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HOW DOES THE BANKRUPTCY PROCESSWORK?

Presented by Hon. Colleen A. Brown, U.S. Bankruptcy Judge

District of Vermont

Conference of the National Paralegal Association ~ Hilton Hotel, Burlington, Vermont ~

October 20, 2016

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Source of Relief

• Bankruptcy relief is found in Title 11 of the UnitedStates Code, is therefore a national statute, andapplies in the same way in each state in thecountry.

• Bankruptcy Judges preside over bankruptcy cases,and all proceedings, contested matters, litigationgenerally involving a debtor and a debtor’sproperty.

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Trustees

• There are “panel” or “case” trustees who overseethe administration of Chapter 7 cases.

• Their job is to liquidate assets and disburse thosefunds to creditors.

• They are compensated based upon the amount ofmoney they disburse in the case.

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The trustee disburses rather than liquidates assets in Chapter 12 & 13.

• Chapter 12 and 13 trustees are known as standingtrustees and often work as trustees full time,administering all of the Chapter 12/13 cases intheir districts.

• Standing Trustees are also compensated basedupon funds distributed but collect those sumsfrom the debtor’s payments into the plan and arecapped at 10% of all such payments.

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Section 341 Meetings

• Every bankruptcy debtor, regardless of the chapterunder which he/she filed for relief, must appear ata meeting of creditors, called a section 341meeting.

• There, the trustee examines the debtor under oathto verify the accuracy of the debtor’s schedules, todetermine if there are assets to liquidate or causesof action to pursue, and explore questions aboutwhether the debtor filed the bankruptcy case ingood faith.

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Four most common types of bankruptcy cases

• Chapter 7: Liquidation

• Chapter 13: Adjustment of Debts ofIndividuals with Regular Income

• Chapter 12: Adjustment of Debts of FamilyFarmer or Fisherman with Regular AnnualIncome

• Chapter 11: Reorganization

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Pre-Filing Checklist

1. If the debtor owns real property• do a title search• review tax bills (to ascertain whether any

property taxes owed and take note ofassessed value)

• obtain copies of any appraisals of theproperty

• review mortgages, if any, and in particularverify accuracy of information filled on themortgage form, and verify all mortgageswere properly executed and recorded

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2. If the debtor owns any vehicles• review certificate of title for each vehicle• read loan docs to ensure they are accurate and

if secured verify security interest is properlyperfected

Scrutinize the information from the debtor to ensure lists of property and debt correspond (e.g., if there is a vehicle and no auto loan, verify vehicle has no loan against it).

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3.

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Encourage the debtor to be scrupulouslythorough in listing all debts and all property;

scrutinize the information from the debtor toensure the lists of property / assets and debts areinternally consistent and add up; and

verify the addresses of all creditors.

If there are attorneys representing any of the creditors, add the attorneys’ name to the schedules and matrix.

Stress how important it is for the debtor to prepare an accurate and reasonable budget.

4. Urge the debtor to get appraisals of significantassets, particularly if none has been donerecently and the assessment of that propertydoes not seem accurate to the debtors.

• The value of large assets is crucial to manyaspects of a bankruptcy case, including choice ofexemptions, possible avoidance of judgment liens,vulnerability to relief from stay motions, and planterms / confirmation.

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5. Obtain from the debtor, for the attorney toreview:

at least 2 years of federal and state tax returns (or a letter stating the debtor need not file returns), at least 2 months of statements for all bank and

investment accounts, copies of documents from any lawsuits involving

the debtor in the last 6 years, copies of any divorce proceeding documents and/

or documents evidencing an obligation to pay any type of family support or maintenance;

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receipts / payment history for any public assistance the debtor receives; copies of the debtor’s most recent mortgage

statements; copies of at least 2 months’ of pay stubs; proof of any payment the debtor made to a

family member within the last year; and proof of any unusually large payment, or “catch-

up”/ “back payment” the debtor made to any creditor within the last 3 months.

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6. Prepare a statement showing all fees the attorney is charging for the case,

all fees the debtor has already paid, and

the terms of the engagement of counsel, torecord and file with the petition and schedules, pursuant to Bankruptcy Rule 2016.

7. Encourage the debtor to file all outstanding taxreturns prior to filing the bankruptcy case.Failure to do so delays bankruptcy case

administration and the plan confirmation process.

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Exemptions are critical and complex:

8. Review the state and federal exemptionsavailable to the debtor in order to assist theattorney inweighing the impact of choosing state vs.

federal exemptions, and identifying the assets that might be at risk

under each available exemption scheme.

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Questions?

• Your local Bankruptcy Clerk’s Office is a wealthof information: familiarize yourself with theirwebsite and get to know them.

• Learn how to use PACER.

• Sit in on sec 341 meetings and/or court hearings –they are all open to the public.

• Consider working with a legal services agency ona pro bono case.• You will learn a lot, have guidance, and help

someone in great need.15

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HOW DOES THE BANKRUPTCY PROCESS WORK? Presented by

Hon. Colleen A. Brown, U.S. Bankruptcy Judge, District of Vermont

Conference of the National Paralegal Association ~ October 20, 2016 ~

~ Hilton Hotel, Burlington, Vermont ~

TABLE OF CONTENTS

A. INTRODUCTION .................................................................................................................................... 2

B. THE PLAYERS ....................................................................................................................................... 3

C. FREQUENTLY USED BANKRUPTCY TERMS ........................................................................................ 5

D. THE FOUR MOST COMMON TYPES OF BANKRUPTCY RELIEF ......................................................... 8

E. BANKRUPTCY ELIGIBILITY REQUIREMENTS ................................................................................... 11

F. INDIGENT DEBTORS, FEE WAIVERS, AND PRO BONO OPPORTUNITIES ......................................... 11

G. PROPERTY OF THE BANKRUPTCY ESTATE AND EXEMPTIONS ....................................................... 13

H. ADMINISTRATION OF BANKRUPTCY ESTATES ................................................................................. 14

I. PREPARING A DEBTOR – AND THE DOCUMENTS – TO FILE FOR BANKRUPTCY RELIEF ............... 15

J. IMPACT OF BANKRUPTCY ON AN INDIVIDUAL’S CREDIT HISTORY ............................................... 16

K. INFORMATION RESOURCES ............................................................................................................... 16

APPENDICES ........................................................................................................................................... 17

1. DOCUMENT CHECKLIST FOR FILING A BANKRUPTCY CASE .......................................................... 18

2. SOME IMPORTANT PRE-FILING PREP .............................................................................................. 19

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A. INTRODUCTION The Bankruptcy Code is found in Title 11 of the United States Code. Bankruptcy relief is

most often sought under Chapter 7, 11, 12, or 13. (Chapter 9 and 15 bankruptcies also exist, but they will not be discussed herein. Chapter 9 relief is available for municipal entities only, and Chapter 15 offers a mechanism for implementing relief in the U.S. pursuant to insolvency or bankruptcy cases pending in other countries.)

