Suffolk Lawyer

Written by Craig D. Robins, Esq.

Previously, in the first two parts of this three-part series, I compared chapter 11 with other chapters and discussed when chapter 11 should be utilized, how the chapter 11 attorney works, and what happens upon filing. I also reviewed some initial procedural issues, the debtor’s chapter 11 obligations, and chapter 11 motions practice. This month I will conclude the series with a discussion of claims and confirmation of the plan.

Classification of Claims. Classification of claims is especially important in chapter 11 because the category of classification as set forth in the plan will determine how much and when the claim will be paid. The debtor makes a preliminary classification of claims in the bankruptcy petition, which contains separate schedules for priority debts, secured debts and unsecured debts.

Bar Date. Proofs of claim must be filed with the court prior to a bar date which is set by the court. The debtor is responsible for bringing a motion to set the bar date. Notice of the bar date is then served on all creditors who then receive about 30 to 90 days to file their proofs of claim. If a debtor lists a potential debt as disputed and the creditor fails to file a claim by the bar date, the claim will be declared invalid.

Objections to Claims. If the debtor determines that a proof of claim is improper it may bring a motion objecting to allowance of the claim. This is a frequently used motion which sometimes results in extended litigation. However, such litigation in the Bankruptcy Court is usually concluded in a matter of months, whereas the same litigation would have taken years in a New York State Supreme Court.

The Chapter 11 Plan. The objective in a chapter 11 proceeding is to propose and confirm a plan of reorganization that will provide how each classification of creditor will be paid. In most small business bankruptcies, the plan is filed six to twelve months after the bankruptcy’s inception. Although the Bankruptcy Code permits a creditor to file a plan if the debtor fails to do so during the first 120 days, this is rarely done with small business bankruptcies.

The plan may also provide for the rejection of executory contracts, the sale of some or all of the debtor’s assets, and the reinstatement or curing of any default. The content of the plan is limited only by the ingenuity and relative bargaining power of the debtor and its creditors, and plans are often amended. Most plans provide for payment of claims over a period of three to six years.

Liquidation Plans. Although most small businesses hope to continue operation of their business, continued post-petition operating losses may render reorganization unfeasible. One way to maintain control over the sale of the corporate assets is to propose a liquidation plan whereby the debtor, rather than a court-appointed trustee, supervises the sale of all of the assets.

The Disclosure Statement. This is an extensive document prepared in conjunction with the plan which discloses to creditors sufficient information about the debtor and the proposed plan to enable them to make an informed decision on whether to accept or reject it. In order to adequately inform creditors, the disclosure statement should provide a history of the company, an explanation of the financial problems which led to bankruptcy, a discussion of steps the debtor took to improve its financial integrity, and a projection of what the debtor intends to accomplish in the future. A financial statement must also be included. The disclosure statement must be written in clear, easy-to-understand layman language and it must be approved by the court upon motion before it is distributed to creditors. The disclosure statement is often likened to an offering plan or prospectus. Usually, the United States Trustee takes an active role in reviewing the sufficiency of this document.

Claim Priorities. Most bankruptcy estates lack sufficient funds to pay all claims in full. Therefore, the priority of the claim will determine what claims are paid first. The highest level of priority is the super priority claim which is reserved for lenders who loaned money to the debtor after the bankruptcy was filed and who received such a priority after court approval.

Administrative Priority Claims. This is the next level. These are claims for expenses incurred after the bankruptcy was filed for the administration of the bankruptcy estate. This class includes attorney’s fees and other professional fees, as well as post-petition debts incurred in the ordinary course of business. Administrative claims are usually paid in full upon confirmation of the plan.

Priority Claims. Priority claims are paid after administrative claims. A priority claim is an unsecured claim that is given special priority by the Bankruptcy Code. Priority claims include wage claims of up to $2,000.00 per employee and most tax claims. All priority claims must be paid in full through the plan. Although payment may be stretched out over a number of years, tax debts must be paid in six years or less.

Fully-secured Claims. A security interest creates a first right to payment from the proceeds of a sale of the secured property. Payment of secured claims take precedence over payment of priority claims to the extent of the security interest. A secured claim must be paid in full, and if payment is spread out over time, the creditor is entitled to receive interest. Judgments are not secured claims unless they attached to real estate prior to the filing of the bankruptcy. Each secured claim is usually unique in its terms and treatment of collateral, and therefore such claims usually form their own class.

Partially-secured Claims. If the amount of a secured claim exceeds the value of the collateral, the creditor is only partially secured. Such creditors have two claims: One secured (in an amount equal to the value of the collateral), and one unsecured (the balance). However, a partially-secured creditor has the right to elect to be treated as fully secured.

Unsecured Claims. All other claims are unsecured and must be paid at least what they would have received had the debtor been liquidated under chapter 7. Payments on such claims are usually spread over a period of years even though the total amount of payments add up to only five or ten cents on the dollar.

Debts Owed to Shareholders. Unfortunately for the owners of the company, their loans to the business are subordinated to trade creditors. Consequently, the shareholders are not entitled to payment through the plan unless the unsecured creditors receive payment in full. Fortunately, though, most plans leave the shareholders with their ownership interests intact.

Impaired Class. At least one class of claims must consist of impaired claims. An impaired class is important for voting purposes. An impaired claim is one that will receive less than full payment through the plan. A claim is also impaired if the rights of the creditor are materially changed by the plan.

Creditors Eligible to Vote. Only those creditors whose claims are impaired are eligible to vote on the acceptance or rejection of the plan. Unimpaired classes of claims are presumed to have accepted the plan and classes of claims receiving nothing under the plan are presumed to have rejected the plan. In addition, only creditors’ claims that are allowed by the court are allowed to vote.

Voting on The Plan. Once the court approves the disclosure statement, it is then served on eligible creditors together with the plan of reorganization. In addition, the debtor also serves a ballot for accepting or rejecting the plan, and a notice advising when the ballots must be filed, as well as the date of the hearing at which time the court will consider whether to confirm the plan. No one can solicit acceptances or rejections of the plan until the disclosure statement is approved. If a creditors’ committee was formed, the debtor will negotiate the terms of the plan with them.

Acceptance of The Plan. The plan of reorganization must be accepted by one class of impaired creditors holding at least two-thirds of the dollar amount of claims, and one-half of the total number of allowed claims. Only those votes that are cast are counted.

Confirmation. Even after the creditors have accepted a plan, it must still be confirmed by the court before the plan can become binding. After giving the creditors approximately one month notice, the debtor will request a confirmation hearing before the judge to “confirm” that the plan has received the requisite number of votes and that it otherwise conforms to the legal requirements for final approval by the court. For example, the court must determine that the plan was proposed in good faith. The regular method of confirmation requires that every impaired class accept the plan.

Cramdown. This is a method of confirmation which is used when one or more impaired classes reject the plan, but which has been accepted by at least one impaired class. This requires the debtor to additionally show that the plan does not discriminate unfairly against the dissenting class, and that the plan is fair and equitable. Obtaining a confirmation under a cramdown is more difficult than the regular confirmation method.

Effect of Confirmation. Once the plan is confirmed, the debtor is considered as having successfully emerged from bankruptcy. The confirmed plan becomes binding on the debtor and its creditors, and acts to discharge all debts listed in the plan. The Bankruptcy Court retains some control over the case to ensure that the plan is implemented. When all of the provisions of the plan have been fulfilled, the plan is “consummated,” and the case is closed by the court.

Caveat. This article was meant to provide a very brief overview of the chapter 11 process. A thorough discussion would fill up a large treatise. Consequently, much of the information was presented in a simplified manner.

