If you are selected for an audit, you will be notified by the Trustee early in the proceedings and likely before the 341 meeting of the creditors. The audit will be conducted by an independent firm selected by the U.S. Trustee Program. Documents requested in an audit can vary but will likely include six (6) months of pay stubs and bank account statements, last two (2) federal tax returns and any property settlement documentation. See Audit Standards.  A good tip is to make sure the debtor has documentation for all items listed in the petition and schedules to the extent documentation is possible. Debtors will typically have twenty-one (21) days to provide the audit firm with the requested documents. Delay or failure to cooperate with the auditors can result in the denial of a discharge. 11 USC 727(d)(4). If a material misstatement is uncovered, the auditor will contact the debtor or debtor’s attorney for an explanation. In that event it is critical to provide an immediate written explanation for the misstatement. Once the audit is complete, an audit report will be filed with the Court. If the auditors find material misstatements which cannot be explained, the bankruptcy Trustee is authorized to take appropriate civil action or refer the matter to the U.S. Attorney for a criminal investigation.

There are no tricks to avoiding the random bankruptcy audit. Consequently it is important to review the bankruptcy petition and schedules carefully before filing with the Court.

- Richard V. Stokan, Jr.

1. How much “equity” do you have in your car? As we’ve discussed on previous posts, a car or any other asset is only subject to liquidation in chapter 7 bankruptcy if there is non-exempt equity. Every state allows debtors to protect a certain amount of equity in their car and property. North Carolina allows $3,500 of equity in a car to be exempted from creditor’s claims. If you have less than $3,500 of equity in your car or like most people owe more than the car is worth, you can keep the car through the bankruptcy process. Problems can arise for those who have paid cash for their car as the lack of financing can leave the car exposed to sale at auction by the trustee. If you have questions, consult an attorney.

2. If you do have a loan on your car, most states will require that you “reaffirm” the debt if you wish to keep the car. What does this mean? Filing for bankruptcy erases your personal obligation to pay debts. Personal guarantees are wiped away unless they are reaffirmed. Reaffirming a debt is akin to renewing your “marriage vows” with your lender. You are reinstating your personal guarantee on the loan and agreeing to pay the debt after the bankruptcy. With no reaffirmation agreement, your lender would only be able to take your car back if you fell behind on payments after your bankruptcy. With the reaffirmation agreement, they will also be able to look to your personal assets as well if you can’t make payments. If you cannot afford to keep up with your car payments, you do have the option of surrendering the car with no continuing obligation on the loan.

3. If you bought your car more than 910 days ago, and owe more than the car is worth, you have the option of “cramming down” the car loan in chapter 13 bankruptcy  by stripping off the amount of the loan that exceeds the value of the car. If your car is worth $15,000 but you owe, and are making payments on a $25,000 loan, the $10,000 that exceeds the car’s value can be paid out at much less than 100% over the life of a chapter 13 plan. After all this legal jargon, the practical effect is to reduce your monthly car payments. In chapter 11 bankruptcy, you can always cram down your car loan, no matter when you bought the car.

The treatment of cars in bankruptcy can be complicated, if you have questions, consult an attorney.

In Wingerter, B-Line, LLC purchased a creditor’s claim against Gerald Wingerter and filed a proof of claim, based upon that debt, in Wingerter’s Chapter 13 bankruptcy.  This claim was purchased from an intermediary that was not the original creditor, although the intermediary had warranted to
B-Line that the claim was valid. The proof of claim did not include copies of the originating documents or contain an explanation of why copies of the originating documents were unavailable. When the Wingerters challenged the proof of claim, B-Line withdrew the same after it was unable to document the claim’s validity.

B-Line’s withdrawal of the proof of claim did not end the story, however.  The bankruptcy court subsequently issued a series of orders directing B-Line to explain both its business practices generally as well as its handling of the claim against Wingerter.  It later issued an opinion sanctioning B-Line for failing to comply with Rule 9011(b) of the Federal Rules of Bankruptcy Procedure.  The court found that B-Line had failed to make a “reasonable pre-filing inquiry” into whether the claim was valid and supported by the evidence.  The bankruptcy court went on to say that any party filing a proof of claim on an unscheduled claim must include copies of ‘originating documents or, when such documents are unavailable, an affidavit explaining the absence of such documents.

Although B-Line had already given up on the Wingerter claim, it appealed this holding to a Bankruptcy Appellate Panel (”BAP”), arguing that the bankruptcy court’s order essentially prohibited B-Line’s business practice of relying on account information and not seeking out copies of a claim’s originating documents unless and until a debtor objects to the proof of claim.  B-Line also asserted that complying with this order would significantly increase its cost of doing business.  However, the BAP dismissed the appeal on procedural grounds (specifically, that the claim was moot).

