majority of filers, this will be the one and only time they need to attend any hearing; it is very rare for a chapter 7 bankruptcy debtor to meet their assigned judge.

At the end of the brief hearing, one of three things can happen.  Most commonly, the meeting is concluded.  The trustee will then issue a report, and the debtors are not required to return.  In some cases, the trustee will “continue” the hearing, setting a new date.  If this happens because the trustee wants additional documents or records, most of the time debtors are not required to attend this later hearing date; it is simply set up as a back-stop, in case the documents or records are not provided, or in case the trustee has additional questions.  The trustee will later let the debtor know, through their bankruptcy attorney if they have one, whether or not they need to attend.

Finally, in relatively rare cases, the trustee will have significant issues or problems with the filing, and will continue the meeting and require an appearance.   Generally, this is due to fraud, major asset issues, or undisclosed assets; you probably will know (or your attorney will tell you!) if you are at risk of this outcome.

Generally, the Meeting of Creditors is a relatively painless requirement in the bankruptcy process.  The most common thing my clients say to me as we walk out of the hearing room is “that was it?”

~Andrew

Why did my car payment bills stop coming?

car vehicle payment reaffirmation

For many of my clients, filing bankruptcy is designed to wipe out personal debt, deal with lawsuits or medical bills, or to stave off foreclosure.  It is seldom because of their car payments.

However, many of them do have loans on their cars, loans for which they are current, and for vehicles they intend to keep.  I will post a future entry on reaffirmation, the strange and confusing process by which car loans can be “ridden through” (pardon the pun) the bankruptcy.

It is very surprising for these clients when their monthly car loan statements simply…stop. It is as though the vehicle lender is no longer interested in receiving payment!

Of course, if you want to keep your car, you will need to keep making payments.  The reason the finance companies stop sending statements is not because they don’t want to get paid; it is because of a special bankruptcy rule called the Automatic Stay.

This rule is the powerful shield provided by a bankruptcy.  It provides that creditors may take no action to collect a pre-petition debt during the bankruptcy process.  A dunning letter (like collection demands), a billing statement, or a phone call from a creditor may violate this rule, and can lead to hefty sanctions.

To avoid violating the Automatic Stay, lenders usually cease sending statements, or send special statements reading “for informational purposes only.”  As a corollary to this, automatic debits often stop.

To avoid delinquency on the car loan, you should contact the lender and arrange to continue making “voluntary” payments.  The payments are “voluntary” because they have no right to bill you or to collect money.  However, if you do not make the payments, as soon as the bankruptcy ends the lender can repossess the vehicle.

If you file for bankruptcy protection and want to keep your car, you should talk to your attorney.  You may qualify to redeem the vehicle, or it might be in your best interest to reaffirm the debt.  In most cases, you will need to make arrangements with the finance company to continue making payments, or you may find yourself without transportation when your bankruptcy ends.

~Andrew

Protecting Assets in Bankruptcy

bankruptcy assets exemption

One of the most common myths about bankruptcy is that you will lose everything you own if you file.  In fact, most people do not lose anything.

Here is how assets work in bankruptcy: the moment you file a petition for relief, a legal fiction takes place.  All the property you own on the date of filing becomes a part of the “bankruptcy estate.”  The trustee has control of this estate.

Along with your petition for relief, you file a number of supplemental documents known as “Schedules.”  These are usually prepared by your attorney.  In these schedules, you list all of your assets, and use a state-by-state system called exemptions to protect those assets from the trustee.

The exemptions you are permitted to use is based on where you live, how long you have lived there, and how your state has set up its exemption system.  Some states have their own exemptions.  Some allow you to use the federal exemptions.  Still others, like California, let you choose from multiple options.

When an asset is not exempted, or if the full amount is not exempted, the consequence depends on the type of bankruptcy filing.  In chapter 7, that may mean the trustee will sell the asset, pay you the value of any exemption you did use on it, and will divide the rest of the money among your creditors based on the type of debt, and the amount owed.  In chapter 13, your plan will need to pay unsecured creditors at least as much money during the plan as they would have gotten from the sale of your non-exempt assets.  This is a complicated calculation, and one you should discuss with a bankruptcy specialist prior to filing.

In the great majority of cases we file, our clients are able to protect all of their assets.  In other cases, there are simple steps the clients can take prior to filing to make sure they get the best result possible, and protect as much of their property as they can.  The myth of going bankrupt and losing your shirt is just that: a myth.

~Andrew

Step One: The Initial Consultation

In this post I want to talk a little bit about the first step for someone considering a bankruptcy filing: the initial consultation with an attorney.  This takes place before you hire an attorney or any money changes hands.  Most attorneys, including our office, do not charge for the initial bankruptcy consultation.

The purpose of the consultation is not just to figure out if you qualify for bankruptcy.  That is a part of the meeting, no doubt, but the bigger question we try to answer is “what options do you have available?”  Usually, bankruptcy is but one of several options, and we can discuss the pros and cons of each approach.

When you have an initial consultation with an attorney, you are protected by attorney-client privilege.  This is a two-sided coin: everything you say will be kept confidential, but at the same time, you absolutely need to tell the truth to the attorney.  We can’t give good advice without accurate information, so it is vitally important that you disclose everything relevant to your situation, and answer our questions honestly.

Different firms vary on what documents and information they require in advance of an initial consultation.  While our office tries not to demand too much up front, it is always helpful if you have a recent pay stub, a tax return, a copy of your credit report, and information about any lawsuits or foreclosure activity.  As a general rule, bring what you can easily locate; we would much rather have a document and not need it, than need it and not have it.

The length of the consultation depends on the complexity of the situation.  For a very simple case, in which you have low income, few assets, and no prior bankruptcy, the consultation may take less than an hour.  More typical consultations last between one hour and ninety minutes.  Very complex cases involving businesses, multiple properties, or other sticky issues can take several hours to fully discuss.

When you have an initial consultation with a bankruptcy attorney, be aware that the meeting is also a two-way interview.  You are interviewing the attorney, and figuring out if you have the comfort level needed to permit him or her to represent you.  The attorney is determining whether your case is one he or she wants to take.  Most bankruptcy attorneys I know are in the field because they enjoy helping people, so they can be picky about which clients they represent; our firm agrees to represent about half of the people with whom we have initial consults.

After your initial consultation, be sure to get the attorney’s card, and ask how they prefer to be contacted with follow-up questions.  In my experience, most clients think of a few questions within the 24 to 48 hours after their appointment, and it is important that you ask how to get in touch with your attorney to get those follow-up questions answered.

The initial consultation is probably the most important step in debt resolution.  It sets the tone for representation, and gives you a chance to ask questions and explore potential solutions.

~Andrew