You should remember that chapter 11 proceedings and the law that they involve are complex, and representation requires a keen understanding of chapter 11 practice and procedure as well as a good knowledge of the Federal Rules. Therefore, if it appears that your small business client might benefit from a chapter 11 reorganization, consider referring the matter to an experienced bankruptcy practitioner who emphasizes debtorrepresentation.

About the Author:  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the January 2005 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com

Written by Craig D. Robins, Esq.

Last month, in the first part of this three-part series, I compared chapter 11 with other chapters and discussed when chapter 11 should be utilized, how the chapter 11 attorney works, and what happens upon filing. This month will continue with a discussion of some initial procedural issues, the debtor’s chapter 11 obligations, and chapter 11 motions practice. I will conclude the series next month with a discussion of claims and confirmation of the plan.

Debtor in Possession
Unlike other types of bankruptcies, in a chapter 11 the debtor acts as its own trustee and remains in possession of the business. A debtor in possession, frequently referred to as a “DIP,” has all of the power and authority that a trustee has in other chapters. The DIP operates the business in generally the same manner as prior to filing. If the DIP or its officers mismanage the corporate affairs or commit fraud, a creditor or the court may seek to appoint an operating trustee to run the business.

Rights of Secured Creditors
The automatic stay gives the debtor tremendous protection from creditor action. However, a secured creditor may attempt to seek relief from the automatic stay by bringing a motion if the creditor does not have “adequate protection” of its interest in the collateral. In order to succeed in lifting the stay, the creditor must demonstrate that there is no equity in the property and that the property is not essential to the debtor’s reorganization.

Adequate Protection
There are several other forms of adequate protection which the debtor may use to prevent the stay from being lifted. In addition to proving that there is an “equity cushion” as discussed above, the debtor may provide adequate protection by making post-petition payments to the creditor to make up for the lack of equity. Adequate protection can also be provided by giving the creditor an additional lien or a replacement lien on other property.

Cash Collateral
This is a term which applies to cash or any other property of the debtor which is easily converted to cash. Property such as bank accounts, securities, accounts receivable, rental income, and cash equivalents constitute cash collateral. Because these assets can be very easily disposed of, their use or sale is subject to strict rules. The Debtor in Possession may not use or sell cash collateral if it is subject to a lien, unless the secured creditor consents or the court approves. Examples of pre-petition situations which give rise to a post-petition lien on cash collateral include filed IRS liens or NYS tax liens; mortgage provisions containing a clause that the mortgagee has a lien on rents; and security agreements and UCC-1 statements that give the secured party a lien on bank accounts and accounts receivable.

Cash Crunch
The debtor’s inability to use cash collateral can be fatal if it is caught in a “cash crunch.” Virtually all debtors require operating funds to continue operating their business and pay post-petition expenses. Failure to have operating funds can be the death knell for any company. Therefore, immediate action is needed to obtain permission to use cash collateral.

Sometimes the debtor’s attorney will approach the secured creditor or taxing authority prior to filing the bankruptcy petition to negotiate a stipulation permitting the debtor to use cash collateral. The secured creditor will look to receive some kind of adequate protection on its security interest. This sometimes can only be done by granting the creditor a super-priority lien on all assets of the estate, which means that the creditor will be paid even before the administrative expenses and post-petition debts are paid. In effect, a super priority lien takes priority over all other claims, including some prior liens.

In the event the secured creditor is not willing to stipulate to the use of cash collateral, the debtor will probably need to bring an emergency first day order to show cause seeking interim approval to use cash collateral. Businesses filing chapter 11 often find themselves without operating funds until the court issues a cash collateral order. Accordingly, the bankruptcy court will act quickly to entertain a debtor’s application to use cash collateral.

Post-petition Credit
Major financing after the petition is filed requires court approval. Usually, the lender will insist on receiving a “super-priority lien.” Although super-priority liens are only permitted by the court when the debtor is unable to obtain financing without them, the super-priority lien is the mechanism of the Bankruptcy Code to induce banks into lending money to businesses in bankruptcy.

Obligations of the Debtor in Possession
The Debtor in Possession usually continues to operate the business without interference from the court. However, the DIP must get court approval to obtain credit, assume or reject a lease, sell assets outside of the ordinary course of business, or employ any professional such as an attorney, accountant, or appraiser. The DIP must pay quarterly filing fees and maintain insurance on all assets as well as liability insurance.

Bank Accounts.
Bankruptcy rules require the DIP to immediately set up new bank accounts. This is usually done on the day of filing. In most cases, at least three accounts are required: an operating account, a payroll account, and a tax trust fund account.

Post-Petition Taxes and Expenses
The DIP has an especially important obligation to timely pay all post-petition taxes, and must also stay current with other post-petition debt. Failure to do so can result in dismissal of the chapter 11 petition and lifting of the automatic stay.

Operating Reports
Once a business files for chapter 11 relief, its finances become subject to strict scrutiny. The Debtor in Possession must file monthly operating reports with the court which include a statement of income and expenses for the period, a statement of post-petition tax and administration expenses and liabilities, a summary of cash receipts and disbursements, a summary of the payroll account, a summary of the tax trust fund account, copies of the DIP bank account statements, and verification of federal tax deposits. Many DIP’s utilize the services of an accountant to prepare the reports. Employment of the accountant and payment of the accountant’s fees must be approved by the court in advance.

Obligation to Reorganize
In addition to coming up with a plan to reorganize its debt structure, the Debtor in Possession is expected to streamline operations and make the company more profitable. This may involve reducing expenses, laying off employees, re-capitalizing debt, reducing salaries, re-negotiating or rejecting leases, and changing day-to-day business operations.

Role of U.S. Trustee
The United States Trustee’s office is a division of the U.S. Department of Justice. It is charged with the responsibility of supervising the administration of bankruptcy estates and making sure that Debtors in Possession fulfill their obligations. The U.S. Trustee should not be confused with the private trustees appointed by the court to administrate chapter 7 and chapter 13 cases.

The failure of a DIP to perform its obligations and duties may result in the U.S. Trustee bringing a motion to appoint an operating trustee, or seeking to convert the case to chapter 7, or dismiss it entirely. The U.S. Trustee also reviews all proposed orders prior to submission to the judge. In addition, the U.S. Trustee reviews the DIP’s operating reports. If it appears that the DIP cannot successfully emerge from bankruptcy, the U.S. Trustee will bring a motion to convert or dismiss.

Unsecured Creditors’ Committee
The U.S. Trustee also has the obligation of appointing an unsecured creditors’ committee to represent the interests of that entire class of creditors. It does this by sending a notice to the top twenty largest unsecured creditors who are not insiders, requesting volunteers to serve on the committee. The purpose of the committee is to investigate the debtor and monitor the operation of its business. With most smaller chapter 11 bankruptcies, the unsecured creditors are usually too apathetic to become involved, and no committee gets formed. When there is a committee, they usually hire an attorney to represent the committee, whose legal fee is ultimately borne by the debtor.

Contracts and Unexpired Leases
A chapter 11 debtor is often faced with burdensome executory contracts or leases that must be terminated or re-negotiated if the debtor’s business is to survive. The Bankruptcy Code provides that the debtor may, at its option, reject or assume almost any contract or lease under which the debtor is obligated. Although this can be done at any time up through confirmation, a motion to assume or reject a non-residential real property lease must be made within 60 days of the date the petition was filed.

Rejection and re-negotiation of burdensome and unprofitable contracts and leases is sometimes a principal reason for filing a chapter 11 petition. A DIP can often re-negotiate a lease for a fraction of the DIP’s pre-petition obligation, assuming there are no personal guaranties that the lessor can pursue.

