Bankruptcy Tips Consumers Should Know

Written by Craig D. Robins, Esq.

I was most intrigued when the Bankruptcy Court announced several months ago that it was going to make certain judicial opinions available on the E.C.F. website, and that they were going to do this at no charge as part of a policy of providing the public and the bar with information. Despite checking the site repeatedly, there have been very few reported decisions – less than ten to date. However, a few weeks ago I saw a decision issued by Judge Stong (Brooklyn) that was quite interesting.

That case contained a set of facts that became more and more fascinating as I read the decision. It also contained an excellent summary of the law regarding a consumer debtor’s obligation to maintain documents and explain pre-petition financial transactions.

When I first started reading the 34-page memorandum decision (provided as an exact copy of the original in PDF format), I expected to quickly skim the entire document and finish it within a minute. However, I found that it was written almost like a novel with an unexpected twist ending that initially kept me guessing as to who would prevail.

Ginger Young filed a Chapter 7 consumer petition in April 2004. Just five months later, the trustee, John S. Pereira, brought an adversary proceeding (Pereira v. Young, Adv. Pro. No. 04-1476-ess) in which he alleged five claims for relief. Essentially, he argued that the debtor, a paraprofessional employed by the N.Y.C. Department of Education, sold her single-family home just six months before filing, netting $78,000, and that since the debtor could not account for where the money went, she should be denied a discharge. In addition, the debtor depleted $62,000 in pension distributions in the year before filing and was barely able to account for where those proceeds went.

The trustee argued that under Code section 727(a)(3), the debtor’s discharge should be denied because the debtor failed to keep or preserve recorded information; that under section 727(a)(4), the debtor knowingly withheld books and records relating to the debtor’s financial affairs; and that under section 727(a)(5) the debtor was unable to satisfactorily explain the losses of assets. Judge Stong quickly pointed out that if the trustee succeeded under any one of these provisions, the debtor would not be entitled to a discharge.

The debtor denied the trustee’s allegations. Although the trial started in June 2005, the parties agreed to postpone the trial in an effort to reach a disposition through Court-referred mediation. When the parties were unable to reach a settlement over the course of almost a year, the trial was concluded in 2006, and this judicial opinion followed.

Half-way through the written decision, Judge Stong found that the documents that the debtor produced did not permit the trustee to determine the debtor’s financial condition with completeness and accuracy. In particular, they did not enable the trustee to determine what the debtor did with the $140,000 that she received from the sale of the house and from the pension distributions.

At this point, I thought for sure that the debtor was a dead duck. After all, I have witnessed trustees examining countless debtors (clients of other attorneys, of course) as to pre-petition loss of assets and the inability to produce satisfactory documents. These debtors would often come up with the flimsiest of excuses or no explanation whatsoever. In each case, it would merely be a question of time before the debtor’s counsel would reach a settlement with the trustee, or in rare cases, the trustee would seek to bar the debtor’s discharge, as here. I therefore wondered why there was such a lengthy decision in what seemed to be a slam-dunk case against the debtor. Furthermore, the Judge pointed out that since the trustee established his case, the burden shifted to the debtor.

The debtor claimed that her failure to keep adequate records was justified because she was the victim of physical and emotional domestic abuse by a boyfriend. I thought the debtor was grabbing for straws. She even brought in her therapist as an expert witness.

However, Judge Stong then addressed each of the trustee’s claims carefully and methodically. She clarified each of the material elements necessary for the trustee to be successful and for the debtor to adequately defend. In doing so, Judge Stong provided a thorough summary of the case law in this area. In the end, she found that even though the debtor was unable to produce documents or explain exactly where the money went, she was justified in doing so.

The reason was that her boyfriend engaged in extreme coercion and control, and the debtor was indeed a victim of domestic abuse. The debtor testified that the boyfriend repeatedly threatened her life. Essentially, the boyfriend stole her money. The debtor was so traumatized, which was supported by the testimony of her counselor, that it was reasonable to conclude that she could not maintain her papers. The debtor also had to move hurriedly, and had to discard most of her possessions in moving from a house to a small apartment. The judge found that discarding documents under these circumstances did not amount to intentional neglect or indifference to proper record keeping. The judge commented that the debtor’s testimony was credible and that her courtroom demeanor evidenced the debtor’s good faith.