The Bankruptcy Code was enacted to provide relief to debtors. The two major goals and

purposes of bankruptcy relief, in all Chapters, are: (1) to ensure an equitable distribution of the debtor’s assets as among the creditors, and (2) to provide the debtor with a “fresh start.”

The filing of a bankruptcy petition commences a bankruptcy case. The petition

constitutes an “order for relief,” and the automatic stay (a freezing of all creditor action) goes into effect immediately upon the filing of the bankruptcy petition.

To commence a bankruptcy case, certain technical requirements must be met. These

requirements are found in the Federal Rules of Bankruptcy Procedure (primarily in Chapter 1 of those Rules). The requirements include, but are not limited to:

(1) the timely filing of complete and accurate schedules which reflect all of the

debtor’s debts and property, and are signed under penalty of perjury;

(2) the filing of a statement of financial affairs, which summarizes the debtor’s financial history before filing for bankruptcy;

(3) the signatures of all debtors seeking relief (a married couple can file a joint case); (4) representation by counsel if the debtor is a corporation; and (5) payment of the appropriate filing fee.

Additionally, there are “jurisdictional requirements” which govern what types of entities

can file under each Chapter (e.g., only individuals with steady income and debts below a specified amount may file for Chapter 13 relief). The jurisdictional guidelines of who may be a debtor are set forth in § 109 of the Bankruptcy Code. There is no requirement of insolvency for voluntary bankruptcy filings.

If the technical requirements are not met, the Bankruptcy Court will likely dismiss the case. If the debtor intentionally files fraudulent or incomplete schedules of property and debts, he or she may be prosecuted by the U.S. Attorney for the commission of a felony, punishable by a fine of up to $5,000 and imprisonment of up to 5 years. (Bankruptcy crimes are set forth in Title 18 of the U.S. Code.)

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The relief offered by bankruptcy (i.e., the stay of collection actions and entry of a discharge) is available only to “honest debtors” who fulfill their statutory obligations and satisfy all of the requirements of the Bankruptcy Code and Rules.

In Vermont, as in most parts of the United States, individuals generally seek bankruptcy

relief for one of three reasons: (1) they are unable to pay the expenses associated with an uninsured medical calamity,

(2) they have lost their job and cannot meet their expenses without that job, or

(3) they have gone through a divorce and cannot afford the cost of maintaining a separate

household and/or cannot meet family expenses because the ex-spouse is not paying support.

B. THE PLAYERS:

The following entities or persons are the ones typically involved in bankruptcy cases:

THE DEBTOR: the person or entity who has filed the bankruptcy case (or against whom the case was filed in involuntary cases). In the past this person or entity was called “the bankrupt,” but that term was replaced by “the debtor” in 1979, when the Bankruptcy Code became effective. THE U.S. BANKRUPTCY COURT: court of equity that resolves all legal issues that arise in bankruptcy cases and bankruptcy proceedings; it also enforces most administrative requirements, several of which can have critical legal consequences (e.g., failure to file timely or complete schedules). The Bankruptcy Code is a national statute and applies in all states; hence, it is federal (rather than state) courts which adjudicate bankruptcy questions and provide bankruptcy relief. Bankruptcy cases include a great deal of administrative oversight and the vast majority of bankruptcy cases are handled administratively so that most debtors never appear in a bankruptcy court. THE BANKRUPTCY COURT CLERK’S OFFICE: the Clerk of the Court and his or her staff are the people responsible for the administrative and operational aspects of the court, and for the processing of all bankruptcy cases of a particular district; their responsibilities are extremely broad and crucial to the court, and include: assisting anyone who needs information about a bankruptcy case or proceeding; answering questions related to the administration of bankruptcy cases; creating, managing and ensuring the accuracy of the case docket of every bankruptcy

case and adversary proceeding in the district; providing guidance and training on the use of the bankruptcy electronic filing system

(CM/ECF); overseeing all operations of the courtroom and the non-legal aspects of all hearings; managing the financial, space, security, and IT aspects of court operations; and generally ensuring that the bankruptcy process runs smoothly.

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Practice Tip: If you are going to work in the area of bankruptcy law, it is essential that you meet – and develop a good working relationship – with the Clerk’s Office staff in your district. These federal employees have a wealth of information and have a vested interest in helping you to do your job well. THE OFFICE OF U.S. TRUSTEE: the primary overseer of the administrative side of bankruptcy cases (since the 1984 changes to the Bankruptcy Code and the permanent establishment of the U.S. Trustee program in 1986) that acts as the “watch dog” of the bankruptcy system to detect and prosecute bankruptcy fraud; appoint, train and oversee bankruptcy trustees; set and monitor 341 meetings; and work collaboratively with the bankruptcy courts to effectively administer cases. Vermont is in Region 2 of the U.S. Trustee system, and the office that includes supervision of Vermont cases is located in Albany, NY. The UST region number often, though not always, corresponds to a court’s circuit number. CHAPTER 7 CASE TRUSTEES: attorneys who are appointed and overseen by the Office of the U.S. Trustee serve as trustees in every Chapter 7 case (also called “panel trustees”). Pursuant to local agreement with the U.S. Trustee’s Office, the Clerk’s Office typically assigns the case trustee in each Chapter 7 case, in a random fashion, consistent with geographic region of each case trustee. The role of a case trustee is to verify the accuracy of each debtor’s schedules, to commence any litigation necessary to obtain all assets that should be in the debtor’s

bankruptcy estate, to liquidate all non-exempt assets, and to distribute the proceeds of those assets to debtor’s creditors.

