Issue: April, 2009
Author: Randy L. Royal
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Bankruptcy - A Fresh Start or a Necessary Evil?
It is no secret that, as the national economy continues its decline, bankruptcy becomes a viable option for many Americans. Most of those who find the need to file bankruptcy find it is a very unattractive option and one that they put off as long as possible. For many, the effect that bankruptcy has on their lives both financially and emotionally takes a heavy toll. Obviously, bankruptcy is a solution that should be avoided if at all possible, but if you have a client that needs to file bankruptcy, that client will find that the bankruptcy laws in combination with the Wyoming exemptions will often times offer a fresh start.
Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)
By far, the most significant piece of legislation which has affected bankruptcy filings in the last decade is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). That act became effective October 17, 2005. Tim Ellis, the new Clerk of the U.S. Bankruptcy Court for the District of Wyoming, provided me with filing data. The five years just prior to BAPCPA (2000 – 2004) saw in the District of Wyoming an average annual filing of 2,344 cases. This includes the three primary chapters under Title 11 of the U.S. Code under which filings occur: 7, 13 and 11. In anticipation of BAPCPA enactment, Wyoming saw a dramatic increase in annual filings for all types of cases to 3,266 in 2005. Since the enactment of BAPCPA commencing with calendar year 2006 through calendar year 2008, bankruptcy filings in Wyoming have been and continue to remain flat. Wyoming has not experienced the increase seen in the eastern part of the country in bankruptcy filings and principally, bankruptcy filings under Chapter 7. For the calendar years 2006, 2007, and 2008, Wyoming has seen an average of 760 cases per year. Laramie County and Natrona County continue to lead the state in terms of those filings.
The Effect of BAPCPA
BAPCPA was enacted principally with an eye toward reducing those filings by debtors seeking to discharge or eliminate credit card debt. Thus, those types of debtors became the principal focus of the act. BAPCPA has become effective in its purpose, not only by its express terms, but also perhaps by its unanticipated consequences. My office routinely receives inquiries from both attorneys and debtors who have heard a “rumor” that one can no longer file against credit card debt. That is not the case.
What BAPCPA has done is to make filing much more difficult and much more expensive and, as a result, the filings are down. Most attorneys have found it necessary to increase their fees both as a result of the responsibilities placed on them by BAPCPA and also in response to the additional work required to get the case ready for filing.
Each individual who wants to file bankruptcy must first undergo credit counseling and receive a certificate showing completion of that counseling. That counseling is to occur within 180 days preceding filing. (11 U.S.C. Section 109(h)). Beyond that, however, is the BAPCPA requirement that each individual is subjected to a “means test” by which his income must be assessed and determined to be either above or below median income as defined by the census bureau. Those households which have an income below the median income are generally free to file either a Chapter 7 or 13 bankruptcy without any further assessment of their monthly expenses. Those households which appear to be above the median income are subjected to a “means test” by which monthly expenditures are compared to those approved by the Internal Revenue Service. At the end of that test, if an above-median income household has in excess of $166.67 per month of excess income, that whole household can be required to file a Chapter 13 or Chapter 11 bankruptcy rather than filing under Chapter 7. (11 U.S.C. Section 707 (b)). As with anything else, there are exceptions, but the general rule is that if there is excess income, one is subject to the means test. Not only does the means test analyze gross income of the person or persons who wish to file, but any proposed debtor must also disclose the income of all members of the household for inclusion in the definition of “income.” Pay stubs and sources of income for the previous six months prior to filing must be produced along with the federal income tax returns of the household. Finally, BAPCPA requires that a filer take a personal financial management course before receiving a discharge in bankruptcy. (11 U.S.C. Section 727 (a)(11)).
Not only does BAPCPA impose what can be some rather difficult requirements upon debtors, but it also offers benefits to creditors that did not exist pre-BAPCPA. BAPCPA prevents the re-filings that have become far too common. Pre-BAPCPA, a debtor could file a Chapter 7 bankruptcy every six years, but that period has been extended to every eight years. (11 U.S.C. Section 727 (a)(8)). In addition, credit card companies now have more flexibility to claim credit card fraud against debtors; BAPCPA restricts bankruptcy courts from adjusting or “cramming down” the value of a car if the car was purchased 910 days prior to the bankruptcy filing; the same type of “cramdown” for real property is restricted and for repeat filers, provisions for an automatic stay are restricted.
A bankruptcy filing is initiated by the filing of a petition in the Bankruptcy Court office either in Cheyenne or Casper. Electronic filings are now encouraged in this district, and in 2004, electronic filings comprised about one-third of the filings. Since 2004, electronic filings account for the vast majority of the filings. Cases are generally commenced by the filing of a voluntary petition as opposed to an involuntary petition.