Meeting of Creditors
All bankruptcies, including chapter 11, require a meeting of creditors. The meeting is presided over by a representative from the U.S. Trustee’s office, who questions an officer of the debtor concerning the debtor’s financial integrity, reasons why it suffered financial difficulty, and its plans to emerge from bankruptcy. With most smaller business bankruptcies, the questions tend to be pro-forma, and creditors rarely appear.

Motions and Litigation
Motions practice and litigation in a typical chapter 11 proceeding will include some of the following: bringing a motion to set a bar date for filing claims; bringing a motion to object to a proof of claim; filing an application to retain an attorney, accountant, or appraiser; defending a motion to lift the stay; filing an application for attorneys fees; and defending a motion which seeks to dismiss the bankruptcy or convert it to chapter 7. Also, bringing an adversary proceeding to set aside a preferential transfer; litigating the value of a secured asset; bringing a motion to use cash collateral; bringing a motion to sell assets outside the ordinary course of business; filing an order to show cause to serve a motion on reduced notice; and bringing a motion to approve the disclosure statement or set the confirmation hearing.

Further, bringing a motion to assume or reject an executory contract or lease; bringing a motion to extend time to file the plan; commencing an adversary proceeding to obtain turnover of bankruptcy estate property, avoid liens, or set aside certain pre-petition transfers.

All judges require regular status conferences and as well as pre-trial conferences for certain types of litigation. All motions practice in Bankruptcy Court requires appearances on the return dates. As you can see, chapter 11 representation necessitates spending a considerable amount of time in Bankruptcy Court.

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the December 2004 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

Written by Craig D. Robins, Esq.

With our turbulent economy, even established businesses may find it difficult to cope with their ever increasing trade debt, pay their taxes, and deal with secured creditors. An option available to a financially troubled company is to seek protection afforded by a bankruptcy reorganization. Chapter 11 enables a business to obtain protection from its creditors while it attempts to reorganize its debts and pay them off, at least partially, over a period of time. Chapter 11 relief is available to virtually any business whether it is a sole proprietorship, partnership or corporation.

Scope of This Article. Many of my previous articles focused on consumer bankruptcy practice and procedure. Chapter 11 business bankruptcy, however, is infinitely more complex than consumer bankruptcy, and is not recommended for the casual bankruptcy practitioner.

Competent representation of a business in reorganization requires a thorough knowledge of the entire bankruptcy code and local rules, together with a keen understanding of local chapter 11 practice and procedure. Therefore, this article will provide an overview of what chapter 11 is about, to better enable you to adequately advise your small business clients as to whether chapter 11 should be considered as a viable option, and if so, what may be expected. In the event chapter 11 looks like a distinct possibility for your client, consider referring your client to a bankruptcy attorney. I will present this article in a three-part series.

Comparison With Other Chapters. Consumers utilize chapter 7 to eliminate most debts, and they generally use chapter 13 to keep real estate and stop foreclosure while paying off their debts with a payment plan. Individuals who ordinarily would file chapter 13, but are prevented from doing so because they have more than $290,525 in unsecured debt or more than $871,550 in secured debt, can utilize chapter 11. Corporations may file chapter 7 as a means of orderly dissolving a debt-ridden corporation that does not want to continue operating. Any significant assets of a corporate chapter 7 debtor are liquidated by a trustee. Corporations may not file chapter 13.

Situations Where Chapter 11 Is Beneficial. Unfortunately, most chapter 11 proceedings are filed only after a company has gotten so seriously into debt that it can barely continue functioning, or the company may be facing a creditor who is threatening to take drastic collection action. In advising a financially troubled company, you should explain that bankruptcy considerations should not be put off too long while the principals of the company hope that business will turn around. Instead, a bankruptcy filing should be taken as a more preventative measure at the early signs of financial difficulty, rather than as an emergency measure done under extreme pressure.

Perhaps the most common situation in which a company is forced to quickly file chapter 11 is when numerous trade creditors have already begun significant collection activity, which may include the initiation of law suits or the enforcement of judgments. Another common emergency situation is when one of the taxing authorities threatens to levy a bank account or padlock the door. Pressure from secured creditors to repossess key equipment, or from a mortgagee to foreclose business property, are also reasons to seek immediate chapter 11 protection. Sometimes a bankruptcy reorganization may be used for less apparent reasons, such as to terminate a highly unprofitable lease or contract.

The Chapter 11 Petition. The petition is essentially similar to the official form used in chapter 7 cases. Thus, the debtor must list all of its creditors and amount of debts; list all assets and property; set forth a statement of income and expenses; and disclose pertinent financial information. In addition, there is a schedule of the “top twenty” largest debts owed to non-insider creditors; an exhibit setting forth whether the shares of stock are registered with the S.E.C., and who the majority shareholders are; a schedule of all equity shareholders; and a corporate resolution authorizing the retention of the bankruptcy attorney and the filing of the chapter 11 proceeding.

In addition, local rules require an affidavit from an officer of the debtor setting forth the estimated weekly payroll and operating expenses for the thirty day period following the filing of the petition, the estimated gain or loss in the operation of the business during this period, and information that will fully inform the court as to the desirability of the debtor continuing business.

Emergency Filings. A chapter 11 petition can be filed in an emergency by filing a skeletal petition. The remaining documents must be filed within a period of two to fifteen days, depending on the document. Chapter 11 petitions must be filed electronically.

The Chapter 11 Attorney. An attorney representing a chapter 11 debtor must be authorized by the court to represent the debtor. In addition, once the petition is filed, the attorney is not entitled to earn any legal fees until the court issues a written order authorizing the attorney to represent the debtor.

For this reason, the bankruptcy attorney will prepare a “first day” application and order requesting approval to be retained by the debtor. The application, which is submitted on the first day of the bankruptcy, must set forth the attorney’s previous chapter 11 experience and qualifications, as well as the attorney’s hourly rates. In addition, the attorney must submit an affirmation of disinterest indicating that he or she represents no interest adverse to the debtor or the bankruptcy estate.

Legal Fees. Because of the extensive amount of work involved in chapter 11 proceedings, legal fees tend to be rather substantial. Virtually all chapter 11 attorneys are compensated on an hourly fee basis. The attorney will usually request a sizable retainer that is paid prior to filing. The amount may depend on the size and volume of the debtor’s business, the number of creditors and amount of debt owed, the attitude and aggressiveness of the creditors, and the extent of issues requiring litigation.

A typical retainer for a small business reorganization is usually $10,000 and up. Most bankruptcy attorneys will also require the principals of the business to personally guarantee the legal fee.

One of the reasons that a large retainer is necessary is because the attorney may not receive any additional legal fees unless authorized by the court. The bankruptcy rules limit the number of fee applications the attorney can make. Thus, once the petition is filed, the attorney will not see any additional legal fees for many months, if at all.

The bankruptcy court takes a very active role in monitoring the legal fees paid by the debtor. Therefore, the fee application itself is a rather involved process requiring a court hearing. The court will only compensate attorneys for necessary legal work, and then, only in an amount which is reasonable. Scrupulous time records are necessary to substantiate the legal work performed. Many attorneys have been criticized by the court for failing to keep proper time records and have suffered accordingly. Some judges are particularly notorious for imposing elaborate record-keeping requirements on counsel.

Court Fees. The current filing fee for chapter 11 is $839. In addition, there are quarterly fees payable to the United States Trustee until the case is confirmed, based on the amount of the debtor’s disbursements.