Chapter 7 trustees are paid a commission based upon the distributions they make to creditors, which is governed by the Bankruptcy Code. Thus, they have an economic incentive to locate, liquidate, and maximize the amount of sale proceeds of each estate’s assets. In no-asset cases, Chapter 7 trustees are paid only $60. (And they are paid nothing if the filing fee is waived.) CHAPTER 11 TRUSTEE OR EXAMINER: appointed when fraud or mismanagement are suspected in a Chapter 11 case. When the Court determines the grounds for such a fiduciary have been established, it directs the U.S. Trustee to appoint the trustee or examiner. The Chapter 11 trustee or examiner need not be a member of the trustee panel, and on those rare occasions that one is appointed, s/he typically is not a panel trustee. STANDING TRUSTEE: an attorney appointed by the Office of the U.S. Trustee to serve as the trustee in every Chapter 12 and 13 case. The role of the standing trustee is to verify the accuracy of each debtor’s schedules, make a recommendation on the sufficiency of the debtor’s proposed plan, collect payments from the debtor pursuant to the confirmed plan, and disburse those payments to the debtor’s creditors in the amount and order set out in the

debtor’s confirmed plan. In contrast to the case trustees, the standing trustees are paid a flat fee (governed by a formula set out in the Bankruptcy Code and monitored by the U.S. Trustee) which cannot exceed 10% of the distributions he or she makes; currently it is about 7% in Vermont.

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CREDITOR: any party who holds a claim against a bankruptcy debtor (i.e., generally, someone to whom the debtor owes money). The definition of a claim, and hence a creditor, is extremely broad. The amount owed can be for a sum certain or be a contingent or unliquidated claim. SECURED CREDITOR: a creditor who has collateral securing the debt, such as a mortgage securing the loan the debtor obtained to buy real property, or a lien on a motor vehicle securing a debt the debtor obtained when the debtor purchased that vehicle, or a judgment lien the creditor obtained through prevailing in a lawsuit for non-payment (e.g., from a credit card or divorce) and then properly recording that judgment in the land records. UNSECURED CREDITOR: a creditor who has no collateral for the debtor’s obligation to pay (e.g., a medical bill, credit card debt, or personal loan). The vast majority of debts debtors owe are unsecured. Unsecured creditors rarely get paid in full through a bankruptcy case – and only get paid at all when the creditor files a “proof of claim.” PRIORITY UNSECURED CREDITOR: a creditor who does not have collateral securing its debt but holds a claim identified as meriting special “priority” treatment. Congress identified a number of debts which it designated as priority claims. Those claims must be paid in full in bankruptcy cases. This category of claims includes most types of taxes, support obligations (generally called “domestic support obligations” or “DSOs” in

bankruptcy cases), employee wages and benefits, consumer deposits, FDIC related penalties, personal injury damages resulting from DUI, and attorney’s fees for the bankruptcy case.

CONSUMER OMBUDSMAN: a skilled professional appointed by the U.S. Trustee’s Office to protect the interests of individual patients and holders of confidential information. In certain types of bankruptcy cases, primarily those involving medical facilities and entities dealing with confidential records, the Bankruptcy Code requires the appointment of a consumer ombudsman and mandates payment of his or her fees during the bankruptcy case.

C. FREQUENTLY USED BANKRUPTCY TERMS CASE: a bankruptcy case is filed under Chapter 7, 9, 11, 12, 13, or 15 of the Bankruptcy Code when one files a petition for relief; the distinguishing characteristic of a case is that it seeks relief from debt under a particular Chapter of the Bankruptcy Code. A case is commenced upon the filing of a bankruptcy petition and the payment of the required filing fee. A bankruptcy case can be voluntary or involuntary, and can be initiated by an individual, a married couple, or most types of corporate or partnership entities.

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BANKRUPTCY CASE FILING FEE: the filing fee varies by Chapter. As of August 2016, it costs $335 to file a Chapter 7 case and $310 to file a Chapter 13 case.

In individual cases, the debtor can obtain permission to pay the filing fee in up to 4 monthly installments. Under certain circumstances, individual debtors may obtain a waiver of the filing fee. This requires that the debtor show their income does not exceed 150% of the poverty level for a family of their size and that they “are unable to pay the filing fee” even in installments. PETITION: the document that must be completed, signed under penalty of perjury, and filed with the Clerk’s Office to commence a bankruptcy case. CREDITOR MATRIX OR CREDITOR MAILING LIST: a list of all creditors to whom a debtor owes money. It must include the full name and complete address of each creditor. It MUST be filed with the petition and filing fee. ADVERSARY PROCEEDING (“AP”): litigation (resembling a state court law suit) to resolve a legal issue, initiated by the filing of a complaint and leading to trial and judgment (unless settled). APs have a separate filing fee. Certain relief is only available through an AP (includes actions challenging the nature, extent or validity of a mortgage or other lien on property; actions to avoid preferential or fraudulent transfers; and resolution of certain state law claims). CONTESTED MATTER: a dispute litigated in the Bankruptcy Court which does not require the formality of an AP. Motions for relief from stay, objections to claims, objections to exemptions, and motions to avoid liens on exempt property are examples of contested matters. Motions for relief from stay require a fee; others do not. PROCEEDINGS IN A BANKRUPTCY CASE: a term that include both APs and contested matters; important to note that proceedings are distinct from cases. 341 MEETINGS: meetings of creditors required by § 341 of the Bankruptcy Code. A trustee presides over the 341 meeting held in each cases filed under Chapter 7, 12 and 13; an attorney from the Office of the U.S. Trustee presides over the 341 meetings held in Chapter 11 cases. The initial § 341 meeting is held approximately 30 days after a case is filed and may be continued as many times as the trustee deems necessary. The primary purpose of the 341 meeting is for the trustee and any creditors in attendance to gather information about the debtor, the debtor’s debts and assets, and the debtor’s financial circumstances/history. It is quite unfortunate that so few creditors attend 341 meetings; they can be an excellent

source of information for trustees and creditors. Frequently, 341 meetings in Chapter 11, 12 and 13 cases lead to resolution of outstanding

legal issues and expedite a cost efficient agreement on terms of repayment.

