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Who Comes to the First Meeting of Creditors?

Section 341 of the United States Bankruptcy Code requires that the United States Trustee shall hold a meeting of the creditors within a reasonable time (usually within 20 and 40 days) after a Bankruptcy Petition is filed.  It doesn’t restrict that to cases with assets or ongoing business activities or anything else.  It requires a meeting of creditors (generally referred to as the first meeting, because there can be more in complicated cases) in all cases filed.

It is called the First Meeting of Creditors (or 341 hearing), which confuses many of my clients who then seem to think that their creditors will actually show up.  In most consumer cases it is really a meeting between the Trustee assigned to the case, the debtor and debtor’s counsel.  I doubt anyone actually knows why the same provision for the same meeting is included in the Code for all chapters.  In reality consumer cases, whether they are filed under Chapter 7 or Chapter 13, are very different from business cases — regardless of chapter.

The first thing to say about 341 meetings is that they vary wildly from one part of the Country to another.  Since there is so little statutory direction, they have evolved according to local custom.  The one constant is that very few creditors show up.  Think about it.  Why would a credit card company pay someone to come to your First Meeting of Creditors?  What is he going to ask?  Why don’t you make more money so you could afford to pay this?   They have better things to do.

Now, a local car lender might show up.  First of all, they are already here, second, there are some things they need to know.  Are you going to keep the car?  Oh, and is it insured?  Actually, though, even that has gotten rare.  A call to debtor’s counsel is just more cost effective.  So, for most consumer debtors the only person interested in their case is the Trustee; and he just wants to make sure that the schedules are complete and accurate, make sure he understands what is going on and if there are any non-exempt assets that he gets his hands on them to he can sell them (pay himself a nice chunk) and distribute the rest to your creditors.

Well, that is most consumer cases.  It isn’t all of them.

A First Meeting of Creditors is held under oath, and it is intended for creditors to ask relevant questions if they want to.  So, it is a great chance for someone who thinks that they might have grounds to object to your discharge to ask some basic questions to help them build their case.  So, if someone thinks that the debtor has defrauded them, then that creditor (or his lawyer) might show up to ask some questions about that.

Then, there are the other creditors.  Probably my favorite to watch is the ticked off former spouse.  They are generally just mad, but they frequently know about assets that the debtor kind of, sort of, forgot to list on the Schedules.   Occasionally, a mad ex-spouse makes me regret that I don’t have the buildings’ popcorn concession; but those are rare.

Next, there are the creditors who got the notice of the hearing in the mail and just thought they were supposed to be there for some reason.  That is probably the largest group.

Finally, you have creditors who are just mad.  By golly, they didn’t get paid and they want to tell somebody about it.  I had one of those today, and the Trustee listened politely and then explained that he isn’t the Judge and he doesn’t make decisions about what debts should or shouldn’t be included in the discharge.  Usually, these people just want to feel like they have had their say and someone has listened.

Still, in most cases, the First Meeting of Creditors is the biggest non-event the debtors have ever lost sleep over.

Elaine

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Dealing With Debt Collectors

The relatively new Consumer Financial Protection Bureau has put some useful resources on the Bureau’s website to deal with obnoxious debt collectors.  The first thing on this page are links to two new bulletins providing notice to debt collectors of practices the Bureau finds abusive.  These things just make kind of fun reading.

The meat of the page are the so-called “Action Letters”.  These are form letters developed by the CFPB to help consumers implement their rights under existing consumer protection laws (primarily the Fair Debt Collection Practices Act).   These letters serve the following purposes:

  • To dispute a debt and request additional information about the debt;
  • To dispute a debt and demand that the collector prove that the consumer is responsible for the debt and to stop contacting the consumer until they have done so;
  • To restrict the times and methods by which the collector can attempt to contact the consumer;
  • To notify the collector that the consumer has retained an attorney and all contacts should go through counsel; and
  • A cease and desist letter — this is a letter instructing the collector to stop all contact attempts with the consumer.