The Automatic Stay. As with all bankruptcies, an automatic stay pursuant to Bankruptcy Code section 362 goes into effect immediately upon filing the petition. The automatic stay acts as an injunction to stop all foreclosures, collection actions, civil litigation, and creditor harassment. The stay applies to all creditors including taxing authorities.

Moratorium on Paying Debts. The debtor does not have to pay most pre-petition debts for a period of several months, until the payment plan is confirmed. However, the debtor may have to pay something towards certain debts, such as rent or arrears on secured debt, under certain circumstances. This breathing time is essential to permitting the debtor to concentrate on becoming a more profitable entity.

First Day Orders. A debtor must obtain court permission to retain any professionals (such as the bankruptcy attorney), or engage in certain conduct. Since such court permission is necessary immediately, the bankruptcy attorney will prepare a number of applications and orders which are immediately presented to the designated judge on the day the bankruptcy is filed. These urgently needed court authorizations are referred to as first day orders. Although such relief is requested ex-parte, a judge will frequently direct counsel to serve all creditors, or certain parties in interest with the application and order, and will permit these parties to later oppose a continuation of the requested relief at a hearing.

Other situations that may require first day orders include applications to pay pre-petition wages, use cash collateral, continue existing bank accounts, employ an accountant, or sell assets outside the ordinary scope of business.

How Creditors Are Notified. About three days after the case is commenced, the court will mail all creditors an official notice of filing which will also set forth the judge, court, name of debtor’s attorney, and date for the first meeting of creditors. In addition, the court also sends a blank proof of claim form which the creditor may use to file a claim.

About the author:  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the November 2004 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

Written by Craig D. Robins, Esq.

We are all aware of people who cheat on their taxes, and crooked accountants who sometimes assist them. Unfortunately there are a few bad apples in the bankruptcy arena as well: debtors who lie in their bankruptcy proceedings and attorneys who may help them. Authorities estimate that ten percent of all bankruptcy cases contain some element of fraud.

The Bankruptcy Code imposes an affirmative duty on a debtor to truthfully list all assets and other information required in the petition. This must be done under the federal penalty of perjury. Not only can dishonesty in connection with a bankruptcy case result in the denial of a discharge pursuant to Bankruptcy Code section 727, but it can also land the guilty party in the jail.

Increased Investigations of Bankruptcy Crimes. Now that the U.S. Trustee’s office has embarked upon a quest to sniff out bankruptcy abuse and bankruptcy fraud through its Civil Enforcement Initiative, it appears that an increasing number of those individuals who commit bankruptcy crime are being caught. The U.S. Trustee, which is a division of the Department of Justice (DOJ) also now has a Criminal Enforcement Unit.

Criminal procedure aspects of bankruptcy fraud are set out in Title 18 of the United States Code. Section 152 of that title states that whoever knowingly and fraudulently conceals assets, makes false oaths, presents false claims, receives property with the intent of defeating the provisions of the Bankruptcy Code, destroys records of the debtor, or withholds documents from a trustee, shall be imprisoned for up to five years or fined up to $5,000. The same statute also imposes liability upon any agent or officer of any person or corporation involved in such fraud.

Section 155 of that title states that a debtor’s attorney who knowingly and fraudulently enters into an agreement with another attorney for the purpose of fixing the fees to be paid to any attorney for services rendered, with such fees to be paid from the bankruptcy estate, shall be imprisoned for up to a year or fined up to $5,000.

Another part of that title, section 3057, imposes a congressional directive to the district offices of the U.S. Attorney to become more active in the prosecution of bankruptcy fraud cases. Bankruptcy fraud can involve other federal statutes as well.

Although bankruptcy fraud is committed by a very limited few, it nevertheless has at times cast a negative reflection upon everyone who files for bankruptcy relief.

Some lawyers might not recognize criminal activity that the DOJ now targets for investigation. Examples include filing for bankruptcy using an incorrect Social Security number, and receiving payments from a bankruptcy debtor that were not approved by the bankruptcy court. In both of these examples, DOJ investigations led to convictions and jail time. The decision to prosecute is based on the level of loss or injury, the existence of sufficient evidence, and the clarity of the law. In some cases, civil penalties for fraud are deemed sufficient to punish and deter.

The DOJ often issues press releases about recent indictments and convictions for bankruptcy fraud. Consumer Bankruptcy News, an excellent periodical for practitioners, now regularly reports news of bankruptcy crime. The following cases, which were gleaned from recent issues and press releases, highlight some interesting bankruptcy crimes involving not only debtors, but their attorneys as well.

Colorado attorney suspended because he secured his legal fees by taking liens against client’s homes. Conrad Kindsfather not only secured his unpaid legal fees by having his bankruptcy clients give him a mortgage on their property, he then failed to disclose his interest in the property in the bankruptcy proceeding. Practical Tip: If you become a secured creditor of the debtor, you have a conflict of interest in a bankruptcy proceeding and may not represent the debtor. Also, and this probably goes without saying, do not prepare a petition and intentionally conceal material information, as this is a deceptive practice.

Identification Theft in Bankruptcy Proceeding Lands Defendant in Prison. Rodney Jones obtained a fraudulent identification card and used it to impersonate someone by filing a bankruptcy petition in that person’s name in order to stop a foreclosure proceeding. Practical Tip: Always ask for and check your client’s driver’s license and social security card at the time they retain you, and make sure your client is who he or she appears to be.

Debtor lied about assets owned by his corporation and was convicted for bankruptcy fraud. Duncan Edwards filed a Chapter 13 petition and listed his corporation as an asset, but indicated that it had only nominal value. It turned out that the corporation owned stock options in another corporation. Edwards later converted his case to Chapter 7 and did disclose the stock options, but testified that they were worthless. A few days later the trustee learned that the debtor had sold the options two weeks prior to the hearing for $445,000. Needless to say, Edwards will be serving time. Practical Tip: Try to make sure your client is realistic about the value of scheduled assets. Remind your client that pulling a fast one and trying to cheat in the bankruptcy system can result in a felony conviction.

Attorney and client are both indicted for scheme to defraud creditors. Arnold Stuart retained Gregory Lyons, Esq. The U.S. Attorney alleged that they schemed to prevent certain creditors from obtaining and recording a judgment lien on Stewart’s property. While Stewart was in bankruptcy, the men allegedly entered into a coal-mining investment encumbering the debtor’s property, but never disclosed that fact to the creditors, the bankruptcy court or the trustee. Instead, they led creditors to believe they were following the order of the bankruptcy court to sell the land and to pay proceeds to the creditors, according to the investigators. When it appeared that some creditors had learned of the scheme, the defendants attempted to conceal the fraud by dismissing the bankruptcy case; however, they were caught. Practical Tip: Practitioners should be aware that there may be criminal law consequences based on advice given and actions taken in the planning and conduct of a bankruptcy case.

Bankruptcy crime seminar in November. Stephanie Wickouski is one of the country’s leading experts on bankruptcy crime. She is the author of the leading treatise on that subject. On November 17, 2004, she will be joined by Southern District Bankruptcy Judge Cornelius Blackshear and Deidre Martini, U.S. Trustee for Region 2, for a roundtable discussion of bankruptcy crimes, their genus and aftermath. The panel will explore the effects that these crimes have on the economy and on confidence in the economic system. The seminar, which will be at the Milleridge Cottage in Jericho, is being sponsored by the Long Island Chapter of the Turnaround Management Association. For information, contact Chapter President Jeff Wurst at (516) 663-6535.

 About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the October 2004 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

Written by Craig D. Robins, Esq.