Now for the legal principles. Two general starting points behind all bankruptcy issues such as this are that bankruptcy relief is a privilege, not a right, and should only inure to the benefit of the honest but unfortunate debtor; and the denial of a discharge is an extreme penalty and must be construed liberally in favor of the debtor.

If a trustee can demonstrate that a debtor failed to satisfactorily explain the loss of assets or the unavailability of documents, then the trustee has met his burden of proof in seeking to deny a debtor of the right to a discharge. However, this merely shifts the burden of proof to the debtor as to whether there is a satisfactory explanation. Here, the question in each instance becomes one of reasonableness under the particular circumstances and whether the debtor’s conduct was justified.

The bankruptcy court has broad discretion in determining what is reasonable. When it comes to the inability of a debtor who is in business to explain a loss of records, the court can look to a number of factors including: (1) whether the debtor was engaged in business, and if so, the complexity of the business; (2) the amount of the debtor’s obligations; (3) whether the failure to keep records was due to the debtor’s fault; (4) the debtor’s education, experience and sophistication; (5) the customary business practices for record keeping in the debtor’s type of business; (6) the extent of any egregious conduct on the debtor’s part; and (7) the debtor’s courtroom demeanor.

With regard to a consumer debtor, the standard is slightly different. Here, the issue of justification depends largely on what a normal, reasonable person would do under the circumstances. For example, a typical consumer debtor may discard credit card statements shortly after receiving them.

Another major factor the court considers is whether the debtor “knowingly and fraudulently” withheld information from the trustee.

Most cases seem to focus on whether the debtor’s explanation was “satisfactory” — a question of broad interpretation left up to the discretion of the court.

I urge you to check out this case and to look for other reported decisions in the future. When logging into E.C.F., just go to the tab for “Reports” and then click on “Written Decisions.”

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 2006 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

New Laws Apply. 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. The new laws have many far-reaching effects in a multitude of areas. The new laws extend the period of time an individual must wait before re-filing a new petition in which the objective is to discharge new debts. In addition, the new laws seek to stop the perceived abuse of serial filers who previously filed multiple Chapter 13 petitions in an effort to delay foreclosure sales.

The Serial Filing Debtor Seeking to Stay Foreclosure. Prior to BAPCPA, consumer bankruptcy practitioners often experienced the following scenario: a client, whose prior Chapter 13 case was dismissed because they didn’t make the necessary payments, comes in the day before a foreclosure sale saying they want to re-file another petition to stop the sale. The practitioner, searching for a clue that the debtor’s financial circumstances have changed for the better so that the debtor can now afford his Chapter 13 obligations, determines that a new filing would therefore be in good faith. The practitioner immediately files a new petition, knowing without a doubt that this mere act will stay the sale and save the day. However, not any more.

New Exceptions to Automatic Stay. Consumer bankruptcy practitioners may no longer blindly rely on the features of the automatic stay. BAPCPA shortens the automatic stay for debtors who have filed for bankruptcy once during the previous 12 months, and it eliminates the stay entirely for debtors who have filed more than one bankruptcy during the previous 12 months.

Debtor Had One Case Dismissed in Past 12 Months. If a debtor had any case (Chapter 7 or 13) dismissed in the past 12 months, then the automatic stay expires thirty days after the petition is filed, unless the Court extends this time upon a showing by the debtor that the case was brought in good faith. The new section providing for this (Code section 363(c)(3)) has the effect of shifting the burden to the debtor to maintain the stay, whereas in the past, the burden was on the creditor to lift the stay.

This provision means that in such situations, the consumer bankruptcy practitioner will now need to rush to file a motion to extend the stay within 30 days of filing and will need to demonstrate the debtor’s good faith and a change in circumstances.

Debtor had Two or More Cases Dismissed in the Past 12 Months. If the debtor had two or more cases dismissed in the past 12 months, then the automatic stay does not go into effect at all. (Code section 363(c)(4)). This means that a motion or order to show cause would be necessary to impose the stay.

Practical Tip. The above provisions limiting the stay are totally new, and it is likely that the bankruptcy judges in our district will set up special chambers rules pertaining to applications extending or imposing stay relief. Accordingly, be on the lookout for this.