B-Line appealed that dismissal to the U.S. Court of Appeals for the Sixth Circuit.  The Sixth Circuit held that the issue was not moot, and that B-Line’s actions (submitting the proof of claim without supporting documentation) did not violate Rule 9011(b). The Sixth Circuit apparently felt that because the company who sold the debt to B-Line provided assurances of the debt’s validity, B-Line acted in good faith.

The important feature of this case, from a commercial debtor’s perspective, is that companies such as B-Line will be able to continue to purchase debts and file proofs of claim with little or no supporting documentation.  It will therefore be up to the Chapter 7 or Chapter 13 debtor (or their attorney) to scrutinize and potentially challenge improper claims, as Wingerter successfully did here.

-Drew Broaddus

So when we prepared her bankruptcy to get rid of the debt, we also included the potential claim for the FDCPA as one of her assets. Even better, we exempted the asset out so the trustee couldn’t seize the case.

Bankruptcy law requires that you include all of you assets and all of your liabilities. Assets can also include potential cases you may have against other people such as FDCPA claims, Personal Injury Claims, or even small claims judgments. All of these are assets in your estate because the possibility exists that they could be converted into money for distribution to creditors.

Now, here is the reason you need to claim the potential asset. If you don’t name it as part of your bankruptcy estate, then it is wiped out. If you didn’t claim the asset and tried to prosecute the claim later, the defense would be able to dismiss your suit under the theory or res judicata.

It’s happened to a pro se debtor and an inexperienced bankruptcy attorney more than once. The debtor’s failure to claim the personal injury suit in the schedules resulted in not only the debtor’s inability to prosecute for the personal injury claim, but the Court revoked her discharge as well for failure to disclose assets. This is not a situation you ever want to find yourself in.

So the lesson for today is “You have to Name it to Claim it!” If you claim the asset, even if the potential case isn’t fully developed, you’ve protected yourself.

I recently had a case where we claimed a potential personal injury suit. My client had not been to see a personal injury attorney yet so we had no idea how much her claim was worth. I listed an unknown claim and reserved my client’s right to amend. Three years later, I received a phone call from the trustee who told me that the case had settled. He told me what the settlement amount was and I said “I’ll amend the schedules for that amount.” The next thing he asked me was where he should send the check. My client had a nice payday as a result of naming her claim in the original bankruptcy schedules filed way back when.

So, remember, you need to list all of your assets, even the ones that haven’t fully matured yet.

Jay S. Jump
(253) 479-0241
528 2nd Avenue South
Kent, WA 98032
www.jumplawgroup.com

Regardless of whether a debtor is seeking a Chapter 7 discharge or Chapter 13 reorganization bankruptcy, an automatic stay goes into effect as soon as the petition is filed with the Court. The stay of proceedings in a Chapter 7 bankruptcy, however, only protects the debtor, not a co-signer. As a result, creditors affected by the stay may immediately attempt to collect the debt from any co-signers. A debtor should always check with the creditor and review any contractual documents before filing for bankruptcy protection to determine whether the creditor can take steps to recover from the co-signer. This is particularly important if the debtor values the relationship with the co-signer.

If the goal of a debtor is to protect a co-signer, a Chapter 13 bankruptcy is the best option. Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy filing stays proceedings against co-signers if the security is for consumer debt and the co-signer did not become obligated to repay the debt through the ordinary course of business. Under a Chapter 13 bankruptcy, the stay will remain in effect as long as the debtor complies with the bankruptcy plan and the creditor is receiving payments. The stay automatically terminates if the bankruptcy case is closed, dismissed or converted to another Chapter of the bankruptcy code. A creditor may also petition the court to lift the stay if it harms the creditor or if the repayment plan does not provide for full payment of the debt. Finally, if the debt is not fully repaid at the end of the Chapter 13 repayment plan, the co-signer will remain responsible for any outstanding balance. Consequently, before filing for bankruptcy protection, debtors with co-signers must consider more than just their own situation when determining whether filing for bankruptcy protection is in their best interest.

- Richard V. Stokan, Jr.

First, if you wish to keep your home, you’re going to have to be able to pay the mortgage. Bankruptcy can eliminate unsecured debt such as credit cards, but requires that secured debts be paid after filing if the debtor wishes to keep the colatteral (car, home, boat etc.) In some cases, when a homeowner is already underwater on their first mortgage, a second or third mortgage can be modified or stripped.