These letters are very useful tools, but they do have some downsides.  FDCPA disputes almost never produce what you hope they will, and if you really do owe the debt, it will buy you only a brief respite from collection activity.  If, however, you are willing to proceed with active litigation against the collector, this kind of verification letter can be extremely valuable.

The most valuable restriction on time and place of contact is preventing the collector from contacting you at work.  This can be very effective.  It will not, however, stop overly aggressive collectors from calling your employer — just to verify that you really do work there — yea, right.

Attorney retention letters are really better coming from the attorney.  Far too often people will tell a collector that they are represented by a certain attorney (whose name they have plucked from the phone book or a website) when they really aren’t, because they have heard that will stop collection calls.  Believe it or not, the collectors really will verify this; and you will not be winning friends with an attorney you may need to actually represent you down the road if his or her phone starts ringing off the hook with creditors of a supposed client the attorney has never heard of.  Bad plan.

Cease and desist letters basically are a mechanism for requiring that collectors stop all collection contact.  It does not mean they can’t sue you.  Well, if they can’t call you, they can’t harass you by mail and you aren’t represented by counsel; there really isn’t much left for them to do.  Now, not every collector sues upon receipt of a cease and desist letter; and I have clients who have used them very successfully, but only in very specific fact situations.

Finally, at the bottom of this page the CFPB outlines its complaint mechanism for lodging complaints against collectors and creditors.  By all means, have at it.  In fact, I encourage everyone to investigate the resources available from the CFPB and make use of them.  Just be aware of the fact that not everything will do what you expect, and most things do have consequences.  Getting a breather from collection calls is not a solution, it is a tool.

Elaine

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Short Answers to Complicated Questions

Frequently when I get a call from someone considering a bankruptcy filing, the first question I’m asked is — complicated.  Here are a few examples.

Are taxes dischargeable in Bankruptcy?

That depends.  Some taxes, like sales taxes and some withholding taxes are never dischargeable.  More commonly I am asked about income taxes, and not surprisingly the rules are complicated.   The most important thing I can tell you in brief is that when you see tax problems developing (and they usually snowball on you), file your returns on time.  Extensions are fine, as long as you file before theyexpire.  If you can’t pay, well, you can’t pay; but file the return.  There are three time frames that must be met before income taxes can become dischargeable, and one of them runs from the time that the tax return was filed.  There is also some troubling case law developing in other parts of the Country limiting dischargeability for late-filed returns.  Of course, if the IRS has filed a substitute for return, that is a whole different ball game.  Yes, I know, this doesn’t make a lot of sense.  It is a short answer to a very complicated question.  Just remember to file your returns timely, and if you wind up way over your head with tax debt, contact a qualified Bankruptcy attorney in your jurisdiction for a consultation.

If I file for Bankruptcy, can I keep my car?

Well, that depends on a lot of things — is it paid for, are you current on it, how much equity do you have in it, have you maintained insurance, can you afford to make the payments?

Think about this one for a minute.  There were over 6300 people who filed for Bankruptcy in the Western half of Oklahoma last year.  If they were all hitchhiking to work, don’t you think you would have noticed? Generally, the impetus for this question is a deep seated sense of shame and a fear that you have been bad and are going to be punished.  I don’t mean to belittle this, it is very real; and most of us have a voice in the back of our heads that says things like this to us, but bankruptcy isn’t about punishment; and most people who file for Bankruptcy keep their cars.   Are there exceptions?   Yes, but that is a whole different blog post.

I’m married, does my spouse have to file with me?

Probably not.  Now, are there reasons why you may want to file jointly?  Yes.  Are there times when you both need to file in order to get a particular result that you want?  Yes.  If your spouse doesn’t file with you, will your filing affect your spouse?  That really depends, and that is one of many reasons why I require that non-filing spouses attend the initial appointment with the filing spouse.

Is the Trustee going to come to my house?