Filing to Discharge Debts After a Prior Bankruptcy Case. Under the old law, a debtor had to wait six years before being eligible to receive another Chapter 7 discharge after a prior Chapter 7 case. However, a debtor must now wait a longer period of time between the prior case and the new case in order to receive a discharge in the new case. Depending on which chapter the prior case was, and which chapter the new case will be, the debtor will have to wait either two, four, six or eight years.

Note that a debtor can re-file for bankruptcy relief at any time after a previous discharge, but will not be entitled to a discharge in the new case unless the requisite period of time has passed. Also note that these waiting times do not apply if the Court did not grant a discharge in the prior case. The waiting times are as follows:

Prior Case Was Chapter 7 and New Case Will Be Chapter 7. Debtor must wait eight years from the date of commencement of the prior Chapter 7 case. (Code section 727(a)(8)).

Prior Case Was Chapter 13 and New Case Will Be Chapter 7. If the allowed unsecured claims in the prior Chapter 13 received more than 70% of the amount of their claims, then no waiting period applies. However, if the allowed unsecured claims received less than 70%, then the debtor must wait six years from the date of the prior Chapter 13 date of filing. (Code section 727(a)(9)).

Prior Case Was Chapter 7 and New Case Will Be Chapter 13. Debtor must wait four years from the date of the prior Chapter 7 date of filing. (Code section 1328(f)(1)).

Prior Case Was Chapter 13 and New Case Will Be Chapter 13. Debtor must wait two years from the date of the prior Chapter 13 date of filing. (Code section 1328(f)(2)).

Practical Tip. If your client had a prior bankruptcy filing which resulted in a discharge, and is not eligible for a discharge in a new filing, but nevertheless needs to quickly file a Chapter 13 proceeding to stop a foreclosure, then you can still file for Chapter 13 relief. The debtor will get the benefit of the stay and the use of the Chapter 13 plan to cure the mortgage arrears and pay off any unsecured debt. However, the debtor will need to provide for payment in full, including interest, to unsecured creditors to avoid those creditors pursuing the debtor after the closing of the case.

Practical Tip. The new time frames can be confusing. In addition, you will not remember if the time from the previous case runs from the date of filing or from the date of discharge. Therefore, I urge you to cut out this article and save it for future reference.

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 issue of the Suffolk Lawyer in November 2005. 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

Most Long Island homes have doubled in value over the past six years. This increase in real estate values has produced a windfall of increased equity to those who own homes, which in turn has affected the bankruptcy options of those homeowners who have serious debt problems.

Despite this boom, foreclosures are at record numbers. This may be attributable in large part to easy financing that enables people to refinance and obtain home equity loans without having to satisfy their existing credit card debts. Although most bankruptcies are attributable to financial crises such as large medical bills, divorce, loss of job, etc., many homeowners get into a bind because they tap their home equity ostensibly to satisfy existing consumer credit debt, yet continue to accumulate more debt.

The tremendous increase in real estate values also means that bankruptcy practitioners must be more careful in advising clients. In many instances, what was often done several years ago in the course of representing a consumer debtor homeowner should not be done today. Here are some tips and practice pointers that address how you should change your approach to such cases:

1. Be Cautious About Recommending Chapter 7 to Homeowners. Chapter 7 filings may not be feasible. Remember that the permitted homestead exemption in New York is only $10,000 worth of equity per person. In the early to mid 1990’s, many homes had declined in value and had very little equity. It was common practice during that time for homeowners to take advantage of utilizing Chapter 7 to eliminate their credit card debts, yet keep and protect their homes. However, the recent increase in real estate values means that there are extremely few homes that would be fully exempt and protected. What would have worked smoothly several years ago will not necessarily work well today.

2. Be Cautious About Submitting Chapter 13 Plans That Pay Less Than 100%. Before the real estate boom, when many homeowners had relatively little equity in their homes, it was commonplace to see many Chapter 13 plans offering only a 10% distribution to unsecured creditors, which is generally accepted as the smallest permitted distribution to that class of creditors. However, 10% plans in Chapter 13 cases for homeowners are becoming sparse as the amount of equity has substantially increased. If you offer a plan that pays less than 100%, the Chapter 13 trustee will very closely scrutinize that plan. If it appears that the amount of non-exempt equity is greater than the amount of unsecured debt, then you should consider a 100% plan.