Practice Tip: 341 meetings are open to the public; it can be very instructive to attend some, even if you are not involved in any of the cases, to get a sense of how they are run for your own edification and to be better prepared to advise a client who will be required to appear and answer a trustee’s questions at such a meeting. They are very brief and formulaic in most Districts.

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DISCHARGE: a release from all dischargeable debts that the debtors owed on the date they filed their bankruptcy petition. Only debtors who are individuals, and fulfilled the responsibilities of the Chapter under which their case was filed, can obtain a discharge. Certain debts may not be discharged, including family support obligations, most tax obligations, and debts incurred through a DUI. The discharge obtained in a Chapter 13 case is broader (i.e., includes more types of debts) than a discharge obtained in a Chapter 7 case. REAFFIRMATION AGREEMENT: an agreement entered into by a debtor and a creditor in which the debtor agrees to pay (that is to say the debtor “reaffirms”) the debt owed to that creditor as of the petition date, even though the debtor has the right to discharge it. Only individual debtors can reaffirm and generally only for secured debts. In order to have an enforceable reaffirmation agreement, the debtor must have entered into it voluntarily, made the agreement prior to entry of the bankruptcy discharge, and be able to show that they can afford the payment. MOTION FOR RELIEF FROM STAY: a motion in which the creditor seeks to have the automatic stay lifted in order to enforce its claims against the debtor in another court (typically, in the state courts). To prevail, the movant must set forth specific allegations that establish the criteria set out in the controlling section of the Bankruptcy Code, including that the creditor’s interest in the collateral is not being protected, the asset is not necessary to the debtor’s effective reorganization, and mostly commonly, that the debtor has defaulted on the payment obligation. This is the most frequently filed type of motion in bankruptcy cases; a fee applies and is only waived if the parties are filing a stipulated motion for relief from stay. PROOF OF CLAIM: a document a creditor files to assert a right to payment the debtor owes to that creditor. It must be complete and specify the amount, nature, and basis for the debt. Documents should be attached to explain the debt and be redacted to ensure no personal information about the debtor is included. A creditor will not be eligible to receive a payment in a Chapter 7 or 13 case if it did not timely file a proof of claim. Once a proof of claim is filed, it is deemed prima facie valid, unless the debtor or trustee files a successful objection to that claim. CHAPTER 13 PLAN: a “Plan” the debtor(s) must file under Chapter 13, which sets out how much he/she proposes to send to the Chapter 13 Trustee each month, how each claim against the debtor will be treated, and how the Trustee is to disburse the money the debtor submits. To obtain relief under Chapter 13, the debtor must get the Bankruptcy Court’s approval

(or “confirmation”) of the Plan, and then must make all the payments required under the Plan.

The term of the Plan must be at least 3 years and cannot be more than 5 years. The Plan must provide that the debtor will devote all of their net monthly income (i.e.,

net funds remaining after payment of current expenses) to the Plan. Debtors are able to do this because once they file for Chapter 13 relief, they no longer need to make payments on any debts they owed as of the petition date, except their home mortgage (if they wish to retain their house) and their vehicle loans (if they wish to retain them).

Under Chapter 13, the debtors obtain a reprieve from their creditors by filing a plan and paying all of their current expenses, including secured claims (e.g. mortgages and auto loans); debtors pay just a portion (called a “dividend”) to the unsecured creditors to whom they owed money prior to filing for bankruptcy.

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If they do this, the balance of the debts they owed on the date they filed their bankruptcy petition are “discharged” or extinguished and they get a “fresh start.”

CONDUIT MORTGAGE PAYMENTS (“CMPS”): mortgage payments the Chapter 13 debtor MUST make to the Chapter 13 trustee if the debtor is in arrears on his/her mortgage on the bankruptcy petition date. Upon receipt of the debtor’s mortgage payment, the trustee delivers it to the mortgage holder by the due date. Debtors who are not in arrears may also make CMPs during their Chapter 13 case. MORTGAGE MEDIATION: VTB has a mortgage mediation program and a panel of court approved mediators who are also experienced bankruptcy attorneys and have met the state requirements to serve as mortgage mediators in state foreclosure proceedings. Most mortgage mediation occurs in Chapter 13 cases, but mediation is available in all Chapters. The process begins with a motion (typically by a debtor) seeking mediation, which is followed by a response or consent by the mortgage holder, appointment of a mediator, exchange of documents, a mediation session, and a report by the mediator. The Court monitors the progress of mediations, and the parties evenly split the mediator’s fee. The success rate in VTB mediations is very high. Many Chapter 13 plans are confirmed subject to mediation. Mediation completed in bankruptcy cases “counts” as mediation in a subsequent state court foreclosure. D. THE FOUR MOST COMMON TYPES OF BANKRUPTCY RELIEF

1. Chapter 7: Liquidation

• Contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors.

• Since there is usually little or no nonexempt property in most Chapter 7 cases, there may not be an actual liquidation of the debtor’s assets. These cases are called “no-asset cases.”

• A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if

o (1) the case is an asset case (i.e., the Trustee has liquidated assets to create cash), and

o (2) the creditor files a timely proof of claim with the Bankruptcy Clerk’s Office. • Chapter 7 debtors obtain a discharge at the end of their case which releases them from

personal liability for all dischargeable debts. • A typical no-asset Chapter 7 case concludes within about 120 days of filing. • Amendments to the Bankruptcy Code enacted in the Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005 (“BAPCPA”) require the application of a “means test” to determine whether individual consumer debtors qualify for relief under Chapter 7.

• If an individual debtor’s income is in excess of certain thresholds, the debtor may not be eligible for Chapter 7 relief, and therefore may need to file Chapter 13 to obtain a discharge.