Well, I don’t know.  Are you inviting him for dinner?  Seriously, now, the Chapter 7 panel trustees are highly compensated professionals who get paid a very small amount of money to administer cases.  They make their money administering non-exempt assets.  No one is paying them to go through your sock drawer.  Now, if a Trustee has reason to believe that you are concealing valuable assets, can a Trustee get a search warrant for your home or office?  Well, yes; and in 22-years of practice, I have seen that happen once.  The Debtor went to prison for a number of years for all kinds of fraudulent behavior.  So, don’t hide uncashed royalty checks; and the Trustee will not be paying you a visit.

Elaine

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So, What Does a Bankruptcy Lawyer Do All Day?

Yesterday I had one of those days were I was constantly busy only to look up and wonder what on Earth I had done all day.  So, I made a list; and since I am frequently curious about what other people actually DO on a daily basis, I thought I would post the list here.

I started off in Court at 9:00, trip to the bank (and two jelly doughnuts, but we won’t talk about that part), opened mail, downloaded electronic pleadings filed the day before (looked at everything, set aside the motions that will take time to respond to), a bunch of phone calls from — former client about a possible discharge violation, a couple of people looking for a bankruptcy attorney, a couple of creditors wanting to verify that I represent they people they want to harass; reorganize a computer directory, review information provided from a client and prepare for an appointment with that client, series of emails with clients mostly dealing with the status of their cases and the effect of their bankruptcies on pending foreclosures, more email with a client about replacing a car during a Chapter 13, prepare and fax a letter to a collection firm, forward two pieces of mail to clients that were sent to me directly, docket a court hearing and forward tax returns to the Trustee, RSVP to a business lunch, spend just under three hours with a client going over every detail of her case, review motions downloaded that morning and begin mapping out my responses, back up my computer and call it a day.

I got to court a little before 9:00.  I left the office about 6:30.  Oh, and I grabbed a slice of pizza someone else in the office had brought in for lunch. 

All things considered it was a pretty good day.  Now, I just need to find the blocks of time to actually respond to the motions, prepare filings for later in the week, start briefing an appeal, file a discharge violation Adversary. . . .

Oh, well.  It’s only Wednesday!

Elaine

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Bankruptcy, Property and Grandma’s China

I spend a lot of time talking to my clients about property of their Bankruptcy estate — what it is, what it isn’t and what that all means; and that talk has changed over the years.  When I was a much younger lawyer, I didn’t always mention that if someone dies within 180 days after a bankruptcy is filed and leaves the debtor an inheritance, that inheritance will be property of the Bankruptcy estate. 

Now, the general rule is that a bankruptcy estate is formed at the instant that a Bankruptcy is filed.  It includes all property including contingent property, unrealized property and even unknown property that the Debtor had any interest in at the time of the Bankruptcy filing.  (Of course, it only includes the Debtor’s actual interest — whatever that may be.)  There is one exception to that found in Section 541 of the U.S. Bankruptcy Code.  That exception is for property received by bequest or inheritance within 180 days after the Bankruptcy is filed. 

Of course, with almost all things Bankruptcy related, this is both simple — and not so simple.  The statute actually provides for all property that the debtor “acquires or becomes entitled to acquire” by bequest, devise or inheritance.  So, having Uncle Jake hold your money for six months doesn’t cure the problem.  The right to receive the inheritance occurs the instant the Decedent died, not when funds are actually disbursed.  Complicating this, of course, is that the instant someone dies, it generally isn’t known what kind of an estate there will be, how many claims will be filed in the probate, how much property will be sold for, there are countless questions.  Regardless, each beneficiary’s interest in whatever that person will ultimately receive becomes fixed at the moment of death — even if it isn’t known yet. 

About this point in time many of my clients start freaking out.  Here is why most of them have little, if anything to worry about.  First of all, 180 days is really not a very large window.  Second, the statute says “bequest, devise or inheritance”.  Depending on State law that may or may not include Grandma’s estate plan.  Third, we come to the biggest savior of most bankruptcy debtor’s stuff.  Bankruptcy trustees are not in the garage sale business — at least, not in Oklahoma.  Sure, if Grandma leaves you a paid for house, a collection of pristine 18th Century French antiques and an antique Wedgewood table service — your Trustee will be showing up.  If the house has barely enough equity to pay the taxes, insurance and closing costs, the furniture is 1970’s era Mathis Brothers, and the china is well-used Lenox — your Trustee may find other things to do.  Oh, and the everyday dishes, pictures, knick knacks, oil painting in the living room from an unknown artist — nobody wants that stuff but family. 