In order to file in this district, a debtor must be a resident of the district for the greater part of 180 days prior to the filing or have Wyoming as the situs for the principal assets in the filing.
Once the bankruptcy is filed, the automatic stay provisions of 11 U.S.C. Section 362 operate in a general fashion to stop the commencement or the continuation of any action or proceeding against the debtor. As a practical matter, this is the first time that a debtor sees any form of relief flowing from a filing, because the automatic stay operates to prohibit actions such as the continuation or completion of any collection action, garnishment, home foreclosure, and the mailing of bills and statements from creditors.
There are six types of bankruptcy filings:
- Chapter 7 - Liquidation (11 U.S.C. Section 701, et seq.)
- Chapter 9 - Adjustment of Debts of a municipality (11 U.S.C. Section 901, et seq.)
- Chapter 11 - Reorganization (11 U.S.C. Section 1101, et seq.)
- Chapter 12 - Adjustment of Debts of a Family Farmer or Fisherman with regular annual income (11 U.S.C. Section 1201 et seq.)
- Chapter 13 - Adjustment of Debts of an Individual with regular income (11 U.S.C. Section 1301 et seq.)
- Chapter 15 - Cross-Border Cases (11 U.S.C. Section 1501 et seq.)
Most of the filings in this district consist of Chapter 7 filings and Chapter 13 filings. Upon the filing of a voluntary petition, cases are assigned to one of three panel trustees for Chapter 7 proceedings or to a Chapter 13 trustee for Chapter 13 proceedings. The cases are then assigned a meeting date for a creditors’ meeting, which is also known as a “341” meeting because it is held pursuant to the provisions of 11 U.S.C. Section 341. Those meetings are conducted by the Chapter 7 trustee in Casper, Cheyenne, Green River, Greybull, Lander, and Sheridan and by the Chapter 13 trustee in Casper and Cheyenne. Debtors must appear at this meeting. This meeting is the opportunity for the trustee to examine the debtor and for creditors to ask questions of the debtor and of the trustee. Certain material, including evidence of pay stubs and tax returns, is required to be submitted to the trustee prior to the creditors’ meeting. The creditors’ meeting is a critical stage of the process because that is often where the trustee will make a determination whether to administer assets in a Chapter 7 case, which assets of the debtor will be subject to liquidation, and which of those assets can be properly claimed as exempt. The trustee only has 30 days after the creditors’ meeting in which to object to claimed exemptions.
Is Your Client Ready to File?
Filing bankruptcy is a highly personal decision. Some debtors are forced into bankruptcy filings by foreclosure, garnishment and seizure of wages, bank accounts or personal property, by creditor harassment, and a number of other factors. However, if you are thinking of representing your client in a bankruptcy proceeding, be sure that he/she is ready to file in terms of the requirements of the bankruptcy code. Pre-bankruptcy planning is absolutely critical to the filing of any bankruptcy. From my perspective as a trustee, one of the biggest traps for debtors’ counsel is inadequate preparation prior to filing. One of the biggest problems that my office sees in Chapter 7 filings is the lack of adequate planning and subsequent failure to maximize exemptions which are available for debtors.
Pre-bankruptcy planning should consist of an analysis of all of the property of your client. You should carefully review all of the documents showing an ownership interest in any real and personal property. Give thought to what your client will lose in the process of the bankruptcy filing, because in exchange for the fresh start and for the relief allowed by the Bankruptcy Code, there is usually a price to pay. Determine whether or not your client has been a party to a transaction which has preferred one creditor over another (11 U.S.C. Section 547) or which may be a fraudulent conveyance (11 U.S.C. Section 548). Under 11 U.S.C. Section 541, generally speaking, all property of the debtor becomes property of the bankruptcy estate. Once a filing occurs, under most circumstances, it cannot be voluntarily dismissed over the objection of the trustee without an order of the court. Thus, once your client files, as a general matter, those assets that he/she owned are now subject to the jurisdiction of the court and administration by a case trustee or a debtor in possession in the case of a Chapter 11.
Sometimes it is obvious what exposure your client has in terms of non-exempt assets, which are assets that will be collected and sold. However, some attorneys fail to recognize that the interest of their client in a personal injury matter is also property of the bankruptcy estate. As well, please keep in mind that if your client maintains a whole life insurance policy with his/her estate as a designated beneficiary, any cash surrender value is not exempt. Likewise, if your client becomes entitled to an inheritance, or receives property from a property settlement agreement or a divorce or as a beneficiary under a life insurance policy or a death benefit plan within 180 days of filing, those interests also belong to the estate.