The Old Laws Are Now History. If you have bankruptcy petitions that you have not yet filed, you are out of luck. The new laws that all consumer bankruptcy attorneys have dreaded for quite some time are now upon us. On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), this country’s most sweeping bankruptcy legislation in decades, became effective. During the past month, the Bankruptcy Court saw a record number of filings by debtors trying to get in under the old laws.

The New Laws Are Extremely Complex. To prepare for the rough road ahead in handling BAPCPA, I recently attended a symposium and workshop in Orlando, Florida sponsored by the National Association of Consumer Bankruptcy Attorneys. BAPCPA contains so many new and complex provisions that several days of morning to evening seminars and workshops seemed to barely skim the surface. The Nassau and Suffolk Bar Associations both offered recent one-evening C.L.E. seminars. However, they merely provided an overview of just a few of the new provisions. The CLE’s were nevertheless very informative as our local judges and trustees gave their input as to how they were planning to address the changeover.

The days of the general practitioner grabbing a Blumberg bankruptcy form are over. In order to effectively represent your clients (and avoid being sanctioned), taking a thorough course on the new laws is an absolute prerequisite. The National Association of Consumer Bankruptcy Attorneys announced that it will be offering some additional symposiums in the near future. Over 1,500 attorneys attended the one in Orlando. Before that, 1,700 attorneys attended their symposium in Chicago. Various organizations will certainly be offering full-day seminars in the near future.

Electronic Filing and Computer Petition Preparation Are Now Mandatory. With the advent of the new laws, combined with the local court requirement that attorneys file petitions electronically, it is inconceivable that a practitioner can prepare a bankruptcy petition without using a computer together with specialized and current bankruptcy petition preparation software. If you plan to practice consumer bankruptcy, then you must make this investment. All of the leading petition preparation software publishers have rushed to prepare updated versions of their software. The software will be especially important in assisting you with the numerous calculations required by the means test. The software should also include all necessary databases regarding the IRS standardized expense tables and the state median income.

The Bankruptcy Law Has Changed Considerably. Discussing the provisions of the new law could easily fill a thousand of these columns. The means test is a major component. Its ostensible purpose is to determine, after a series of calculations, whether a debtor who seeks to file for Chapter 7, would be abusing the bankruptcy laws if that debtor could afford to pay something back to his creditors. In addition to this totally new procedure, there are new provisions for determining property of the estate and calculating exemptions. There are new procedures for valuing assets. There are new laws concerning the automatic stay, which will not be so automatic in some instances. Treatment of secured claims has changed and debtors will likely have to reaffirm all secured debts, a procedure that had been mostly done away with in this jurisdiction during the past decade. Matrimonial obligations are now treated totally differently in a way to designed to protect the innocent spouse. There are new exceptions to discharge. There are also greater limitations upon re-filing after a previous petition has been filed. And don’t forget, debtors must receive credit counseling as a condition to filing for bankruptcy relief, and budget counseling as a condition to receiving a discharge, and you will certainly need to assist them with this.

You Must Read the New Laws. Let me repeat that. You must read the new laws. If you file a petition after October 17, 2005 without having a thorough understanding of the new laws, you will be inviting sanctions, embarrassment and malpractice suits. Although the new laws are several hundred pages, you must read them and you must understand them. At the bankruptcy CLE at the Suffolk Bar Association earlier this month, one of the speakers suggested that all attorneys read the new section 521, concerning debtor’s duties, at least ten times.

The Most Significant Change is the Means Test: A Potential Nightmare. The essence of the new law is the means test, a six-page, fifty-five line item, computational form that makes the most complicated tax return form look like a walk in the park. This form alone will intimidate the most seasoned practitioner and will likely have the effect, intended or not, of preventing many people from filing for bankruptcy for various reasons. If you fail to properly prepare the means test, you will be looking at sanctions. Even though your software will assist you with the computations, you must still understand the appropriate figures and definitions that the new law requires.

Attorneys Now Face Tough New Responsibilities and Liabilities. At the CLE at the Suffolk Bar Association earlier this month, speaker Sal LaMonica suggested that “as a result of this law, you have to look at each new client as a potential liability.” The number one concern that most consumer bankruptcy attorneys probably have about the new law is that it imposes a tremendous responsibility and potential liability on the attorney.

The attorney must now conduct a reasonable investigation to verify the accuracy of the information provided by the client. In addition, the attorney must determine that the petition and all other information provided to the court and the trustee is well-grounded in fact. Finally, the attorney must certify that a Chapter 7 petition is not an abusive filing. At the same CLE, Judge Cyganowski suggested that a debtor’s attorney will now have the obligation to examine every bill and every utility statement to ascertain the accuracy of the debtor’s budget.

The penalties for violating any of the new liability provisions can be strict and can include fee disgorgement, actual damages, attorney’s fees and costs, and possible civil penalties. These new responsibilities, combined with attorney liability, will likely cause many lawyers to leave the consumer bankruptcy practice, and will result in an increase in fees charged by those who stay.

New Mandatory Disclosures and Advertising. As a debtor’s attorney, you are now required to make numerous disclosures about the nature of legal services offered, the consequences of filing for bankruptcy, and the obligation to provide truthful information in the petition, with such disclosures being made no later than three days after you first offer legal services to the client. Failure to do so can mean additional sanctions.

If you advertise bankruptcy legal services you must now identify yourself as a “Debt Relief Agency” in any advertisement and contain a disclosure essentially stating that you help people file for bankruptcy.

Revising Your Legal Fees. As a result of the additional amount of time that you will need to spend with each bankruptcy matter, combined with the added potential attorney liability, many attorneys are anticipating that they will end up doubling their existing fees. Legal fees of $2,000 to $3,000 for Chapter 7 cases and $3,500 to $5,000 for Chapter 13 cases may become the norm, although it is too early to determine. In addition, many bankruptcy attorneys will probably charge two separate fees: one to cover the several hours worth of work that will be involved with the means test, and another to cover the remainder of the bankruptcy including preparation of the petition and representation in court. After all, it will often be difficult to recommend filing Chapter 7 until a substantial amount of time is devoted to reviewing all aspects of the case and then performing the means test.

Are You Ready for All of This? If all of the above does not sound intimidating enough, even the most experienced attorneys, trustees and judges are experiencing high degrees of angst because no one seems to know how the new laws will pan out. Finally, if you decide to continue your bankruptcy practice, be prepared to spend a substantial amount of time reviewing the new laws, attending seminars and workshops, and re-adjusting your perspective as to how bankruptcy works. As Judge Bernstein stated, “It will be an evolutionary process for everyone.”

 Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in te October 2004 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com

Written by Craig D. Robins, Esq.

Nowadays, those who are most likely to file for bankruptcy are middle-class families of the baby-boomer generation. In other words, the typical Long Island family. We previously considered middle-class families as a stereotypical group noted for their financial stability and for the vitality they provide to the American economic system. It is the middle-class family, however, that now has become the stereotypical bankruptcy filer.

I have observed this phenomenon in my consumer bankruptcy practice. Aside from some truly destitute clients that I represent on a pro-bono basis as part of the Nassau-Suffolk Legal Services Project, most of my clients are somewhat educated and hold, or have held, typical jobs, often “white collar,” that fuel the Long Island economy. Most of them are not young.

Yet, bankruptcies were once the primary domain of the young and struggling, or the lesser-educated who would spend their money recklessly, or those with young families who did not have savings cushions to carry them through lean times. However, it appears that we must now discard these stereotypes of bankruptcy debtors. More and more, even families with many years of positive financial experience, retirement nest eggs, home ownership, and perfect credit are finding themselves in financial holes that they cannot dig themselves out of.