In twenty-two years of practicing law I have had two clients with family members who died unexpectedly after their bankruptcy was filed.  In both cases, the clients were hysterical and convinced something horrible was going to happen.  In neither case, did their Bankruptcy trustee wind up with anything.  I also postponed a bankruptcy filing for more than a year, which took a substantial amount of finagling to manage.  The postponement was because the Debtor’s Mother had just died, and the Debtor needed to get the Estate liquidated before she filed.  There was a house, a business, antiques, you name it.  Well, let’s see; the house was fully mortgaged, the business was losing money hand over fist and the antiques — well, no dealer could be found who was sufficiently interested to drive out to small town Oklahoma to pick them up.  Oh, well.

Of course, to me, the really interesting questions are what constitutes a bequest, devise or inheritance.  Sure, if you are a beneficiary under a traditional will, that is pretty clear; but frankly, there aren’t a lot of those around anymore — at least not that are distributing serious assets.  So, what about a revocable trust, a testamentary trust, a transfer on death deed, life insurance proceeds payable directly to a beneficiary, ERISA qualified retirement accounts transferring to a designated beneficiary, joint tenancy property?  This is how most stuff moves around upon death these days.  Is any of this by “bequest, devise or inheritance”?  In Oklahoma?  Beats the heck out of me, but it won’t be easy or automatic for the Trustee; and it is going to have to be enough to be worth it.

Elaine

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Bankruptcy’s Reset Button

One of the most challenging parts of interacting with my clients is identifying and addressing the emotional baggage that we all bring to the Bankruptcy table.  Some of that emotional baggage can be ignored.  Some of it needs to be addressed head on, and some of it had to be addressed before the client picked up the phone to call me in the first place.

A friend of mine in another State was telling me about a billboard that she had seen recently.  It uses the slogan, “Life has a RESTART button.”Image

She actually misremembered it.  She remembered, “Life has a reset button.”

This slogan (which is being used by a fellow NACBA member, but not one whom I know, he is just getting a free plug here, because I really like his billboard) has the ability to cut through some serious emotional baggage.  The word bankruptcy has a way of becoming an emotional monster under the bed, and otherwise intelligent, rational adults start investing the bankruptcy monster with the same kind of absurd powers that terrified children bestow on their own monsters in the dark.

So, if you know someone who is contemplating bankruptcy, or just in financial trouble; ask them if what they really need is a reset button.  I’ll bet their whole expression changes, in a way, a Bankruptcy filing really is a reset button.

Elaine

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Tax Refunds and the Bankruptcy Estate

Tax refunds present a couple of interesting points in a Bankruptcy filing.  This post is concerned with Chapter 7 filings.  Chapter 13 is a little bit different for a couple of reasons.  This is also rooted in Oklahoma law, and although the theory remains the same, the results can be very different in other States. 

When talking about tax refunds with my clients, the first thing I have to do is figure out exactly what we are talking about.  I long ago stopped asking my clients and just started looking at their most recent returns.  Clients tend to refer to that check they receive from the IRS (or electronic credit) as their tax refund, although in many cases, it is all kinds of other things.  A tax refund is literally the refund of money that the tax payer overpaid to the IRS during the course of the year.  Various tax credits are paid along with the refund, but they are money given, or credited, to the tax payer by the Government.  Some common tax credits are Earned Income Credit, Child Care Credit and recently the Making Work Pay Credit.  Those are not a tax refund, those are tax credits.  At this point my clients are generally rolling their eyes and muttering, “Whatever” under their breath thinking I can’t hear them.  Then, I get their attention.

