If you are asked to return to a bankruptcy trustee a payment you received from a customer/client who declared bankruptcy, do not despair, you may be able to avoid having to repay the money. If you can show that the payment was not on account of a previous debt, that you may be able to show that the payment was made in the ordinary course of business, or that you gave new value to the customer/client after the payments were made, you may be able to fight the trustee regarding the trustee’s action to recover the payments you have received.
The defenses to a preference action are very technical, so it is best to consult with an attorney as soon as you are served with a demand letter or complaint from a bankruptcy trustee demanding repayment of money received from a customer/client.
You can absolutely prepare and file the petition and schedules on your own, but if the forms aren’t prepared properly your case could be dismissed or you could be denied a discharge. So it is a good idea, at the very least, to have an attorney review the documents before you file them. (This is a service our office provides for a flat fee of $200 per review.)
But drafting a Chapter 11 or 13 payment plan is very complicated, and the penalties for failure to draft the proper plan can be very severe (non-confirmation of the plan by the court and/or dismissal of petition). So, it pays to have an attorney who understands the rules prepare the plan to ensure it is acceptable to the court.
Commonplace Bankruptcy Types:
Chapter 7: Liquidation, Businesses or Individuals
The filing fee for a chapter 7 bankruptcy is $335 and the average cost to hire an attorney is $2,500. Under this chapter, the Bankruptcy court appoints a trustee to evaluate your assets and determine whether selling your assets will result in a meaningful recovery for the benefit of your unsecured creditors. In order to take advantage of this chapter, your household income must be less than the state median income, or if your household income exceeds the state median income and your debts are primarily consumer debts, your disposable monthly income must be less than a specified amount. If you don’t pass this “means test” then you cannot file for Chapter 7, you will have to file either a Chapter 11 or Chapter 13.
Chapter 11: Reorganization, liquidation or involuntary, Businesses or Individuals
The filing fee for a chapter 11 bankruptcy is $1,717 and the average cost to hire an attorney is $20,000. A Chapter 11 is a reorganization of business or individual debts. The provisions are very complicated, and you should consult with an attorney before filing a petition.
Chapter 13: Repayment of All of Part of the Debts by Individuals with Regular Income
The filing fee for a chapter 13 bankruptcy is $310 and the average cost to hire an attorney is $3,500. Under §109(3), in order to qualify for a Chapter 13, your must have a regular source of income, and have liquidated non-contingent secured debts less than $1,184,200, and liquidated non-contingent unsecured debts less than $394,725. If your debt exceeds these limits, and you do not qualify for a Chapter 7, the only other option is to file a Chapter 11.
In a Chapter 13, the debtor calculates his/her disposable monthly income, and then applies that amount towards his/her debts every month for a period of three to five years. The plan setting forth the repayment terms must be approved by the Bankruptcy Court, and you do not obtain a discharge until all of the payments have been completed.
Chapter 12: Reorganization, Family Farmers or Fishermen
The filing fee for a Chapter 12 bankruptcy is $275 and the average cost to hire an attorney is $3,500. This bankruptcy is only available to family farmers and fisherman, but a farmer may not have more than $3,792,650 in debts and a fisherman no more than $1,757,457 in debt in order to use this type of bankruptcy.
Chapter 9: Reorganization of Municipalities
Chapter 15: Cross-Border Cases
You may file for bankruptcy as frequently as you would like. But you will not receive a discharge again unless a specified amount of time has passed since the last time you filed for bankruptcy.
To file another Chapter 7 and obtain a discharge, you must wait 8 years from the date you last filed for Chapter 7 bankruptcy.
To file another Chapter 13 and obtain a discharge you must wait at least 2 years from the date you last filed for Chapter 13 bankruptcy. Because discharge doesn’t happen until all payments are made in a Chapter 13, and the payment term is 3 to 5 years from filing, typically you are eligible to file a petition in a Chapter 13 immediately after your first case is closed.