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2. Chapter 13: Adjustment of Debts of Individuals with Regular Income

• Designed for an individual who has regular income; the requirement for “regular income” is crucial but also flexible (e.g., social security is sufficient and the income may be minimal if the debtor proposes a viable “sale plan”).

• Chapter 13 is often preferable to Chapter 7 because it enables the debtor to keep a valuable asset (such as a house or boat), to cure the past due amount on that asset over time and reinstate the note, to propose a “plan” to repay creditors less than the full amount due, and to be free of lawsuits and collections activity, over a period of three to five years.

• Chapter 13 is also used by consumer debtors who do not qualify for Chapter 7 relief under “the means test.”

• At a confirmation hearing, the court will determine whether to confirm the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements after taking into account any objections or consents filed by creditors, the Trustee’s position, and the adequacy of the record in the case (e.g., whether schedules are complete and notice is sufficient).

• Chapter 13 is very different from Chapter 7 since the Chapter 13 debtor usually remains in possession of the property of the estate and makes all payments to pre-petition creditors through the trustee, based on the debtor’s anticipated income over the life of the plan.

• Unlike Chapter 7, in Chapter 13, the debtor does not receive an immediate discharge of debts. The Chapter 13 debtor must complete the payments required under the plan before the discharge is granted.

• The discharge is also broader (i.e., liability on more debts is extinguished) under Chapter 13 than under Chapter 7.

• The debtor is protected from lawsuits, garnishments, and other creditor actions during the time the plan is in effect (unless a creditor has obtained relief from stay).

• The role of the Chapter 13 trustee is to verify the completeness and accuracy of the debtor’s schedules, review and take a position on the debtor’s plan, commence any litigation necessary to effectively administer the case, disburse payments to creditors under the confirmed plan.

• If the debtor is making their mortgage payments in the form of conduit mortgage payments (“CMPs”), the trustee accepts and disburses those payments during the whole time the Chapter 13 case is pending, and then obtains an order at the end of the case certifying (i) the debtor has made all mortgage payments due during the time the plan was in effect, (ii) the debtor has cured all mortgage arrears that were due on the date of the bankruptcy filing, and (iii) the debtor is fully current on the mortgage debt as of that date and this order is binding in any other proceeding related to the debtor’s payments on that mortgage debt, in any court.

• Eligibility: Chapter 13 relief is only available to an individual who, as of the petition date, owes

o noncontingent, liquidated unsecured debts of less than $383,175, and o noncontingent liquidated secured debts of less than $1,149,525.

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3. Chapter 12: Adjustment of Debts of Family Farmer or Fisherman with Regular Annual Income • Provides debt relief to family farmers (and fishermen) who can demonstrate they have

“regular income,” i.e., income that is predictable. • The process under Chapter 12 is very similar to that of Chapter 13: the debtor proposes a

plan to repay debts over a period of time – no more than three years unless the court approves a longer period, not to exceed five years.

• There is also a trustee in every Chapter 12 case whose duties, as in Chapter 13, are to verify the completeness and accuracy of the debtor’s schedules, take a position on the debtor’s plan, commence any litigation necessary to effectively administer the case, and then disburse payments to creditors under the confirmed plan.

• Chapter 12 allows family farmers or fishermen to reduce their secured debt, discharge certain unsecured debts, and continue to operate their business while the plan is being carried out.

• It offers the most potent tools of the Bankruptcy Code in that it allows debtors to restructure or “cram down” all types of secured debts, including those secured solely by the debtor’s primary residence; permits debtors to change the interest rate, reduce the principal balance (to correspond to the value of the collateral securing the debt), and/or reduce the interest rate.

• Chapter 12, like Chapter 11, can also be very effective when a debtor seeks to shift – or even radically change – the focus of their operations (e.g., from conventional to organic farming, or from cows to cash crops).

4. Chapter 11: Reorganization

• Ordinarily used by commercial enterprises that desire to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization; individuals may also file Chapter 11 but typically do so only if their debts exceed the debt limits of Chapter 13.

• The Chapter 11 debtor usually has the exclusive right to file a plan of reorganization for the first 120 days after it files the case and must provide creditors with a disclosure statement containing information adequate to enable creditors to make an informed decision as to whether vote in favor of confirmation of the plan.

• A Chapter 11 plan is not effective until the court approves (confirms) it. • Under a confirmed plan, the debtor can reduce its operating expenses by repaying just a

portion of its unsecured obligations and discharging the balance; the debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability.

• Under Chapter 11, the debtor normally goes through a period of negotiation with its creditors and emerges with a reduced debt load and a reorganized business.

• In this District, Chapter 11 cases typically conclude within 1 to 3 years after filing; the statute however sets forth no minimum or maximum reorganization period of time.

• An important element of Chapter 11 is retaining and maximizing the “going concern” value of the business, even if the debtor’s ultimate intent is to sell the business through the Chapter 11 case.

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E. BANKRUPTCY ELIGIBILITY REQUIREMENTS

1. Time Between Filing of Cases and Eligibility for Discharge: • A debtor may not obtain a Chapter 7 discharge if he or she

o obtained a Chapter 7 or 11 discharge within 8 years filing the instant Chapter 7 case, or

o obtained a Chapter 13 discharge within 6 years of this filing (w/ some exceptions). §727(a)(9)

• A debtor may file a Chapter 13 to cure a mortgage or other secured loan anytime, but may not receive a discharge if he or she received a discharge

o within 4 years in a prior Chapter 7, 11, or 12 case within the preceding 4 years, or o within 2 years in a prior Chapter 13 case. §1328(f).

2. Filing Requirements and Access to the Filed Documents [§521]:

• A debtor must either provide to the Trustee or file with Bankruptcy Court: i) federal tax returns; ii) evidence of employer payments (“payment advices”); iii) monthly net income projections; and iv) anticipated increases in income or expenses.

• A debtor’s tax returns and statements of income & expenses must be available to creditors.