You see, tax refunds are not exempt in Oklahoma.  That means that any tax refund that has accrued to a debtor at the time he files for bankruptcy becomes property of his bankruptcy estate — meaning his Bankruptcy Trustee gets the money, and the debtor doesn’t.  Earned Income Credit, however, is exempt; and the Debtor gets to keep that money.  It is about this point that eyes stop rolling and clients’ posture visibly improves. 

Let me explain.  A Chapter 7 Bankruptcy is a deal.  The Debtor agrees that if he has any non-exempt property that the Trustee wants to administer for the benefit of his creditors, the Debtor will put it on the front porch with a red bow on it for the Trustee to come get — and BE HAPPY ABOUT IT.  In exchange, the Debtor gets a discharge — meaning he gets out of the debt that brought him to my office in the first place.  If that deal isn’t worth doing, then don’t file a Chapter 7 Bankruptcy.  Now, in most cases my clients lose no property, because the list of property that you get to keep in Oklahoma (exempt property) is really very generous.  Most people who file in Oklahoma lose nothing but a whole bunch of ugly debt they didn’t want in the first place, but the most commonly lost asset in Oklahoma is a tax refund — because tax refunds are not exempt.  Earned Income Credit, however, is exempt; and so the Debtor gets to keep that.  Ah, yes, focused attention. 

Now, I am posting this in April — tax time; but this is a relevant topic all year.  Here’s why.  Any time a bankruptcy is filed, the Debtor creates what is called a Bankruptcy Estate, and he gives to that Estate everything he owns and everything he owes.  Then, the Debtor takes back all property that he is claiming as exempt.  The goal is to leave as much debt as possible trapped in the Bankruptcy Estate and as little property as possible.  The Debtor can take back his Earned Income Credit.  He cannot take back his overpaid taxes, those are trapped in his estate and belong to his Trustee to pay to his Creditors. 

Notice, that last sentence refers to overpaid taxes, not specifically to a tax refund.  That is why this is an issue that is relevant all year.  Let’s assume that a client is expecting a $4,800 tax refund.  That means he has overpaid his taxes at the rate of $400 a month ($400 x 12 = $4,800).  If he files for Bankruptcy on January 1, he will have overpaid to the IRS the whole $4,800.  Now, he probably can’t file his taxes and claim it for at least another month or two; but he is owed that money even though he doesn’t have it yet.  His right to that money passes into his estate the instant he files his Bankruptcy.  That means when he does file his tax return, that entire refund will belong to his Trustee for the benefit of his creditors — all $4,800 of it.  Ouch. 

Now, let’s assume that this same person files on July 1 rather than January 1.  At that point he will have overpaid his taxes by $2,400 (January – June = 6 months x $400 = $2,400).  Even though he can’t claim that money for another seven or eight months, he is entitled to it.  Think of this as a savings account that you could only withdraw from after the first of the year.  You still are entitled to the money you deposit, you just might have to wait a while to get it.  Well, your Trustee can wait a while too.  So, in this set of facts, if the Debtor files for Bankruptcy July 1 and gets a $4,800 tax refund the following February or March, he will be entitled to keep the excess, or refund, that he paid in after he filed his Bankruptcy on July 1.  The Trustee will be entitled to the excess paid in before July 1. However, to the extent that refund is Earned Income Credit rather than tax refund, the Debtor gets to keep it all, regardless of when he filed.

This illustrates several significant concepts central to the Bankruptcy system:  1.The nature of the Bankruptcy Estate; 2. The inclusion in the Estate of accrued interests in property; 3. The difference between exempt and non-exempt property, and how technical that distinction can appear to be; and 4. The role of the Trustee.

Of course, the moral of this story is don’t file a Bankruptcy shortly after the first of the year until your tax refund is back and spent.  Do, however, talk to an attorney in advance, however.  There are ways you can spend a tax refund right before you file that can cause bigger problems.  As this post should have pointed out, Bankruptcy is a complex and technical area of law, and there can be significant ramifications to deceptively routine transactions. 

Elaine

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Foreclosures and What on Earth does “In Personam” Mean Anyway?

