What You Need to Know About Bankruptcy

• Why you need to know if your client has already filed bankruptcy

• What should you do if an adverse party– Has filed bankruptcy?– Is a threat to file bankruptcy?

• Your client may be filing bankruptcy – What you can do to preserve client’s ability to file

bankruptcy

How a previous bankruptcy may affect current case

• You may not be able to proceed with the lawsuit

• Who owns the lawsuit?

• Can the other side use judicial estoppel against your client?

Previous bankruptcy means client can’t play the bankruptcy card

• Can’t file bankruptcy if you lose this case• Received discharge “recently”

– Waiting period may be 2, 4, 6 or 8 years

• Was denied bankruptcy discharge and debt is before prior case was filed

• Wouldn’t get discharge because of unrelated fraudulent conveyance

Client being sued in someone else’s bankruptcy case

• Your client may have done nothing wrong

• Innocent recipient of preferential payments– fraudulent conveyance – actual or constructive

• Trustee wants to sell your client’s house

• Debtor/trustee wants to evict your client– right to jury trial if not waived. Seventh Amen.

Client is creditor of adverse party who has filed bankruptcy

• How does the automatic stay affect your case?

• Can/should you stop adverse party – From getting a discharge at all?– From discharging your client’s claim?

• Can your client get any money from the bankruptcy case?

Traps for the advocate

• Don’t violate the automatic stay• Make sure client understands the deadlines

– to object to exemptions– to object to discharge/ dischargeability– to file proof of claim

• CAUTION: filing a claim waives right to jury trial

• If you know bankruptcy was filed, you are on notice, even if not officially listed

Beware of the Automatic StayAutomatic nature

• Filing petition invokes stay

• No court order is necessary

• Actions in violation of stay are void, even if no actual notice

• Willful violations of stay – Contempt, actual and punitive damages

Automatic StayBroad scope

• Applies to acts against debtor– Lawsuits– Any other action to collect debts

• Applies to acts against property – Acts to recover property for pre-petition debts– Acts to recover property of bankruptcy estate

• Co-debtor stay in Chapter 13 cases

Automatic StayNotable exceptions

• Criminal cases

• Child support or alimony (DSO)– Establishing, modifying or collecting

• Establishing paternity

• Post-petition debts– If collected from debtor

Waiting out the automatic stayExpiration

• When discharge granted (or denied)

• When case dismissed or closed

Automatic stayMultiple filings by debtor

• If 2nd case within 12 months, stay expires after 30 days,

• Even if 30 days have expired, be careful

• Stay can be extended– Even if no extension, stay of actions to recover

property of the bankruptcy estate may continue

Automatic StayRelief from automatic stay

• Grounds– No adequate protection of creditor’s interest– Debtor has no equity in property AND not

needed for effective reorganization– Other “cause”

• Examples– Get judgment so that you can collect from

insurance

Relief from automatic stay Procedure

• Bankruptcy court has exclusive jurisdiction to grant relief from stay

• File motion in bankruptcy court. – $150 filing fee, – No fee for child support creditors– Others may get fee waived by motion

• Mandatory electronic case filing

Preventing discharge

• Denial of discharge vs.• Excluding debt from discharge• Procedure –

– Short statute of limitations

– Adversary proceeding, $250 filing fee; waivable!?

• Dismissal of case– Can you get case trustee or US trustee to move to

dismiss case?

DischargeWhen do you need to act?

• Some debts are never discharged– Creditor can collect once automatic stay ends,

does not need express permission from court

• Some debts are discharged unless creditor takes timely action in bankruptcy court

DischargeDebts that are never discharged

• Child support and alimony

• Criminal restitution orders

• Drunk driving resulting in personal injury

DischargeDebts that may be discharged

• Debts discharged if no timely objection– Property settlements (chapter 13 only)– Fraud– Theft, embezzlement, breach of fiduciary duty– Willful and malicious injury to persons or

property (Chapter 7)– Willful or malicious injury resulting in personal

injury or death (Chapter 13)

Getting money from bankruptcy caseDon’t miss claims bar date

• Timely proof of claim required– No fee to file proof of claim– Types (1) secured* (2) priority (3) general unsecured– unpaid wages, child support, alimony have priority

• Chapter 7. Usually don’t need to file a proof of claim until notice of potential assets

• Chapter 13. – There is always a (short) claims deadline – Objections to plan to try to get more money sooner

What if debtor has property?

• Don’t miss deadline to object to exemptions• Your client may know of property that is

left off schedules. Do you tell the trustee?– Even unlisted property is property of the

debtor’s estate

• Exempt property is taken out of bankruptcy estate– Debtor loses exemption as against DSO

Tenancy by entireties property

• Principal residence owned in tenancy by the entireties is exempt from unsecured debts owed only by one spouse– Is child support an exception under Illinois law?

• Entireties property can be liquidated to pay child support if parent files bankruptcy

Monitoring a Chapter 13 case

• Debtor’s new post-filing duties gives creditors information and leverage

• Debtor must file all tax returns that come due.

• Creditors can ask for yearly statements of current income and expenses

Collecting DSOs after Chapter 13

• Chapter 13 debtors must be current in post-petition child support to get discharge

• If debtor gets Chapter 13 discharge, trustee to notify child support creditor of last known address of debtor

Anticipating a bankruptcy

• Get and record judgments, perfect security interests ASAP

• Domestic relations negotiations– Get alimony and child support, not property

settlement or agreement to pay debts– Get a property interest now, not an unsecured

promise to pay out of a future sale

Your client may file bankruptcy

• Don’t foreclose or limit discharge in possible future case

• Plan with possible bankruptcy of your client in mind

• Identify timing issues now

Preclusion issues

• Judgment res judicata as to amount of debt– Client may be filing Chapter 13

• Collateral estoppel as to dischargeability of a debt– Same rules as in state court

• Admissions

Help clients avoid mistakesAssets

• Don’t lose exemptions– by commingling exempt and non-exempt assets – or spending exempt assets first

• Don’t throw good money after badDon’t cash out exempt assets, such as retirement

accounts, when bankruptcy is inevitable

• Exemption planning is allowed– Defrauding or hindering creditors is not. Pigs/hogs

Help clients avoid mistakesDebts

• Paying dischargeable debts before nondischargeable debts

• Actions that create nondischargeable debts– Paying taxes by credit card– Failing to file tax return

Other client mistakes(trying to outsmart the system)

• Sanctions are harsh– None of the benefits, all of the burdens

• Examples– Giving away property before filing

– Selling property cheap to friends/relatives

– Not listing, undervaluing, or actually hiding assets

– Deliberately omitting creditors

• Full disclosure is required

Timing the bankruptcy filingAdvise client that timing may be crucial

• Don’t be late. Know the deadlines to stop– forced sale -mortgage, judgment, tax sale, UCC– eviction (leased property, installment purchase,

condo, cooperative)

• Don’t jump the gun. It may pay to wait – To remove taint of certain bad acts– So some debts are old enough to be discharged– To prevent trustee from pursuing preferences

Credit counseling Requirement strictly enforced

• Has to be from approved agency

• Within 180 days of filing case

• Average fee - $50?

• Provided without regard to ability to pay.

• Can file petition if exigent circumstances & attempted to get counseling at least 5 days before.