In full disclosure, as I’m about to tell you why you shouldn’t dabble in Bankruptcy Court, I do handle bankruptcy cases, but I don’t dabble in it, it makes up a large part of my practice and has for the last seventeen years. This is not going to be a technical article about how to file in bankruptcy court; this is going to be a tale of caution.
If you have very wandered into Judge Joan Lloyd’s courtroom, on a fairly regular basis, you will hear her explain, in no uncertain terms, why it is a bad idea for a non-bankruptcy practitioner to be in that type of Court. She will tell you (I have her permission to paraphrase her here), that you can just look at the administrative manual for the bankruptcy court and see that it is a very complicated and technical area of law.
Most practitioners can have a friend or a relative call us and ask us to do a bankruptcy for them. At first glance, it may not look that difficult, so you think “Why not? It can’t be that difficult to just fill out some forms”.
Now, we are going to look at Chapter 7 petitions (as Chapter 13 cases are more complicated).
Let’s pretend that someone, let’s say Dan, has decided to try to file bankruptcy petitions, either as a favor for a current client, or because he has decided to expand his practice areas. First, he finds out that he has to buy the bankruptcy software, which runs anywhere from $495 (for a company I have never heard of) to $2395. All of that software has to be updated fairly regularly and he will have to pay for the also. The reason for this software, besides making his life easier, is that the bankruptcy petition has to be filed electronically, which means if he hasn’t gotten a login and password from whatever bankruptcy court he is going to be filing in, he will need to. This is in addition to the login and password he would have for being able to file in the Federal Court he is already admitted to.
We will come back to the filing. Dan either finds the forms he needs online or from the software provider and has his first bankruptcy client come in to meet with him. As he doesn’t know that since the bankruptcy law changed in 2008, there are specific disclosures he has to provide to his client regarding bankruptcy, which they have to sign for and he has to keep on file long after the case is closed. When the client is filling out the forms and asks questions about what they can and can’t keep, Dan doesn’t know and is just relying on the software to fill it out for him. He doesn’t even know if he should be using the federal or state exemptions, so he decides to file using the Kentucky exemptions. (In Kentucky, we use the federal exemptions as they allow you to keep more items; in Indiana they use the state exemptions.) Dan doesn’t know when the client is writing down the value of their property if they are to use the resale value, or the replacement value (as that changed in 2008) and doesn’t know what can be exempt and again relies on the software to help him.
Once Dan manages to figure out how to file the bankruptcy petition, he gets a notice (and sometimes a call) from the Court explaining that there is a deficiency. Depending on which Court it is, they may fix it for him, tell him how to fix it himself or tell him to read the manual (that last one was not a Kentucky clerk that told me to read the manual). If Dan does not get the deficiency corrected in time, the case will be dismissed and he will have to refile and pay a refiling fee, out of his own pocket as the client isn’t responsible for Dan’s mistake. The current filing fee for a Chapter 7 is $338, so Dan just lost $338 of what his fee was.
Also, Dan didn’t know that if the client completed the mandatory pre-filing credit counseling class the same day he filed the petition, but after he filed the petition, the case will be dismissed, as the class has to be done not more than 180 days before filing.
Next Dan is to get documents to the bankruptcy trustee at least 10 days before the meeting of creditors. Now, Dan isn’t set up to use the doclink system that some of the trustees use exclusively and therefore has to call them about getting put on the system. Let’s say all of that happens. Next is the meeting of creditors. Now, Dan didn’t know to tell his client to bring their driver’s license and social security cards. The client can’t get into most of the federal courthouses without their license, so if they brought their license, they make it to court, but their case can’t be heard without their social security card, as it is required for verification of identity before the meeting of creditors can be held. This means that the client and Dan will have to come back to another meeting of creditors, on another day, with those items. At the second meeting of creditors, Dan forgets the file, or only prints out the electronic (filed) copy of the petition, and some trustees (like those in Lexington); want the debtors to verify that it is their signature on the petition, which they cannot do as Dan forgot the originals at his office. This requires another rescheduling of the meeting of creditors.
Once the meeting of creditors actually occurs, the trustee asks Dan’s client some questions, including “Do you know what a reaffirmation agreement is?” Now, Dan didn’t prepare his client for the questions, as he had never been to a meeting of creditors (other than the botched ones in this case), so he didn’t go over the questions ahead of time. Once the trustee finishes asking the debtor questions, she or he asks if there are any creditors and there is one. This creditor wants to know if the client wants to reaffirm the debt on their car. The client looks blankly at Dan and Dan looks blankly back and the trustee explains that reaffirming a debt means that you are resigning the debt, at the same terms. If the client says yes, Dan and the client step out into the hall, or another room, with the creditor’s attorney to talk about the terms. Normally, the debtor would just sign under the same terms, but if the terms are egregious, then Dan could ask for different terms, but Dan doesn’t know that and instead advises the client to go ahead and sign the reaffirmation agreement at a 20% interest rate.
When they are leaving Court, Dan should remind the client to complete and get to him the class that is required after filing bankruptcy, the personal financial management course, as their case can’t be discharged without it, but does not do so.
The next time Dan thinks about this case is when he gets notice there is a hearing on the reaffirmation agreement. The terms of the agreement were such that the client couldn’t show that they have enough income to cover their regular monthly bills and the car payment. When that happens, the Judge set a hearing date to question Dan as to whether he thinks it is not only in the client’s best interest to allow them to stay in debt but also to explain how they are going to pay that debt when the petition they filed with the Court doesn’t show enough to cover that payment per month, even after the rest of the debt is gone. Now if Dan can explain why the debtor needs that specific car and that the circumstances have changed since the petition was filed, the judge may allow the debtor to keep the car and sign off on the agreement. At that point, the judge can also amend the interest rate to a more conscionable rate.
Now that Dan finally thinks he is ok, as he had made it through the meeting of creditors and made it through the hearing, he doesn’t realize that he has to make sure the client’s certificate for their second required class has to be filed with the court and sixty days after the meeting of creditors, the case is dismissed instead of discharged. (You want the debts to be discharged, which means they are gone. When the case is dismissed, it was just thrown out and the client still owes all the debts.) So, Dan then has to pay another filing fee (another $338 out of his pocket, not the client’s) and make a motion to reopen the case, just to file the class certificate. Once he does that the case is finally discharged and the client walks away from any debts that they didn’t reaffirm or that aren’t on the list of debts that can’t be bankrupted.
Now this is a cautionary example and the Chapter 7 filing is much less complicated than the other Chapters of the bankruptcy code. I could provide other real life examples of cases when I helped the attorneys out in fixing the mistakes they made and in all those instances, I assisted them with the understanding that they are not to take a bankruptcy case as a favor or for the money for one case and think that is was easy.
Per Judge Lloyd, the bankruptcy code has more specialized legal jargon then that the general practitioner would be expected to know. She further stated that the very technical nature of the area of law should be apparent to everyone as a practitioner owes a duty to not only their clients and the Court, but to the Creditors to make sure that everything is filed correctly; as even a minor mistake can be a serious problem in Bankruptcy Court.
Now, I am not trying to dissuade anyone from learning how to handle bankruptcy cases, I am just saying that unless you are really interested in filing them on a regular basis, your malpractice carrier would probably prefer you refer those cases out to attorneys that handle those cases.