Such 100% Chapter 13 plans offer many benefits over conventional refinancing. Generally, there is no interest on any mortgage arrears or unsecured debt. In most cases, only older mortgages which originated prior to October 1994 are entitled to interest. I explain to my Chapter 13 clients that a 100% plan is like a forced refinance that creditors must accept. It is as if the client borrowed all of the necessary funds to satisfy all existing debts, but was given the opportunity to pay that back with no interest over a five-year period.

3. Be Aware That Some Chapter 7 Trustees Are Becoming Very Aggressive. With the potential to administer a valuable asset (which in turn will pay the trustee a sizable commission), trustees are becoming very aggressive in trying to administer and sell houses as an asset of the bankruptcy estate. For this reason, even after you and your debtor client have engaged in due diligence before filing to ascertain the current fair market value of the property, it is quite possible to encounter a trustee who thinks the property is worth even more. The issues to consider in addressing such situations can easily take up an entire column and more, and I will try to devote a future column to this topic.

In any event, if you encounter a very aggressive trustee, some possibilities include: negotiating a settlement that can be paid from exempt, borrowed or gifted funds; converting to Chapter 13 (which overly-aggressive Chapter 7 trustees will try to oppose); litigating against the trustee; or letting the trustee try to sell the house, in which event the debtor would have to leave upon a sale, but this would nevertheless require the trustee to pay the debtor the $10,000 per person homestead exemption from the proceeds of sale.

4. Be Very Cautious About Real Estate Valuations. Several years ago, when real estate was not increasing at an incredible rate, many attorneys would simply tell their bankruptcy clients to obtain broker price opinion letters in order to determine the value of their property. However, in today’s very volatile real estate market in which values can change overnight, it is essential to utilize the services of an unbiased and highly qualified real estate appraiser. Be aware that in Nassau County, where there is a property value assessment system, the assessed value is not an accurate indication of the current value of the property.

Also be cautious that the appraisal can become obsolete within a matter of weeks or months. Many a client will retain a bankruptcy attorney, obtain an appraisal, and then put off filing for many months. If this happens, you should consider obtaining an update on the appraisal if the disposition of the existing case is very dependent on the real estate valuation.

Another difference in today’s practice is that trustees generally no longer rely on appraisals submitted by debtors or their counsel. Several years ago, trustees would often accept submitted appraisals as conclusive proof of the value of real estate. Today however, many trustees will obtain their own independent real estate valuation, often well before the meeting of creditors. Accordingly, the real estate appraisal is becoming more of a tool to assist counsel in determining how to best represent the client, than a means for persuading a trustee that there is little equity.

5. Consider Non-Bankruptcy Options Such as Refinancing or Sale. Bankruptcy is not the answer for everyone. Some debtors cannot file chapter 7 because of extensive non-exempt real estate equity, yet they are not eligible to file Chapter 13 because they do not have sufficient income to fund a plan. Keep in mind that there are a number of lenders who specialize in the sub-prime market. However, many individuals who are over-extended, or who have already cashed out most of their home’s equity, may not qualify for any type of financing. If bankruptcy and refinancing are both out of the question, then the only remaining option may be for the debtor to sell the home. It is important to help your clients be realistic about their options.

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 February 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.

We have now seen several straight years of rapid real estate appreciation on Long Island. With the current real estate boom, most home prices have doubled in the past six years. Buoyed by low interest rates and a hot real estate market, the mortgage industry has become incredibly competitive and has relaxed many previous requirements that have acted as impediments to former bankruptcy debtors seeking to obtain a new mortgage or refinance an existing one. You can help your prior bankruptcy client purchase their first home, or take advantage of increased equity in their existing home by helping them with refinancing.

Homeowners with Bankruptcy Histories Are Often Able to Get Mortgages, Sometimes at Respectable Rates. With over a million and a half consumers filing bankruptcies each year, many mortgage companies have tapped into the lucrative market of offering mortgages to those who recently sought Chapter 7 bankruptcy protection, and even those still making payments in open Chapter 13 cases. Just a few years ago, debtors seeking to obtain mortgages under such circumstances found it difficult, if not impossible. Today, however, mortgage lenders actively solicit the profitable sub-prime market of recent home-owner debtors. A “sub-prime” mortgage is one where the borrower has a blemished credit history. Lenders, in their drive to maximize profits, have actually become quite lenient with the sub-prime market and have relaxed some previous requirements. Some lenders even specialize in providing financing to recent debtors. A former Chapter 7 filer can qualify for a mortgage one year after the bankruptcy is over.