You may file a Chapter 13 after obtaining a discharge in a Chapter 7 case, but you can only obtain the discharge in the Chapter 13, if the plan is completed at least 4 years from the date you filed the Chapter 7. (This is commonly known as a Chapter 20.) This means that you may file a Chapter 13 immediately after filing a Chapter 7, provided the payments under the plan aren’t completed until 4 years after the date you filed for Chapter 7.
To file a Chapter 7 after obtaining a discharge in a Chapter 13 case, you have to wait 6 years unless you paid all of your unsecured debts or at least 70% of your unsecured debts and the plan was proposed in good faith and you made your best effort.
The court may also restrict your ability to file again or to obtain discharge for certain debts if your case is dismissed with prejudice or you have committed fraud, hidden assets, or filed your earlier case in bad faith.
If a petition is dismissed, then if you file again within one year of the dismissal, the automatic stay in the new case is limited to 30 days. If you have had two or more dismissals within one year of your new case, you are not entitled to the automatic stay.
Under §541 in a Chapter 7 all non-exempt assets you own at the time you file for bankruptcy become part of your bankruptcy estate. For a Chapter 13 and a Chapter 11, your bankruptcy estate will also include income earned and assets obtained after you filed for bankruptcy.
Under §522 you are entitled to exempt certain assets from your bankruptcy estate. That means that you may be able to keep certain assets if the value of the asset is less than or equal to the exemption amount. In Washington State, you may elect to use the federal exemption amounts or the Washington State exemption amounts. You need to consult with an attorney to decide which exemptions you should use.
With limited exception, §521(b) and §109(h) require all individual debtors who file for bankruptcy relief to receive credit counseling within the 180 days prior to filing the petition from an approved credit counseling agency and provide a copy of the debt repayment plan, if one is developed, to the court. The services available from approved credit counseling agencies include the following:
- An analysis of such client’s current financial condition;
- Factors that caused such financial condition;
- How the client can develop a plan to respond to the problems without incurring negative amortization of debt;
- Determining your net income and expense for an average month;
- Uncovering ways to balance your expenses against your income; and
- Delivery of a personalized action plan to help you find ways to increase your income and/or cut back on expense, to find state and national resources that may be of assistance, to find helpful money management strategies, and to find possible options for dealing with your debt.
These counseling services can take place in person or by telephone or using an agency’s online bankruptcy counseling module.
Further §727(a)(11) requires debtors to complete an instructional course in personal financial management after filing the bankruptcy petition The court can refuse to grant a discharge if the debtors fail to complete the required course or the course is deemed to be inadequate
You begin a bankruptcy by filing a petition and Schedules showing all of your assets and liabilities along with a Statement of Financial Affairs with the Bankruptcy Court. Under §521(a) if it is not possible for you to file the petition and schedules at the same time, the Schedules must be filed no later than 14 days after filing the petition. You will also need to submit proof of credit counseling when you file your petition. If you fail to file the necessary information, or fail to file the Schedules and other financial information timely, you may be denied a discharge or your case may be dismissed.
If you are separated and/or are considering divorcing your spouse, there are important considerations to take into account prior to filing. All property acquired during the marriage which is community property, becomes part of the bankruptcy estate. This means that even if one spouse isn’t included on the petition, he/she doesn’t retain any interest in the community property, because it is now 100% part of the bankruptcy estate.
If the filing spouse doesn’t claim an exemption on the community property, then the non-filing spouse may not get anything from the trustee’s sale of the community asset.
If your ex-spouse or soon to be ex-spouse has filed for bankruptcy, the automatic stay prevents you from asking a state court to divide up the couple’s community property. You will need to ask the bankruptcy court for relief from stay in order to continue on with your divorce proceedings with respect to the division of community property.
If your ex has filed for bankruptcy it is best to hire a bankruptcy attorney to work with your divorce attorney to make sure that you handle the situation properly, otherwise, if you could wind up being liable for damages to your ex-spouse.