• Under the Local Rules of this district, as mandated by the Judicial Conference of the United States (“JCUS”), parties must redact all but the last four digits of the taxpayer’s identification number on all filed documents, redact the entire taxpayer identification numbers and birth dates for any non-debtors that are identified, redact the names of all minor children, and redact all but the last four digits of all account numbers listed on filed documents (particularly schedules).

Practice Tip: Redaction is required of all filers; creditors filing proofs of claim must comply with the Local Rules and take caution to avoid the publication of personal information.

• A party in interest may request that a case be dismissed if the debtor has failed to file the

requisite documentation, and the Court may, upon trustee’s motion, decline to dismiss a case if the debtor made a good faith effort to file all required information and the best interests of creditors would be served by denying dismissal and administering the bankruptcy case. (To meet the “best interest” of creditors in a Chapter 13 case, the creditors must get paid at least as much as they would get paid in a Chapter 7 case.)

F. INDIGENT DEBTORS, FEE WAIVERS, AND PRO BONO OPPORTUNITIES If an individual cannot afford to hire a bankruptcy attorney, he or she has some options. First, a debtor may opt to cease making payments to general unsecured creditors whose debts will be discharged in bankruptcy and save those funds as a source of the fees for hiring an attorney to represent them in a Chapter 7 case.

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Second, an individual may opt to seek Chapter 13 relief and then pay his or her attorney over time, through the Chapter 13 plan.

Third, the individual may qualify for a pro-bono or lo-bono attorney through a Volunteer

Legal Services Agency; such agencies and bar associations often have a list of attorneys who have volunteered to represent bankruptcy clients without fee (called “Pro Bono” representation) if the potential client meets the federally set eligibility requirements, or on a reduced fee basis (called “Lo Bono” representation). Practice Tip: many Volunteer Legal Services Agencies and Pro Bono Law Clinics offer free training to lawyers and paralegals willing to take a pro bono bankruptcy case. This is a win-win-win arrangement because the attorney and paralegal have ongoing assistance and support as they learn how to represent someone in a bankruptcy case, the client gets competent representation and the life-changing relief of a bankruptcy discharge, and the agency has met its goal of ensuring that eligible indigent citizens get the relief available through the Bankruptcy Code. Individual debtors who are unable to pay the filing fee in full at the time of a bankruptcy filing may file an application with the Court to pay the filing fee in installments [under Bankruptcy Rule 1006]. This relief is available to individual debtors in all Chapters of bankruptcy.

In order to obtain an order authorizing the debtor to pay the filing fee in installments, an

individual debtor must file a signed application (Official Form 103A), with the petition, certifying that the debtor cannot pay the filing fee except in installments. In signing the application, the debtor certifies he or she is unable to pay the full filing fee at once; wants to pay the fee in installments; and understands that

(a) the entire filing fee must be paid before the debtor may make any more payments or transfer any more property to an attorney, bankruptcy petition preparer, or anyone else for services in connection with the bankruptcy case;

(b) the entire filing fee must be paid no later than 120 days after the bankruptcy petition was filed, unless the court extends that deadline;

(c) the debtor’s debts will not be discharged until the entire filing fee is paid, and (d) if the debtor fails to make any of the payments when due, the bankruptcy case may

be dismissed, and the debtor’s rights in other bankruptcy proceedings may be affected.

Individual debtors who are unable to pay the filing fee at all may file an application to waive the filing fee. Like the installment payment option, this is available only to individuals, but unlike that option, it is only available only in Chapter 7. This right to a waiver of certain bankruptcy filing fees was created in 2005 through BAPCPA. It [28 U.S.C. § 1930(f)] authorizes bankruptcy and district court judges to waive the filing fee for an individual Chapter 7 debtor only if the debtor establishes by a preponderance of the evidence that:

• the debtor’s income is less than 150% of the income official poverty line applicable to a family size corresponding to the debtor’s family size; and

• the debtor is unable to pay the filing fee, even in installments.

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An application to waive the filing fee or pay the filing fee in installments must be filed with the bankruptcy petition. The case will be subject to immediate dismissal if there is not either one of these applications or the filing fee attached to the petition. In order to obtain an order waiving the filing fee for a Chapter 7 case, an individual debtor must file a signed application (Official Form 103B), with the petition, certifying the debtor’s income is below 150% of the poverty line for a family of his or her size, and that he or she cannot afford to pay the filing fee, even in installments.

The application to waive the filing fee is quite routinely granted in pro bono cases, but in other cases courts scrutinize applications carefully to make sure the debtor meets both criteria. This is due in large measure to the fact that granting a fee waiver means there is no money to pay the Chapter 7 trustee.

G. PROPERTY OF THE BANKRUPTCY ESTATE AND EXEMPTIONS

1. Assets included in the bankruptcy estate as of the petition date. The Bankruptcy Code definition of “property of the estate” [set forth in 11 U.S.C. § 541]

is a very broad and all-encompassing definition. It includes ALL of the debtor’s property, in any form, and wherever located. All of the debtor’s interests in property come into the bankruptcy estate, upon commencement of case, even if the interest is contingent or unliquidated and even if it is not currently in the debtor’s possession or name.

Post-petition income is not property of the estate in a Chapter 7 bankruptcy case, but it is

property of the estate in a Chapter 13 bankruptcy case.

2. Certain property acquired within 180 days of the bankruptcy filing treated as property of the estate as if owned on the petition date. Any interest in certain types of property which the debtor acquires, or becomes entitled to

acquire, within 180 days after the petition date is treated as property of the estate, as if the debtor owned it on the petition date. This includes assets arising from: (a) a property settlement with a spouse or former spouse, (b) insurance proceeds, or (c) an inheritance.

3. Exemption of some property of the estate. Even property for which the debtor claims a valid exemption is “property of the estate”

until the debtor successfully asserts an exemption applicable to the property. In some states, such as Vermont, debtors may elect to claim the federal exemption scheme set forth in the Bankruptcy Code OR use the state exemptions set out in the state exemption statute.

It is crucial to know whether the debtor has this option in the state where he or she resides

or is bound by the federal exemptions. If there is a choice, then a careful comparison must be made to determine which is more beneficial to the debtor, on a case by case basis. If two spouses seek relief together, in a joint case, they must both use the same set of exemptions.