Last month, the Wall Street Journal featured a front-page article: “New Group Swells Bankruptcy Court: The Middle-Aged.” The Journal story focused on “an emerging class of middle-age, white-collar Americans who make the grim odyssey from comfortable circumstances to going broke.”

It now appears that the demographic group with the highest rate of personal bankruptcies in the U.S. is no longer people with little education in the youngest employment bracket (age 25-34), but rather middle class, educated, white-collar workers in the 35-44 and 45-54 age brackets, representing an important shift from a decade ago.

The increase in middle-aged, middle-class people filing for bankruptcy is largely attributable to soaring medical costs, an unstable job market and years of easy money from aggressive credit-card marketing. Also, today’s baby boomers are not as frugal as their Depression-era parents, perhaps largely the result of being driven by societal pressure and temptation to finance the American dream by purchasing and spending beyond their means. This has all led to staggering amounts of personal debt which many middle-class families are becoming increasingly unable to handle, especially when the household becomes overextended. Many middle-aged individuals who have borrowed heavily have brushed off concerns, saying they expect to live longer and work longer.

Written by Craig D. Robins, Esq.

In my previous two columns, I addressed many common problems that come up at the Meeting of Creditors. In this last part of the three-part series I will cover some additional issues and dilemmas.

Problem No. 16: The U.S. Trustee Decides to Participate Also. As mentioned in a previous article, the Office of the United States Trustee has placed greatly increased priority in its Civil Enforcement Initiative Program. This means that there is a chance that the U.S. Trustee’s Office may red-flag a case for “substantial abuse” and then send one of its attorneys or paralegals to participate in the Meeting of Creditors and ask questions. If this happens, plan for your case to be called out of order, expect a much longer meeting, and fully cooperate. Try to use this opportunity to point out anything which will establish the debtor’s good faith. This usually means demonstrating that the debtor’s budget is reasonable or that a relatively large amount of debt was reasonably incurred.

Problem No. 17: A Creditor Shows Up. It is relatively rare these days for any creditor to appear at the Meeting of Creditors. However the following types of creditors are much more likely to appear: a local individual creditor who may have given a personal loan to the debtor, a separated or divorced spouse who is owed maintenance and support, or a business creditor whose account the debtor personally guaranteed. Such creditors may show up on their own, or with counsel who is not familiar with bankruptcy procedure, or with very experienced bankruptcy counsel. Most creditors who show up are unsophisticated and under the mistaken notion that they are required to appear.

If a creditor appears at the meeting, they are entitled to ask the debtor questions about the debtor’s assets and liabilities. They are not permitted to cross-examine the debtor as if the trustee was a judge. If the creditor (or their inexperienced counsel) asks improper questions or becomes argumentative, you should direct your client not to respond and admonish the creditor or counsel as to the proper scope of questioning. The trustee will probably do so as well. Also, a creditor cannot use the meeting as a fishing expedition to ask the debtor very general questions. Although a creditor has the exact right to do that, it is done pursuant to a Bankruptcy Rule 2004 exam, and not at the meeting of creditors, where time is very limited.

Problem No. 18: The Chapter 13 Trustee Wants to Adjourn the Meeting Because the Trustee Never Received Certain Documents. The Local Rules require all Chapter 13 debtors to provide the trustee, at least ten days prior to the Meeting of Creditors, with certain documents including the last two years of tax returns, one months worth of pay stubs, a real estate valuation if the plan pays unsecured creditors less than 100%, copies of real estate leases, tenants affidavits, affidavits of contribution, and affidavits of changed circumstances. (See Local Rule LR-2003-1). If you neglect to do this, the trustee will refuse to examine the debtor, you will look foolish in front of your client, and you will be told to return. Always make sure you provide the Chapter 13 trustee with the documents in advance. The Chapter 13 trustees are not too sympathetic with attorneys who neglect this rule.

Problem No. 19: There are Pages Missing From the Photocopies of the Petition. All photocopy machines will skip a page or two from time to time. If you sit down for your hearing and realize that all photocopies of the petition are missing an important schedule, you can apologize to the trustee, request a ten minute break, and then run down to the clerk’s office to print out the missing pages, assuming that you filed a full electronic copy.

Problem No. 20: The Debtor has Trouble Understanding English. If the trustee becomes frustrated trying to understand the debtor’s responses in broken English, the trustee will adjourn the hearing and make you re-appear with an interpreter. Therefore, you should anticipate in advance whether the debtor will have difficulty being examined in English. If so, you should arrange for a disinterested interpreter to accompany the debtor to the Meeting of Creditors.

The interpreter can usually be a friend, relative or spouse. However, the trustee has the right to object to the interpreter if the trustee believes the interpreter may be biased or interested. Consider calling the trustee in advance to advise him that an interpreter will be used and to make sure the particular interpreter will not be a problem. At the meeting, the trustee will swear in the interpreter and have them pledge that they will fully and truthfully translate the questions and answers.

If, in your office, the debtor previously seemed to be able to fully communicate without an interpreter, it is possible that the debtor is nervous or that the trustee may be talking too fast. If you sense this, ask the trustee’s indulgence to be patient because the debtor is nervous, and ask the trustee to talk more slowly. I have had some trustees talk so fast that I, myself, needed an interpreter!

Problem No. 21: The Debtor Appears to Be Wearing a Million Dollars Worth of Jewelry. Common sense dictates that out of respect for the proceeding, the debtor should not wear any flashy jewelry, even if it may be worthless rhinestone costume jewelry. If the debtor is wearing expensive-looking jewelry, expect the trustee to ask about it, which is like opening a can of worms. Advise your clients to avoid dressing in an overly flashy manner. It is best to leave all jewelry at home except for the wedding band.

Problem No. 22: You Observe the Debtor Lying Under Oath or Answering Incorrectly. If you observe the debtor answer a question, and you know the answer is incorrect, you have an affirmative duty to speak up. Sometimes the debtor innocently didn’t understand the question, or the trustee asked a series of yes-no questions too quickly. Worse, it may appear that the debtor is fabricating an answer. In any event, counsel should immediately interject, “the debtor might not have understood the last question,” and ask the trustee to ask that question again. You certainly do not want to get into a situation where the debtor can be labeled a perjurer because you didn’t speak up quickly. Even though a trustee’s questions can seem repetitive, you must always pay keen attention.

Debtors must pay close attention also and counsel must be sufficiently prepare them for the examination. For example, a frequent problem is that a trustee will ask a debtor about bank accounts and the debtor will answer in the negative because the debtor does not view a checking account as a “bank account.” All seasoned bankruptcy practitioners should know verbatim just about every possible question a trustee may ask. It is your responsibility to adequately prepare your client for the meeting by reviewing the potential questions with the debtor in advance.

Problem No. 23: The Debtor Has Difficulty Explaining a Complex Situation. Sometimes a trustee may ask the debtor to explain a complicated pre-petition transaction and the debtor has difficulty giving a sufficient answer. When that happens with my clients, I will often interject and offer to provide the trustee with the facts. Most trustees will appreciate this. However, you need to approach this carefully as some trustees will downright resent such efforts and will view it as counsel testifying for the debtor. Try to get a feeling as to how your particular trustee will respond and then consider asking the trustee if he would like you to “clarify” the matter.

Problem No. 24: There is a Snow Storm: Will the Hearing Go On? Is Court Open? On severe weather days the Court will close and is supposed to indicate this on a recording when you call the Court or log onto the Court’s web site. However, many attorneys have been frustrated because this information was not made available until mid-morning or early-afternoon, when it is already too late. Consider calling the trustee’s office. If the weather looks ominous the day before the meeting, make special arrangements with your client to communicate the next morning. Then, if the weather is relatively bad the morning of the meeting, and you cannot confirm whether the meeting will go forward or not, you may decide to tell your client not to go, in which case, you should be able to call the trustee’s office a day later and get an adjourned date. If there are several inches of snow on the roads, and you cannot confirm whether the meeting will go on, counsel can hardly be faulted for not appearing, but you should avoid an embarrassing situation where your client shows up and you do not.