Finally, domestic support obligations (which include spousal maintenance and child support) are not dischargeable, and have priority over all other debt. So declaring bankruptcy does not relieve you of paying those obligations.
For additional information about divorce and bankruptcy check out this link: http://www.silawfirm.com/Published-Works/A-Bankruptcy-Primer-for-Matrimonial-Attorneys.shtml
You must provide accurate information on your petition and schedules or else you could lose your discharge and possibly be subject to criminal penalties. Specifically, under §527(a)(2), be advised that:
- All information that you are required to provide with a bankruptcy petition and during a bankruptcy case must be complete, accurate, and truthful.
- All assets and liabilities must be completely and accurately disclosed, with the replacement value of each asset as defined in section 506 listed after reasonable inquiry to establish such value.
- Current monthly income, the amounts specified in the “means test” under section 707(b)(2), and disposable income in chapter 13 cases must be stated after reasonable inquiry.
- Information that you provide during your bankruptcy case may be audited, and failure to provide such information may result in dismissal of the case or other sanction, including a criminal sanction.
Once you file your petition and schedules, your creditors, with a few exceptions, may not contact you regarding your debts. If they contact you in violation of the stay, you can sue them for damages.
Note that if you are involved in a divorce, the divorce proceedings can proceed, but the divorce court may not dispose of any community property without the non-filing spouse obtaining relief from stay from the Bankruptcy Court.
After filing your bankruptcy petition the court will discharge your debts, with some exceptions (such as student loans). A discharge means that you will no longer be responsible for paying back those debts.
Note that the Court can deny you a discharge if the Court finds that you deliberately presented false information on your petition, or failed to produce adequate records to support your schedules when requested, or have actively tried to hide your assets from the court or the bankruptcy trustee.
Domestic support obligations, student loans, certain taxes, most criminal fines and restitution obligations, certain debts which are not properly listed in your bankruptcy papers, and certain debts for acts that caused death or personal injury, and certain long term secured obligations are not dischargeable which means that you are still responsible for paying them even after bankruptcy.
Yes, you must attend an approved financial management course after filing, but prior to obtaining a discharge.
You sign your petition and schedules under oath, that is under penalty of perjury. The Attorney General of the United States through the Office of the United States Trustee, the Office of the United States Attorney, and other components and employees of the Department of Justice may all examine any information you supply in your bankruptcy case. So, if you make a false oath or statement on your schedules, you may be subject to fines, imprisonment or both.
There aren’t many alternatives to bankruptcy. You can try to negotiate with your creditors, but that can be slow going, and ineffective as many creditors aren’t interested in making a deal.
You can try to use a receivership instead of filing for bankruptcy as this is a much less formal process and can be less expensive to pursue. But using a receivership does not result in a discharge of your debts, so it might not be a good fit for your situation. Further, a receivership is only appropriate in circumstances you want to protect or collect property which is the subject of multiple claims. Recieverships are most often used in the case of distressed businesses, where the receiver is appointed to manage the business in order to maintain or increase the value of the company’s assets while waiting for the eventual sale of those assets.
DETERMINING THE Information Required By §521 to Appear on Your Bankruptcy Schedules
How to value assets at replacement value:
For real property, you need to determine the fair market value by using Zillow.com or Redfin.com or other online real property valuation website. You can hire a real estate agent to do a formal current market analysis (CMA) or hire an appraiser to get a more formal appraisal.
For personal property you need to determine the liquidation value, which is the value you would get if you sold the item at a garage sale, auction, or to a pawn broker. Basically it is the price an interested buyer would be willing to pay for it. For items which have a Kelley Blue Book or NADA value, you should use the sales value rather than the trade in value.
If you cannot find the value from a reputable source, estimate the value, but be prepared to explain how you determined the estimate.
If you share ownership of the property with another, report the percentage of the value which you actually own. For example, if you co-own your house with your friend 50-50, then report 50% of the value of the house on your schedules.