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The decision of which exemptions to claim, and what assets to claim exempt, is one of the most important decisions to be made prior to filing a bankruptcy case. If a debtor has assets that cannot be claimed as exempt, then if he or she files a Chapter 7 case, the Chapter 7 trustee will be entitled to turnover of those non-exempt assets for sale, and will then distribute the proceeds of those assets to creditors. This can be devastating to a debtor who had hoped and expected to be able to retain those assets after bankruptcy.

If a debtor has non-exempt assets they would like to retain, and also need to obtain a bankruptcy discharge, then their best option, in the context of bankruptcy relief, is to file a reorganization case (Chapter 13, generally, or Chapter 12 if he or she is a family farmer or family fisherman). In a reorganization case, the debtor can retain non-exempt assets as long as he or she

(a) pays all disposable net income to the Trustee each month for distribution to creditors, and

(b) pays unsecured creditors at least as much as those creditors would have received if the debtor had filed a Chapter 7 case and paid creditors the proceeds from liquidation of the non-exempt assets [this is referred to as “the best interests of creditors test”].

Additionally, in a reorganization case, a debtor may opt to sell assets (exempt or non-

exempt) to generate the funds to pay creditors. Debtors will often propose plans that include the sale of assets, called “sale plans” as opposed to payment plans, because they recognize they need to liquidate their assets but believe they can obtain a much better price if they do it in an orderly fashion rather than have a Chapter 7 trustee auction them. Typically, sale plans require a debtor to complete the sale of such assets within one year of filing.

H. ADMINISTRATION OF BANKRUPTCY ESTATES

Regardless of under which Chapter a bankruptcy petition is filed, all of the debtor’s property and all property in which the debtor has any interest is treated as that debtor’s “estate.” If the debtor is an individual, he or she is entitled to certain exemptions, but even exempt property is initially “property of the estate” for purposes of bankruptcy law.

In Chapters 7 and 13, the trustee is the party charged with administering the debtor’s estate. The “estate of a Chapter 7 debtor” is that property which the debtor has as of the date the petition was filed. With limited exceptions, property the debtor becomes entitled to receive through inheritance, a divorce/property settlement, or insurance recovery, within 6 months of the bankruptcy filing date, and property that the debtor acquires after the filing of a Chapter 7 petition is beyond the scope of the Chapter 7 estate and is not available to the trustee for distribution to creditors. (For example, if a debtor buys a lottery ticket on the day after she files bankruptcy and wins, all that money belongs solely to her and neither the case trustee nor her creditors have any claim to it; by contrast, if the debtor bought the ticket the day before she filed her bankruptcy petition and then wins the day after she filed, she must turn over all winnings to the trustee for distribution to her creditors, minus any portion of the winnings that are exempt.)

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A Chapter 13 case, on the other hand, is funded primarily from future earnings of the debtor. Thus, property of the Chapter 13 estate includes all property acquired during the pendency of the Chapter 13 case, including all earnings from services performed by the debtor during the pendency of the case.

In Chapter 11, there is typically no court-appointed trustee, so the debtor-in-possession

(“DIP”) must act as a fiduciary (or guardian of the property) on behalf of, and for the benefit of, creditors.

The U.S. Trustee is responsible for monitoring the performance of all trustees and DIPs.

Any allegations of malfeasance or inappropriate conduct by trustees or DIPs, as well as claims of debtor fraud, are handled by the U.S. Trustee’s Office and, if appropriate, investigated by the FBI and prosecuted by the U.S. Attorney. In Vermont, these agencies pursue, investigate, and prosecute allegations of bankruptcy crimes very diligently. As a result, despite the low number of bankruptcy frauds, there is a Vermont debtor indicted and convicted of a bankruptcy crime every few years. All bankruptcy hearings are open to the public, as are all records of bankruptcy cases (unless the Court grants a motion to seal a record or make it inaccessible to the public – which is very rare). Thus, when one files for bankruptcy, it is very likely that others will hear about it and it is possible that it will be published in the newspaper. PACER is a very valuable resource. Whether one represents debtors or creditors, having a PACER account and being familiar with how it works can save an enormous amount of time.

I. PREPARING A DEBTOR – AND THE DOCUMENTS – TO FILE FOR BANKRUPTCY RELIEF Before individuals may file for bankruptcy relief they need to obtain a certificate verifying they have completed a consumer credit counseling course. Congress imposed this requirement in 2006 in order to ensure that persons who might have other non-bankruptcy options for resolving their debts were aware of, and had the opportunity to pursue, those opportunities. Additionally, during the pendency of a Chapter 7 or Chapter 13 case, every consumer debtor is required to complete a Financial Management Course and the agency that administered that course must file a certificate verifying completion of the course. Debtor education courses can be taken in person, by telephone, or online. Before filing for bankruptcy relief, or meeting with a bankruptcy attorney, the debtor needs to: (1) gather together information about all of his/her assets and debts, including the current value of all assets and the amount due for all debts, and

(2) consult with a bankruptcy attorney. This is a very specialized area of law so it is important to make sure to talk to someone who has experience and expertise in the area. It is possible to file for bankruptcy relief without an attorney, but it is not recommended.

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J. IMPACT OF BANKRUPTCY ON AN INDIVIDUAL’S CREDIT HISTORY It is often difficult for individuals to build credit after a bankruptcy case. The Debtor Financial Management Course may provide some guidance, but generally it is the debtor’s bankruptcy attorney who provides information to the consumer about this. Post-bankruptcy, local banks and credit unions are sometimes willing to provide small unsecured loans and/or grant secured loans with a guarantor, to help debtors establish credit. This is crucial to the rebuilding of credit as a Chapter 7 bankruptcy generally stays on an individual’s credit history for 10 years, and a Chapter 13 bankruptcy generally stays on an individual’s credit history for 7 years.