Oftentimes, debtors seem to be unaware that they will also lose a pro-rata share of any federal or state tax refund, including earned income credit. Trustee typically obtain those directly from the Internal Revenue Service. In addition, cash in banks that is not directly from Social Security or other such entitlements is not exempt, and debtors will be required to surrender those monies based on the amount in the bank account as of the date of their filing. The date of the filing of the proceeding is the key date for the entire administration of the case and is important in the determination of what will be an asset of the case.
11 U.S.C. Section 541 sets forth in detail both the inclusion of property and exclusions.
The bankruptcy code recognizes that certain assets are exempt from administration. The federal exemptions are contained in 11 U.S.C. Section 522. However, Wyoming is known as an “opt out” state because the Wyoming Legislature opted out of the federal exemptions in W.S.§ 1-20-109. Those exemptions from bankruptcy therefore available under Wyoming Statute can generally be found in W.S.§ 1-20-101, et seq. and include generally:
- Homestead - $10,000 per debtor
- Mobile Home Homestead - $6,000 per debtor
- Wearing Apparel - $1,000 per debtor
- Vehicles - $2,400 per debtor (1 exemption per debtor)
- Tools of the Trade - $2,000 per debtor
- Retirement Accounts - Entirely Exempt
- Social Security, Workers' Comp. and Disability Payments - Entirely Exempt
- Medical Savings Account - Entirely Exempt
What is the Goal?
The goal in any bankruptcy is a fresh start. Whether that is accomplished through a reorganization under Chapter 11, 12, or 13, or a liquidation in Chapter 7, the goal is the same. In a Chapter 7 proceeding (the most common in this District), a debtor will receive on an automatic basis the entry of a discharge approximately 60 days from the date of his/her creditors’ meeting. That discharge operates to discharge and eliminate all of those debts that are dischargeable (corporations do not receive a discharge). At that time, most debtors have essentially experienced the relief to which they are entitled under the code, because the automatic stay has turned into a permanent injunction against the commencement of any case or collection of any further amounts from the debtors.
Debtors should understand that they will be called upon during the administration of their case to make a decision whether they are going to lose certain assets. This will be accomplished in two principal ways. Secured debt is subject to realization of the collateral by the creditor. Only the equity in a secured piece of collateral is exempt, and the creditor can wind up repossessing the property after getting relief from the automatic stay and then moving forward with the liquidation process (with the exception of pursuing a deficiency against the debtor). However, non-exempt assets are generally liquidated by a trustee at either public or private sale, and oftentimes, debtors are called upon to decide whether they wish to repurchase those assets or subject them to sale. This is a difficult choice for many debtors. In that same process, debtors will be asked whether they wish to reaffirm an obligation with regard to residential property but quite commonly as to a vehicle as well. If your client reaffirms an obligation, he/she is as liable for the debt as if the bankruptcy had not been filed.
How much will it cost?
In my experience, the credit counseling courses and the financial management course are running about $100.00 in total. Debtors can expect a filing fee of $299.00 for a Chapter 7 case, $274.00 for a Chapter 13 case, and $1,039.00 for a Chapter 11 case. Legal fees will vary widely, but debtors can expect to spend probably no less than $1,000.00 (exclusive of the filing fee) for a Chapter 7 proceeding and $2,500.00 for a Chapter 13 proceeding, although that fee can be paid from the reorganization plan itself.
Bankruptcy remains a viable option for many. That seems inconsistent with the “flat” numbers in the District of Wyoming, but the relatively low numbers are probably more attributable to the legal fees and the filing fees which debtors incur. Many members of the bankruptcy bar have shared with me that they are getting large numbers of inquiries but the filings have yet to match those inquiries. At any rate, if you have a client that needs to file bankruptcy, there are many resources available to assist you and your client in that process. There are a number of excellent software applications available to assist in the preparation of all of the statements and schedules required by the bankruptcy code, and the bankruptcy court for the District of Wyoming has developed an excellent website (www.wyb.uscourts.gov) that includes many helpful references.
Randy L. Royal is a sole practitioner in Greybull where he has been practicing since 1979. He serves as a panel trustee in the District of Wyoming for the United States Bankruptcy Court. He has served in that capacity since 1987. Randy administers cases filed under Chapter 7 and on occasion, under Chapter 11. He also serves as a court appointed receiver, special master and hearing officer as needed. He is a full time Circuit Court Magistrate, a District Court commissioner and Greybull municipal judge.
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