Mortgage Companies Offer Various Mortgage Programs Depending on Financial History. Although the borrower may not qualify for the best rates (known as “A” paper) if there was a recent bankruptcy filing, they may nevertheless qualify for sub-prime rates, (known as “B, “C” or “D” paper). Lenders with programs for recent debtors will typically offer something like a two-year hybrid adjustable rate mortgage in which the mortgagor has the option of converting to a more conventional mortgage with better interest rates after a two year period of time, provided that the borrower makes timely payments and keeps his new credit history clean. Even former debtors who developed additional negative credit information after their bankruptcy was concluded can qualify for financing if they have a healthy loan-to-value ratio of 70% or less.

Debtors May Become Eligible for “A” Paper Mortgages Sooner Than They Think. According to some published guidelines, a former Chapter 7 debtor may be eligible for the best rate FHA mortgage just two years after the discharge if the borrower has re-established good credit or has not re-established any new credit. If more than two years have elapsed since the Chapter 7 bankruptcy was discharged and the borrower is applying for a VA mortgage, then the bankruptcy will not even be considered. If the borrower is applying for a conventional mortgage, then they will be considered for the best rate after four years, although some lenders will consider them after three years, if there is a good reason. For Chapter 13 debtors, the provisions are even better for FHA and VA mortgages. In such instances, debtors need only wait 12 months from the date of filing and may even be in an open case.

Debtors Should Consider Consulting a Mortgage Broker. Ordinarily, I steer my real estate clients directly to banks. However, when it comes to borrowers who have blemished credit histories or previous bankruptcies, I sometimes suggest that they consult with a mortgage broker, who will have access to many potential lenders, and who should be keenly familiar with the various sub-prime financing issues. As a variety of lenders offer different programs to borrowers with prior bankruptcies, a mortgage broker catering to this customer base should have a good familiarity with what program might be best for a particular borrower. Savvy brokers should also be able to give tips to clients in advance about improving chances for qualifying.

Chapter 13 Debtors in Open Cases Who Seek to Refinance Must Either Obtain a Court Order or Withdraw Their Case. If the borrower is still a debtor in a pending Chapter 13 case, refinancing a home will require seeking court approval of the refinance by bringing a motion. Consider discussing this issue with the Chapter 13 trustee if refinancing becomes a possibility. Alternatively, you may consider withdrawing the debtor’s petition, although you would only want to do this if the conditional mortgage commitment permits it, and the debtor can handle the unsecured debt after the case is dismissed. Also remember that the debtor loses the protection of the bankruptcy stay once the case is dismissed. Therefore, you should only withdraw a case if it appears absolute that all closing conditions have been met, and the closing will definitely occur.

Consumers Should be Cautious with Adjustable Rate Mortgages. Previous bankruptcy filers may have no choice other than obtaining an adjustable rate mortgage hybrid. At some point, the monthly payments for all adjustable rate mortgages increase. As your client previously got into a financial bind resulting in the prior bankruptcy filing, it is important that you advise them about preparing realistic future budget projections so that they do not end up in a future financial bind when the rate increases.

Many Abstract Companies Do Not Understand How Prior Bankruptcies Discharge Debts. Several times a year I deal with a lender or abstract company who insists, incorrectly, that certain discharged debts actually remain for various reasons. This usually happens when the client refinances without the aid of legal representation or uses an attorney who is unfamiliar with bankruptcy law, and I get a frantic call from the client while they are sitting at a closing table. In-house title examiners at abstract companies are notorious for their lack of knowledge about the implications of a bankruptcy filing. You should persuade former bankruptcy clients that it is advisable to utilize counsel for all real estate financing transactions. Then, if the lender’s abstract company raises a bankruptcy-related problem, insist on speaking directly with underwriting title company’s clearance department or legal department to clear up any bankruptcy-related title exceptions.

Practice Pointer for Helping Debtors with Mortgages and Re-financing: Be aware that financing is often available, advise your client of the options, and suggest that your client retains legal counsel for real estate transactions.

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a frequent columnist for the Attorney of Nassau, published in Nassau County New York for members of the bar. This article appeared in the December 2004 issue of the Attorney of Nassau. 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 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.