Preparing the bankruptcy Lawyer Manual

If it appears that a bankruptcy will benefit the client and the client wishes to proceed, the following questions and issues need to be addressed:

• Have you ever filed a bankruptcy before? If so, when;
• Regardless of the answer to the question, the attorney should conduct a search on PACER case locator to see if the debtor has filed before;
• Individuals who voluntarily dismissed a prior bankruptcy case within the past 180 days after a motion to lift the automatic stay was filed are excluded from seeking bankruptcy relief;
• Individuals who had a prior bankruptcy case involuntarily dismissed within the past 180 days for willful failure to appear before the court in proper prosecution of the case or failure to obey court orders are excluded from seeking bankruptcy relief; and
• Is there an order in a previous case barring the debtor from filing again for a specified time?

Which chapter?

If the client is not barred from filing or receiving a discharge, under what chapter can she file?  11 USC § 109 of the Bankruptcy Code provides the answer. You may find our program on deciding between the different types of bankruptcy useful for your clients.

Different chapters of the Code are restricted to different entities. For example:

• Chapter 7 is available to a person, defined as an individual, partnership or corporation, with certain specific exceptions, such as railroads, domestic insurance companies, banks and savings and loans; and
• Chapter 13 is available to an individual, no partnerships or corporations, with regular income who owes less than $394,725 in unsecured debts and less than $1,184,200 in secured debts. These dollar amounts are adjusted every three years. 11 U.S.C. § 104

A debtor with primarily consumer debts who files under Chapter 7 bankruptcy will be subject to the "means test." If the debtor does not pass the means test, the case may be dismissed as a substantial abuse. It involves a 2-step process.

First, a debtor’s income is compared to the median income of the state for a family of the same size as the debtor’s. If the debtor’s income is lower than the median income of the state, then the case cannot be dismissed as a substantial abuse. If the debtor’s income is higher than the median income of the state, then the second step of the means test is triggered. Under that step, a debtor’s disposable income is found by subtracting certain expenses from the debtor’s total income. The median income numbers and allowable expenses can be found on the website of the office of the United States Trustee.

There are three different outcomes to the test depending on the debtor’s projected disposable income:

• If the projected disposable income is less than $7,025 over the following five years, the debtor will remain eligible for Chapter 7 bankruptcy;
• If the debtor's projected disposable income is higher than $11,725 over the following five years, then there is a presumption that Chapter 7 bankruptcy is an abuse of the bankruptcy system;
• If the debtor’s projected disposable income is between $7,025 and $11,725 over the following five years, then the debtor’s projected disposable income is compared to the amount of the debtor’s unsecured debt. If the projected disposable income is greater than 25% of the unsecured debt, there is a presumption that Chapter 7 bankruptcy is an abuse of the bankruptcy system. If the debtor’s projected disposable income is less than 25% of their unsecured debt, then the debtor may file for Chapter 7 bankruptcy; and
• Even if the debtor does not pass the means test, the debtor may still be able to defeat a motion to dismiss the Chapter 7 case if he or she can demonstrate special circumstances. 11 U.S.C. § 707(b)(2)(B)

Note: While 11 USC § 109 requires a debtor to either reside in the US, be domiciled in the US or have property located in the US, it does not require that a debtor be a citizen of the U.S.

Will it work?

The ultimate question of any bankruptcy is, will it accomplish the goal of the debtor, namely a fresh start free of the burden of debt? And if not, is it still worth filing?

Discharge v. dischargeability

A discharge is the release of all pre-bankruptcy liabilities. 11 USC § 727 provides that discharge shall be granted unless any one of ten specific grounds is shown to exist. 11 § USC 523 specifies which particular debts are not dischargeable even if a discharge is granted. It reduces the benefit the debtor may receive from the discharge.

Discharge

Of the ten grounds for not granting a discharge is that the debtor has received a discharge in a Chapter 7 proceeding within the last 8 years or has received a discharge in a Chapter 13 proceeding within the last 6 years in which the debtor paid less than 70% of the unsecured debt. 11 U.S.C. § 727(a)(8) and (9). Filing a Chapter 7 for this client would be a useless act as she is not eligible to receive another Chapter 7 discharge at this time. However, if it has been more than 4 years since the filing of a case in which the debtor received a Chapter 7 discharge, the debtor is eligible to receive a discharge in a Chapter 13 case.

Dischargeability

It is most important to look at the client’s debts and be aware of the red flags which may signal problems with dischargeability. The following are some typical debts that you will encounter and issues that each may present:

• Procedure: There are three categories of debts where the creditor must file an adversary proceeding and get a ruling from the bankruptcy court that the debt is nondischargeable, otherwise the debt is discharged. These are:
• Fraud;
• Theft, embezzlement, or defalcation while acting in a fiduciary capacity; and
• Debt for willful and malicious injury by the debtor to another entity or the property of another entity 11 U.S.C. § 523(a)(2), (4), and (6).

Student loans are nondischargeable unless the debtor obtains a ruling from the bankruptcy court that the debt should be discharged because it causes an undue hardship for the debtor and the debtor’s dependents. The other exceptions to discharge are self-enforcing.