How to determine current monthly income for the purposes of the “Means Test” under §707(b)(2):
For Chapter 7 (Form 122A) and Chapter 13 (Form 122C) your current monthly income is income received during the 6 full months before your file this bankruptcy case. This income includes wages, salary, tips, bonuses, overtime, commissions, income from operation of a business, profession or farm, rents and real property income, interest, dividends, royalties, unemployment, pension and retirement income. It also includes regular contributions to your household expenses, including from a child, roommate or spouse and income from any other source not listed above.
This is different from the current monthly income as calculated on Schedule I.
For detailed instructions about how to determine your current monthly income on the various forms go to these links:
How to determine the monthly expenses amounts specified in “Means Test” under §707(b)(2):
Some expenses are based upon the applicable monthly expense amounts specified under National Standards and Local Standards and some on your actual monthly expenses. Actual monthly expenses include your average monthly expenses for payments to secured creditors on your automobile, amounts actually incurred for taxes, involuntary deductions for employment, mandatory payroll deduction, life insurance premiums, court-ordered payments, including spousal or child support, education expenses required for work child care, health care not otherwise reimbursed and the amount you pay for telecommunications services.
In a Chapter 13 case, expenses also include Chapter 13 administrative expenses.
These expenses may differ from the expenses shown on Schedule J.
For detailed line by line instructions on how to determine the expense amounts required on Form 22A used to carry out the means test under 707(b), go to these links:
How to determine disposable income in a Chapter 13 case in accordance with §707(b)(2):
The disposable income and the calculations shown on Form 22C are a starting point for the calculation of the “projected disposable income”. The object is to determine the real amount available for repaying creditors based on the debtor’s capability to do so. The type of income allowed under the definition of Current Monthly Income, rather than the income shown on Schedule I, is the framework for projecting the debtor’s income over the life of the plan. The type any amount of expenses allowed under §707(b)(2) rather than the expenses shown on Schedule J are the framework for projecting the debtor’s expenses over the life of the plan.
For detailed line by line instructions on how to determine the amounts required on Form 22C used to calculate a Chapter 13 debtor’s disposable income, go to this link:
How to complete the list of creditors (including how to determine what amount is owed, and what address for the creditor should be shown):
Compile a list of your known creditors. Keep track of creditor phone calls as it might be from a creditor you forgot you had. Collect all the bills you receive through the mail. Obtain a copy of your credit report (we will obtain one too in order to cross-reference all creditors that you provide). Be careful, however, because not all creditors report to the credit bureaus so your credit report may be missing some creditors.
If you miss reporting a creditor on your schedules you most likely will be able to add the creditor after filing, but you may not be able to amend your schedules to add the creditor after filing which would mean that the debt would not be discharged by the bankruptcy.
How to determine what property is exempt:
In Washington State you are allowed to take either the Federal exemptions or the state exemptions. You are to use the exemption laws of the state where you had your legal home for 730 days before you filed for bankruptcy. If you haven’t lived in Washington state for 730 days before filing, then you will use the exemption laws of the state that you lived in prior to Washington if you lived there for at least 180 days immediately preceding the 730-day period or for a longer portion of such 180-day period than in any other place. If you did not live in any state for 180 days, then you have to use the federal exemptions.
Spouses must utilize the same set of exemptions. For each item of property claimed as exempt you will have to specify a dollar amount for the exemption.
Which exemptions you choose can have a significant impact on which property you may exempt, so it is important to determine whether federal or state are better for your situation. You value your exempt property under the replacement value listed below.
For more information about exemptions, go to these links:
How to value exempt property at replacement value as defined in §506:
The value with respect to personal property securing an allowed claim is “determined based on the replacement value of such property as of the date of the filing of the petition without deduction for the costs of sale or marketing.” The replacement value is not the fair market value, but is the “price a retail merchant would charge for the property of that kind considering the age and condition of the property at the time value is determined.” 11 U.S.C. §506(a)(2).