About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the June 2004 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

Written by Craig D. Robins, Esq.

In my column last month, I addressed some common problems that come up at the Meeting of Creditors. This month I will focus on additional problems involving the trustee. Many problems can be reduced or eliminated by making sure that you and your client are prepared, by preparing the petition correctly, and by making sure that you and your client are considerate and respectful towards the trustee.

Problem No. 8: The Trustee Thinks the Debtor Is Being Disrespectful. Advise your clients to avoid any sarcasm or joking at the hearing. What may be taken as amusing by one trustee, may be seen as disrespectful and annoying by another. If the trustee reacts in a negative or hostile way towards the debtor for any reason, try to immediately neutralize the situation, perhaps by interjecting that the debtor is nervous and didn’t mean to come across the way that they did.

Problem No. 9: The Trustee Wants to Adjourn the Meeting Because the Trustee Never Received a Copy of the Petition. With the advent of Electronic Case Filing, the debtor’s attorney is obligated to immediately mail a hard copy of the petition to the trustee which should contain the signatures of the debtors and their counsel. If the trustee does not receive a copy sufficiently in advance of the meeting, the trustee may adjourn the hearing and make you come back. Always make sure you timely mail a copy of the petition to the trustee. (Note that you are also required to mail a hard copy to the U.S. Trustee). If the trustee wants to send you home, consider pleading for sympathy and offer the trustee your copy.

Problem No. 10: The Trustee Announces That the Debtor Must Turn Over an Asset. This situation almost only arises when the debtor’s attorney is not a regular bankruptcy practitioner. Counsel must be familiar with the concept of exemptions and how local practice and procedure treats them. For example, if a debtor has a car that contains a large amount of non-exempt equity, it becomes property of the estate and the trustee is theoretically entitled to take possession of it. Almost all trustees will seek to negotiate a settlement to enable the debtor to keep the non-exempt asset. However, if the car is not insured, the trustee may not even let the debtor drive it away. If you have to file a petition in a case where there are significant non-exempt assets, make sure your client knows what to expect. You should review with your client any assets that may not be totally exempt, such as liquid assets and entitlement to tax refunds, pending accident cases or causes of action, and the right to inherit from a pending estate.

Problem No. 11: The Trustee is Going Crazy Because the Debtor Is Speaking Too Softly. All hearings are recorded. The debtor must talk loud enough to make sure his or her voice is being recorded. The debtor must also talk clearly. If the trustee asks a yes-or-no question, the debtor must answer vocally, rather than just nod the head. You should tell your client in advance to speak up, answer all questions, and speak clearly.

Problem No. 12: The Trustee Wants to Adjourn the Meeting and Have Debtor Return to Be Re-Examined. Some debtor situations can be rather complex, and may involve businesses, pre-petition transfers of real estate or other assets, or preferential payments. In such instances, the trustee may want to investigate the information just provided, or may request additional information. If the trustee directs the debtor to re-appear for an adjourned Meeting of Creditors, consider fully cooperating with the trustee by expeditiously providing any additional documents. Then call the trustee a few days prior to the adjourned date to see if the trustee will consider waiving appearances for the adjourned date.

Problem No. 13: The Trustee Announces That He Is Making a “707(b) Referral” to the U.S. Trustee. If a trustee feels that a debtor has filed a petition in bad faith or that the filing is an abuse, the trustee does not have the power to take any further action other than to refer the matter to the Office of the United States Trustee for further review. Sometimes the trustee may tell you, after examining the budget or the amount of debt, that he is making a “707(b) referral.” If that happens, expect to receive a receive a detailed request from the U.S. Trustee to audit and investigate the case.

Problem No. 14: The Trustee is on the War Path. Trustees are human too and can be in a bad mood for a variety of reasons. I have witnessed many trustees in a bad mood, sometimes compounded by frustration caused by recalcitrant debtors or slow-moving calendars. If the trustee is in a bad mood, it is vital not to tick the trustee off. Many a trustee has yelled at attorneys for talking in the hearing room. If you need to talk, take your client or fellow attorney outside the room. Be considerate and use common sense.

Problem No. 15: The Trustee Does Not Like the Way You Prepared the Petition. This is another situation that almost exclusively arises when the debtor’s attorney is not a regular bankruptcy practitioner. Trustees expect a certain level of professionalism. If the petition is sloppily prepared, lacks necessary information or contains incorrect information, contains incorrect exemption statutes, or is not properly prepared, the trustee may direct the attorney to re-do it, and may even refuse to examine the debtor until the petition is done correctly. The trustee can also refer the attorney to the U.S. Trustee’s Office to be investigated, as that office is responsible for maintaining the professionalism of the bankruptcy bar. Remember, one of the purposes of the Meeting of Creditors is for the trustee to check the accuracy of the information in the petition. The bottom line: If you file a petition, make sure you know what you are doing, and do it right. Then proof-read it before having the debtor execute it.

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq.,  is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the May 2004 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

Written by Craig D. Robins, Esq.

What the Meeting of Creditors Is All About. With most bankruptcies, the Meeting of Creditors is the only real “event” of any importance during the entire case, and it is generally the first and only time that you and your client will have to appear in Court. As creditors rarely show up, it is primarily an opportunity for the trustee to examine the debtor.

Ideally, the actual hearing goes smoothly and routinely, lasting just a few minutes, and then you and your client are happily on your way. However, there are a myriad of things that can go wrong at the meeting much to everyone’s consternation and dismay. Fortunately, most problems can be avoided with proper planning and preparation.

Since every bankruptcy case involves a Meeting of Creditors, and since I regularly witness so many problems that other attorneys are having while waiting for my cases to be called, I will devote the year’s three remaining columns to such problems and how to prevent or handle them.

Problem No. 1: Debtor Brings Insufficient Identification. The Office of the United States Trustee has a policy that requires all debtors to identify themselves with picture identification (typically a driver’s license) and proof of correct Social Security number (typically a Social Security card). What happens if your client fails to have these forms of identification at the hearing?

Trustees should also accept the following items as acceptable photographic identification: passport, legal resident alien card, military identification, or state-issued photo identification card. Trustees should accept the following as satisfactory proof of Social Security number: pay stub, health care card, any correspondence from the Social Security Administration, or a current W-2.

If the debtor fails to have proof of Social Security number, most trustees will examine the debtor but will require counsel to immediately fax a copy of acceptable proof. If the debtor does not have picture identification, most trustees will examine the debtor, but will require the debtor to personally appear later at the trustee’s office with photo identification in hand. However, some trustees may simply refuse to examine the debtor without the satisfactory identification documents and adjourn the meeting.

In my practice, I require all clients to provide me with their driver’s license and Social Security card at the initial intake. I then make a legible photocopy and place it in the file. On numerous occasions these copies have saved the day. Also, by reviewing the debtor’s identification early on, you have time to have debtor obtain satisfactory identification if the debtor does not immediately have it available.

Problem No. 2: The Trustee Sends the Debtor Away For Failing To Read the Trustee Information Sheet. The Bankruptcy Amendment Act of 1994 imposed an obligation on all trustees to make sure that debtors know certain bankruptcy fundamentals, now codified in Code section 341(d). Trustees now meet this obligation by asking each debtor at the beginning of their examination if they read the U.S. Trustee’s Information Sheet which is posted on the wall outside the hearing room. If the debtor states that he has not yet read it, the trustee will refuse to examine the debtor. I give each client a copy of this information sheet when they retain me and I also make it a part of their petition, which I have them sign. Thus all my clients have read this in advance. Nevertheless, I prepare them for this question so that they answer it properly.