K. INFORMATION RESOURCES The Bankruptcy Court’s website (www.vtb.uscourts.gov, for the Vermont court and a similar URL for every bankruptcy court in the country) has information about bankruptcy law, resources explaining how to file a case, information about the bankruptcy judge and the court generally, as well as an electronic version of all of the Court’s local rules and issued decisions. It also sets forth the dates for upcoming hearings and meetings of creditors. Each bankruptcy court website also has a link to PACER (Public Access to Court Electronic Records). If one registers with PACER, one can then access the case docket for any debtor who filed for bankruptcy relief, anywhere in the country, using either the debtor’s name, the debtor’s social security number, or the bankruptcy case number. (Opening a PACER account is free and there is no charge for viewing or downloading documents through PACER; a fee is only incurred for printing documents and one is not billed unless and until one’s use exceeds $15 per calendar quarter.) Many hearings held in bankruptcy courts – including in the Vermont Bankruptcy Court – are digitally recorded, downloaded unto an MP3, and attached to the docket entry for that hearing; the digital audio recording can be accessed and played, from the case docket, shortly after the hearing, through PACER.

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APPENDICES

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1. DOCUMENT CHECKLIST FOR FILING A BANKRUPTCY CASE (based upon checklist on the E.D.N.Y. Bankruptcy Court website)

Practice Tip: new forms went into effect 12/2015 – you must use the new forms!

• Voluntary Petition (B101 or B201* individual /non-individual) (Signed) (Original & 1 Copy) • Payment of Fee or Application to Waive Fee or Pay Fee in Installments (B103 A or B103 B) • List of Creditors (certified by the debtor if the debtor is not represented by an attorney) • Statement of Social Security Number (B121) • Exhibit D: Certificate of Credit Counseling (or motion to exempt or waive CC requirement) • Notice to Individual Consumer Debtor (B2010) with Certification • Summary of Schedules (B106-Summary) (includes statistical summary of certain liabilities) • Declaration Concerning Debtor(s) Schedules (B106 DEC for individuals, B202 DEC for corps) • Schedule A/B (real and personal property) (B106 A/B or B206 A/B) • Schedule C (Property Claimed as Exempt by Individual Debtor) (B106 C) • Schedule D (Creditors Holding Secured Claims) (B106 D or B206 D) • Schedule E (Creditors Holding Unsecured Priority and Nonpriority Claims) (B106 E/F or 206 E/F) • Schedule G (Executory Contracts and Unexpired Leases) (B106 G or B206 G) • Schedule H (listing of all co-debtors) (B106 H or B206 H) • Schedule I (Current Income of Individual Debtor) (B106 I) • Schedule J (Current Expenditures of Individual Debtor) (B106 J and B206 J-2 if a sep household) • Statement of Financial Affairs (B107 or B207) • Chapter 7 Statement of Your Current Monthly Income (B122 A-1 and 122 B) • Supp Statement of Exemption from Presumption of Abuse Under §707(b)(2) (B122 A-1 Supp) • Chapter 7 Means Test Calculation (12/14) (B122 A-2) • Statement of Intention * Due by 341 Meeting (B108) • Personal Financial Management Course Certificate (B243)

o An individual debtor must complete this course in order to receive a bankruptcy discharge. • Copies of Pay Statements received within 60 days of filing from any employer or a statement

indicating this requirement is not applicable (important: show only last four digits of SSN)

If the debtor is a partnership or corporation: • Partnership Statement or Corporate Resolution • Corporate Ownership Statement Pursuant to Federal Bankruptcy Rule 1007(a)(1) • Declaration on Behalf of a Corporation or Partnership

If the debtor is represented by an attorney or paid for petition preparation:

• Disclosure of Compensation Pursuant to Federal Bankruptcy Rule 2016(b) (B2030) • Declaration and Signature of Non-Attorney Bankruptcy Petition Preparer (B119) • Notice to Debtor by Non-Attorney Bankruptcy Petition Preparer • Disclosure of Compensation of Non-Attorney Bankruptcy Petition Preparer (B2800)

_______ * a significant change the new forms made was to distinguish between individual and non-individual debtors; this is evident from the fact that the 100 series of forms apply to individuals and the 200 series of forms applies to non-individuals

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2. SOME IMPORTANT PRE-FILING PREP 1. If the debtor owns real property

• do a title search, • review tax bills (are property taxes owed? what is the assessed value of the property?), • obtain copies of any appraisals of the property and compare to assessments, • review mortgages, if any, and in particular verify accuracy of information set out in the

mortgage, and verify all mortgages properly executed and recorded.

2. If the debtor owns any vehicles • review certificate of title for each vehicle, • read loan docs to ensure they are accurate, and • if vehicle loan was intended to be secured, verify security interest is properly perfected.

3. • Encourage the debtor to be scrupulously thorough in listing all debts and all property; • scrutinize the information from the debtor to ensure the lists of property / assets and debts are internally consistent and add up; and • verify the addresses of all creditors. If there are attorneys representing any of the creditors, add the attorneys’ name to the schedules and matrix. Stress how important it is for the debtor to prepare an accurate and reasonable budget.

4. Urge the debtor to get appraisals of significant assets, particularly if none has been done recently and the assessment of that property does not seem accurate to the debtors.

5. Obtain from the debtor, for the attorney to review, a. at least 2 years of federal and state tax returns (or a letter stating the debtor need not file), b. at least 2 months of statements for all bank and investment accounts, c. copies of documents from any lawsuits involving the debtor in the last 6 years, d. copies of any divorce proceeding documents and/ or documents evidencing an obligation

to pay any type of family support or maintenance, e. receipts / payment history for any public assistance the debtor receives, f. copies of the debtor’s most recent mortgage statements, g. proof of any payment the debtor made to a family member within the last year; and h. proof of an unusually large payment, or “catch-up”/back payment the debtor made to any

creditor within the last 3 months.

6. Prepare a statement showing all fees the attorney will charge and has been paid, and the terms of the engagement of counsel, to record and file pursuant to Bankruptcy Rule 2016.

7. Encourage the debtor to file all outstanding tax returns prior to filing the bankruptcy case.

8. Review the exemptions available to the debtor and assist attorney in weighing the impact of choosing state vs. federal, and the assets that might be at risk under each exemption scheme.