• Credit cards: It is very important to find out when the client last used the card. Clients should be advised to stop using their credit cards immediately. If the debtor has made charges for luxury goods or services totaling more than $600 in the 90 days before bankruptcy is filed, those charges are presumed to be nondischargeable. Cash advances aggregating more than $875 obtained within 70 days of the filing of bankruptcy are presumed to be non-dischargeable. 11 USC 523(a)(2)(C). Regardless of the amount or timing, charges made by a debtor before bankruptcy with no intention to repay can be challenged by a credit card company by way of an adversary complaint;
• Traffic accidents: Always ask if the accident occurred as a result of the client’s use of drugs or alcohol. 11 USC § 523(a)(9) exempts from discharge any debt for death or personal injury caused by the debtor’s operation of a motor vehicle while under the influence of drugs or alcohol. But note that a property damage claim is  dischargeable;
• Student loans: Student loans are not dischargeable unless the debtor can show that payment of the loan will impose an undue hardship on the debtor and their dependents. 11 U.S.C. § 523(a)(8); 
• Taxes: A personal income tax debt can be discharged in bankruptcy.  However, to be dischargeable, the debt must fall within these strict guidelines:

1. The debtor must have filed an individual tax return for the year in question;
2. The return filed was not fraudulent; and
3. It has been more than 3 years since the debtor's tax return was due and 2 years since the return was filed.

• Domestic Support Obligations: Any domestic support obligation in the nature of alimony, maintenance, or support of a spouse, former spouse, child of the debtor, or parent of the debtor’s child cannot be discharged in any bankruptcy. 11 U.S.C. § 523(a)(5); 11 U.S.C. § 1328(a)(2). The definition of a domestic support obligation can be found at 11 U.S.C. § 101(14A);
• Property settlements in divorces: Obligations to a spouse or former spouse or child that are not domestic support obligations that arise out of divorce or separation are not dischargeable in a Chapter 7 case. 11 U.S.C. § 523(a)(15).
• Parking tickets: Even though parking tickets must be listed on the bankruptcy, 11 USC 523(a)(7) does not permit their discharge; and
• Debts due to the Department of Public Aid, Unemployment Compensation, and other public benefit agencies: The question here is, how was the debt incurred? If the debt was the result of an error by the agency involved, the obligation could be extinguished by bankruptcy.

For example, the debtor was a recipient of Public Aid for several years. Each time the debtor was employed he would submit copies of his pay stubs to his caseworker and would receive a monetary supplement based on his pay. At some point, his caseworker mistakenly computed his supplementary benefit incorrectly with the result that the debtor received several hundred dollars of excess benefits. The debtor was eventually notified of the error on the part of the Department and the amount of overpayment. If the debtor goes into bankruptcy, this debt will be discharged. If, however, the debt was incurred as result of provable fraud on the part of the debtor (i.e., failure to report employment income) while receiving Public Aid, the Department may file an adversary proceeding and prevent discharge of the debt.

• Bad checks: Bad checks may be dischargeable. Much depends on the circumstances.  Did the debtor know that there were no funds to cover the check when it was written, or did the debtor think there was money in the account, or there would be money in the account by the time the check would be presented?  Is there a pattern of bad checks over a period of time or is there a single event, "My boyfriend always deposited his pay into my account on Friday so I thought I had the money", which may have resulted in a number of bouncing drafts? The client should be advised that a bad check debt will be discharged in bankruptcy unless the creditor files a successful adversary complaint; and
• Utility bills: Utility bills are dischargeable. 11 USC § 366 of the Bankruptcy Code prohibits a utility from refusing, discontinuing service to, or discriminating against a debtor simply because they have filed bankruptcy. However, the debtor must, within 20 days of the filing of the bankruptcy, provide the utility with "adequate assurance of payment" for future service.

Note: As discussed previously, it is essential to find out from your client how the utility bills were incurred, especially very large bills in the thousands of dollars. While these debts can be discharged, a utility bill incurred through fraud or theft can be found to be non-dischargeable.  

For example, Commonwealth Edison disconnects service to the home of a client who has failed to pay his bill for several months. The client, at this point, could file bankruptcy and discharge the debt. Instead, the client illegally hooks his service up again. ComEd finds the illegal tap, again disconnects service, and sends the client an estimated bill for the months of unauthorized usage. The client should be advised that the utility may now file an adversary complaint to determine the dischargeability of the debt if bankruptcy is filed.  Only the service obtained after the illegal self-restoration is nondischargeable. If the utility chooses not to file an adversary complaint, the debt will be discharged.

• Secured debts: Clients who seek to file bankruptcy to avoid paying secured creditors while retaining the secured items should be advised that a secured creditor has the right to expect payment or a return of the security, whether or not the debtor goes into bankruptcy. Therefore, if the purpose of the bankruptcy is to wipe out a car loan or a mortgage, this will only be accomplished in conjunction with the return of the car or the house to the creditor. Sometimes, the creditor will offer to reduce a secured debt, typically on furniture or home appliances, if the debtor will agree to reaffirm on this lower figure;
• Post-petition debts: These debts are not dischargeable. This is why someone who is at risk of incurring medical bills not covered by insurance needs to be careful when deciding whether to file bankruptcy and the timing of the filing; and
• Medical bills: These are always unsecured. However, finding out the reason for these bills may be very important. A client who went to the emergency room because of a broken arm or had successful surgery some time ago is in a much different position than the client who suffers from a chronic condition or a life-threatening illness. The first individual should have no qualms about proceeding with bankruptcy. Time should be taken with the second person to make sure that the client understands that:
  • Bankruptcy can only discharge debts which have been incurred as of the date of the filing of the petition. This means that if a new medical bill is incurred the day after the bankruptcy is filed, it cannot be included in that bankruptcy; and
  • A second Chapter 7 bankruptcy cannot be filed within 8 years of the first. If the purpose of the bankruptcy is to wipe out medical bills, but the individual suffers from a chronic condition which can result in hospitalization at any time, and the client does not have medical insurance, the client should be advised of the drawbacks of bankruptcy to make sure she is making a fully informed decision.

Choice of Individual vs. Joint Husband/Wife Bankruptcy

One spouse can file for bankruptcy without the other spouse joining in the action, or a husband and wife can file jointly. In a joint filing, both spouses must sign the bankruptcy documents.