Second, assuming you can afford your mortgage, you can keep your home through the bankruptcy process if your home equity can be protected by an available exemption. What does this mean? As a matter of public policy, every state has enacted laws that specify how much property an individual in that state can protect from their creditors. These laws are called exemptions. For example, let’s say the homestead exemption in state A is $50,000. Jeff is considering filing for bankruptcy in state A, but is concerned about losing his home. Jeff’s home has been appraised at $350,000 and he has a mortgage of $310,000. In this example, Jeff would be able to file for bankruptcy and keep his house by utilizing state A’s homestead exemption. State A allows debtors to protect $50,000 of home equity and according to an appraisal, Jeff has $40,000 of equity. A home is at risk of being liquidated in a chapter 7 bankruptcy only when there is non-exempt equity that exceeds the amount allowed to be protected under state or federal law.

It should be noted that even if you have non-exempt equity in a home, you still may be able to retain it by filing for chapter 13 bankruptcy.

Today, legal publisher Fastcase has announced that they have released the world’s first legal research app, available for the iPhone, iPad, and iPod Touch according to PRWeb.

The app will be the largest law library on the iPhone, available as a free download, and will allow free searching of the company’s national law library of both cases and statutes.

I have tried out this new, free app and find it to be very user friendly.  This is a great move by Fastcase and will, I am sure, propel them even further into the forefront of the legal research world !  Give it a try and see what you think. It also may be a good reason to purchase an iPad.

John Rogers, Kentucky Bankruptcy Attorney

In light of this Order, the Bankruptcy Court for the Eastern District of Michigan will no longer enforce any order confirming a plan that has already been entered, to the extent that it directs the Internal Revenue Service to pay the debtor’s tax refunds to the debtor’s Chapter 13 trustee. The Bankruptcy Court will continue to enforce previously entered orders confirming plans in all other respects.  Further, the Bankruptcy Court will not, from this point forward, enter any order confirming a Chapter 13 plan that contains a provision directing the Internal Revenue Service to send the debtor’s tax refunds to the debtor’s Chapter 13 trustee.

For more information about bankruptcy-related tax issues, see John O’Connor’s articles on this site,  “Be Careful With Tax Refunds in Bankruptcy” and “What happens to property I acquire after filing for bankruptcy?”, as well as my recent entry which can be accessed here.

-Drew Broaddus

“Bankruptcies due to medical bills increased by nearly 50 percent in a six-year period, from 46 percent in 2001 to 62 percent in 2007, and most of those who filed for bankruptcy were middle-class, well-educated homeowners, according to a report that will be published in the August issue of The American Journal of Medicine.”

The basic rule for the treatment of medical debt in bankruptcy is as follows: medical bills are treated as unsecured debt and wiped out by filing bankruptcy just as credit card debt is. The extent to which the debt will be eliminated will hinge on what type of bankruptcy you file, however, most medical bills, no matter how large, will be eventually be discharged by filing bankruptcy. Even if you have health insurance, your medical debts are eilgible for discharge in bankruptcy.

If you have questions about bankruptcy, contact an attorney.

This excerpt about the author J.K. Rowling, of the popular Harry Potter series, from  The Writers Almanac, by Garrison Keillor, is, I think, a very good example for folks that are down on their luck to ponder: 

“Rowling grew up in rural England. She tried writing a couple of novels, but never finished them. One day on a cross-country train trip, the idea of Harry Potter just appeared in her mind. She didn’t have a pen to write things down, so she said: “Rather than try to write it, I had to think it. And I think that was a very good thing. I was besieged by a mass of detail, and if it didn’t survive that journey, it probably wasn’t worth remembering.” As soon as she got home, she started writing what she did remember.

But her personal life was falling apart. She said: “A mere seven years after my graduation day, I had failed on an epic scale. An exceptionally short-lived marriage had imploded, and I was jobless, a lone parent, and as poor as it is possible to be in modern Britain, without being homeless. … I was set free, because my greatest fear had been realized, and I was still alive, and I still had a daughter whom I adored, and I had an old typewriter and a big idea. And so rock bottom became the solid foundation on which I rebuilt my life.”

It took J.K. Rowling awhile to find a publisher for her novel, but finally it was published: Harry Potter and the Philosopher’s Stone (published in the U.S. as Harry Potter and the Sorcerer’s Stone). It started with a print run of 1,000 copies. The last book in the series, Harry Potter and the Deathly Hallows (2007), had a first print run of 12 million copies in the United States, the largest first printing of any book in history. Altogether, the series has sold more than 400 million copies. She said, “I would like to think that readers enjoy my stories because they are simply good stories.”

So, if life has you down, don’t despair.   Assess your situation and determine to tackle your problems head on.  If your problems involve your finances, be sure and talk with a knowledgeable attorney about your situation.

John Rogers, Kentucky Bankruptcy Attorney

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