I get to sue a mortgage company.  That always makes for a good Monday.  Here are the facts.  Woman files for Bankruptcy.  She gives her house back to the lender in the Bankruptcy.  She moves out and moves on.  Lender has to obtain clean title to the house, so the Lender files a foreclosure action.  Lender screws up.  Lender is getting sued. 

The rest of the details.  Yes, at least in Oklahoma, the lender is supposed to foreclose on the house; but the lender is only supposed to seek a judgment against the house — or, to use the fancy, Latin, legal phrase — in rem (against the property).  Instead, this lender filed its foreclosure action and sought a judgment in rem (against the property), but also sought a judgment against my client, or in personam (against the person).  So, this foreclosure petition is asking for the property AND the right to pursue my client for money if the house doesn’t sell for enough to pay the total amount due.  That is the problem.

You see, when my client filed for Bankruptcy, she got a discharge.  A discharge is the reason you file for Bankruptcy.  It is what gets you out of all that debt that caused you to file in the first place.  A discharge is a Court Order that means that none of the people that the Debtor owed money to at the time that the Debtor filed for Bankruptcy can ever try to make the Debtor pay them again.  That means no collection calls, no bills in the mail, no nasty letters, no lawsuits and NO in personam liability in a foreclosure. 

Sure, the foreclosure needed to be filed.  In the Petition it should have mentioned the Bankruptcy filing and then said that the lender was seeking the property only, and not seeking a personal judgment against my client.  This one didn’t do that.  Some weeks I really like Mondays. 

Elaine

 

 

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Why How Your Insurance Company Pays Claims Should Matter

Ok, this isn’t my usual debt related kind of post; but here goes.

Wednesday night I was rear-ended at a stop light on the NW Expressway.  In all honesty it was more understandable than that.  The sun was in just the wrong place to see the light change.  Nonetheless, I stopped; the woman behind me didn’t.  The back of my car was pretty badly crunched, and the front of hers was a real mess.  Anyway, I discovered soon enough that her insurance policy was in a family member’s name, the car she was driving was her husband’s; and all of this makes sense when you realize that she doesn’t have a driver’s license.  She did have a State ID card.  Yes, she does have a couple of DUI convictions.  Why do you ask?

Anyway, the next morning she calls me to tell me that she has called it in to her insurance; and she needs two additional pieces of information:  my home address (I had given her my office) and my insurance policy number.  That didn’t strike me as the kind of thing you make up, so I assume that she called it in.  I reported in to my insurance company, just like my policy requires.  Then, I waited for her company to call me; and I waited.  Finally, I called her agent’s office.  They had no clue what I was talking about, so I gave them all relevant information.  They were going to have the claims office in Enid call me; and they did.  A man called to say he was returning my call and who was I and what did I want — basically.  Once again, no clue that there has been any communication on this claim.  So, today I get a call from their National Claims center who didn’t know who was driving, didn’t know if I was hurt, didn’t know the make or model of my car or even if it was drivable.  At this point I am starting to lose my cool with what I am now calling the Larry, Moe and Curly Insurance Agency.

So, my instructions now are to take my car to their approved body shop for pictures and an estimate.  They have a location near my house and one near my office, but they are only open Mon-Fri.  So, I get to take off work for them to appraise my car.   Then, I can have them fix it or I can take it someplace else and have it fixed.  Oh, that assumes that they are going to allow the claim.  They haven’t made a decision yet, because they haven’t spoken to their insured yet.

Now, maybe it is just the bleeding heart defense lawyer in me; but I would think that if I were that company’s customer I would expect that they would be a little more proactive in protecting me from a lawsuit involving an unlicensed driver with 2 DUI convictions.  I have been annoyed at the runaround they are putting me through, but I have been appalled at how little effort they are making to protect their own insured.

So, the next time you go to buy car insurance.  Give some thought to how the company treats the people their insureds hit.  You could be preventing your own lawsuit.

Elaine

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The Goldman Sachs SEC Mess

This explains it:

http://www.creditslips.org/creditslips/2010/04/explaining-the-abacus-cdo.html

I love the analogy of the fight promoter.

Elaine

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