Problem No. 3: You Learn that Creditors Were Inadvertently Omitted From the Petition. A debtor will frequently approach his attorney in the minutes before the hearing to advise the attorney that there is a creditor or other information missing from the petition. Sometimes this will come out while the debtor is being examined. You can easily amend the schedules of the petition prior to the closing of the case to add any inadvertently omitted creditors. At the meeting, however, you should immediately respond to one of the trustee’s first questions to the debtor, which is, “Are there any changes or additions that you would like to make to the petition?” Advise the trustee that a creditor was inadvertently omitted and that you will be amending the petition.

Problem No. 4: There Is a Discrepancy with the Social Security Number. If there is any problem with the correctness of the Social Security number as it appears in Court documents, it will probably surface at the Meeting of Creditors. If it turns out that the number on the petition is incorrect, then counsel must prepare and file an application and order correcting the caption to reflect the correct Social Security number. Remember that now, only the last four digits of the Social Security Number can appear in any document that will become part of the Court file. In your application, indicate that you will be sending a hard copy Amended Form 21 (Proof of Social Security Number) directly to the Clerk’s office.

Problem No. 5: You Are Running Late and Will Not Make it to the Hearing on Time (Or At All). The trustee may tell the debtor to call their attorney from the pay phone at the end of the hall. A few trustees may even ask the debtor if they mind being examined without their attorney present If the case seems rather simple. Otherwise, the trustee will adjourn the case for about two weeks. In any event, you should communicate with the trustee as soon as possible.

Problem No. 6: The Debtor Has Young Children Who Are Getting Very Impatient. Most trustees (not all) are understanding and will call certain cases out of order if the situation calls for it. Consider approaching the trustee in between cases and quickly discuss the special courtesy requested.

Problem No. 7: Your Client Fails to Show Up. I observe that this is a constant problem with many attorneys. To ensure that your client appears, always remind them a few days beforehand. I also send them directions and a photograph of the building so that they do not confuse it with the other court buildings nearby. I remind them not to bring cell phones into the building which may cause the U.S. Marshal to send them back to their car. I tell them to be there at least 30 minutes before their hearing, and to sit in the hearing room. If you still don’t see your client, they may be sitting in the wrong room as there are two meeting rooms next to each other. Consider using the pay phone at the end of the hall to call your client or have your office track them down. If all else fails, ask the trustee for an adjournment and then charge your client for having to make a second appearance if the client forgot to go.

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the April 2004 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

Written by Craig D. Robins, Esq.

Be Prepared for Emergency Filings. It is bound to happen. You receive a phone call from a potential client who says that his house is being auctioned off at a foreclosure auction tomorrow. Or, a creditor is about to file a judgment lien against your client’s property. Or, a creditor is about to immediately enforce a judgment by garnishing wages, restraining a bank account, or padlocking a business. Sometimes the bankruptcy petition must be filed immediately to get the benefit of the automatic stay, but there is insufficient time to prepare the entire petition and supporting schedules. This article will provide some practical information for addressing such an emergency situation.

The Automatic Bankruptcy Stay. The bankruptcy stay becomes effective at the time the petition is filed with the Clerk of the Bankruptcy Court. If you file electronically, the time of filing is basically the time you press the final send button on your computer, which time is then indicated in the E.C.F. (Electronic Case Filing) filing receipt. If you file in person at the bankruptcy court, it is the time that the clerk clocks in your petition with the clerk’s time and date stamping machine.

Filing a Skeletal Petition. The local rules do not require that you file all of the supporting schedules at the time the case is initially filed. Fortunately, you can commence a case by filing just the two-page bankruptcy petition together with a list of creditors and their addresses either in the form of the matrix or by filing the schedules of creditors. You must also pay the filing fee.

The local rules permit you to file the remaining schedules and forms several days thereafter. The Matrix and Social Security Number Statement must be filed within 48 hours. All of the other schedules must be filed within the next 15 days, although the Chapter 7 Statement of Intention (regarding secured assets) and the Statement of Attorney’s Time Pursuant to Local Rule 2017-1 can be filed up to the date of the Meeting of Creditors. If you do not file the remaining schedules during these time periods, the Court has the right to automatically dismiss the case. If you need additional time, you can bring an application seeking additional time during the 15-day period.

As a practical tip, in emergency situations you may have no choice but to file now and amend later. Note that pursuant to Local Rule 1007-1(b), any schedules filed after the filing of the petition may need to be accompanied by an affidavit. Any amendments or late-filed schedules must also be served on the Chapter 7 or 13 trustee, as well as the United States Trustee.

Filing the Petition. The Court now requires all attorneys to file their petitions electronically by E.C.F. If you have computer problems and must file under emergency circumstances, you can still file a petition in person at the clerk’s office. If you do, you should try to convert your papers into P.D.F. files and come to the Court with the files on a 3.5 inch floppy disk. If you are unable to do this, the Clerk’s office maintains a scanner for public use and they will require you to scan your papers into P.D.F. files there. You should also bring exact change for the filing fee.

If there is a line of people waiting to file petitions, the clerk will permit you to move to the front of the line if you declare that you have a true emergency filing with only minutes to spare. Please note that the time and date stamping machine sitting on top of the Court’s “night depository” drop box which is located outside the clerk’s office does not provide an official time and date stamp; only the clerk’s office can provide an official stamp. Therefore, stamping your petition with this machine will not help. If you have a real emergency situation with very little time to spare, and you are unable to file electronically, you should call the clerk’s office for further guidance and to advise them to expect you.

Assess Whether the Situation is Actually A True Emergency. I frequently get calls from potential clients who believe their house is about to be auctioned off in a foreclosure sale. However, many of them mistakenly confuse a motion return date in the foreclosure proceeding with the actual sale date. Before rushing like a madman, take the time to verify that the client’s urgency is well-founded.

Avoid Filing for Sole Purpose of Delay. You should remember that even though a bankruptcy filing will automatically stay any foreclosure sale or judgment execution, the Bankruptcy Code prohibits debtors from filing for the sole purpose of frustrating the legitimate collection rights of creditors. You should only file a petition on behalf of a debtor if it is supported by good faith. Even under emergency situations, a debtor’s attorney is still responsible for diligently ascertaining whether there have been several prior filings which may lead to a conclusion that a new filing is abusive and being done in bad faith. A potential client calling at the last minute may have been in a prior bankruptcy case that was dismissed with a provision that the debtor cannot re-file for a period of 180 days. It is the attorney’s responsibility to determine if any prior filings prohibit a subsequent filing.

Notifying Creditors of the Filing. The reason for an emergency filing is because a particular creditor is about to enforce a judgment. Most commonly, this is a foreclosure sale. It is advisable to contact the creditor’s attorney once you have been retained to advise them that there will be an emergency filing at the last minute. In addition, you should also fax them a letter containing the filing information and verify that they received it.

Try to Avoid Emergency Filings. Whenever possible, it is most advisable to file the entire petition and all supporting schedules at the commencement of the case. Otherwise, it becomes an additional burden to file the remaining documents on time, and extra attention will certainly be required to keep everything in order. Fortunately, however, there is a mechanism for filing a skeletal petition under emergency circumstances, but the emergency should be the result of the client calling you at the last minute, rather than caused by your own procrastination.

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the March 2004 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.