There is nothing easy about making the decision to file for bankruptcy. I welcome the opportunity to speak with you personally and confidentially to help you find the ideal solution to your financial challenges.
The Chapter 11 bankruptcy process is complicated because the governing provisions for a Chapter 11 are found in section 1101 through 1146 of the bankruptcy code. With the overlay of what can and cannot be done set forth in section 101 through 112 [General Provisions], section 301 through 308 [Commencement of the Case], section 321 through section 333 [Officers], section 341 through section 351[Administration], section 361 through the section 366 [Administrative Powers], section 501 through section 511 [Creditors and Claims], section 521 through section 528 [Debtors, Duties and Benefits], section 541 through section 562 [Estate].
The filing of the Chapter 11 bankruptcy petition, by an entity or individual, is governed by section 301. Following the filing of a voluntary petition for Chapter 11 bankruptcy relief, there is normally set by the U.S. Trustee’s office a Section 341 first creditors meeting, scheduled to take place 4 to 5 weeks after the petition filing. In between the petition filing and the noticed section 341 first meeting of creditors, the initial debtor interview, is conducted at the bankruptcy court by US Trustee’s office.
Which is essentially an informal office interview where the debtor provides business records for his business and personal activities, bank statements 3 to 6 months previous to filing, evidence of insurance, available and most recent financial statements, and the last 2 to 3 years income tax returns. All of these business records are then reviewed by the bankruptcy analyst working for the U.S. Trustee’s office.
The initial debtor interview is usually attended by the debtor and the debtor’s attorney, and answers given at the IDI meeting are usually not under oath, and lead to further questioning by the US Trustee’s attorney representative at the section 341 first meeting of creditors.
After the section 341 first meeting of creditors is concluded by the US Trustee’s office representative, then creditors have an opportunity to ask factual questions about assets and liabilities for debtor’s business affairs. Following conclusion of the section 341 meeting, the debtor has the exclusive time period to file a plan or reorganization of 120 days, followed by another 60 day exclusive of time period to gain confirmation of the plan of reorganization that is timely filed by the debtor.
In the case of small businesses, under section 1121, the requirement is for the debtor to gain confirmation of plan within 300 days from the date of petition filing, unless extended by the court. Additionally, there may be a 90 day limitation to file a plan reasonably capable of being confirmed in the case of a single asset real estate case. See Section 362.
Filing of the Disclosure Statement in Chapter 11 Bankruptcy
After that debtor timely files its plan of reorganization, the debtor also files a companion pleading called a disclosure statement, which disclosure statement is noticed for hearing under section 1125 of the bankruptcy code, seeking a court order decreeing the existence of the adequacy of the information in the disclosure statement, which is a requirement before debtors are allowed to solicit their plan of reorganization.
Once the court enters its order approving of the adequacy of the information contained in the disclosure statement pursuant to section 1125, the debtor can proceed to notice a confirmation hearing under section 1129(a) and (b) of the bankruptcy code. The confirmation hearing is the ultimate goal for a debtor filing the Chapter 11 plan, for a confirmed plan dictates creditors repayment schedule, which payment obligations must be strictly adhered to by the debtor and accepted by a creditor on certain terms and conditions set forth in the confirmation plan.
Timing the Chapter 11 Bankruptcy Filing
Timing may be a critical element in bankruptcy filing for number reasons. Some reasons may affect your individual situation. Your attorney will be aware of the subtle details that might because you to delay the filing date. If these circumstances apply to you, talk with your attorney. Here are some of the important ones:
If you have repaid debt to family members or insiders during the past year, you may want to wait for a year to pass so you protect them from having to repay money to the estate.
If you expect to receive a large income tax refund or other payments, you might want to wait until you receive that money. If you file for bankruptcy before you receive the money, that money will become part of the bankruptcy estate and it will potentially go to the trustee not to you.
If you have recently incurred debt, especially credit card debt, you may want to wait in till some time passes so that the creditor will not try to claim fraud. The creditor may want to try to stop you from including that debt in the bankruptcy and receiving a discharge.
If you have recently lost your job or have a major reduction in your income, waiting a few months may make passing the means test much easier. The means test is based on your average income for the last six months before filing the petition, so if you have a few months of lower or no income, it will reduce your average monthly income for these 6 months.
If you’re considering divorce, talk with your attorney to see when the most advantageous filing date would be appropriate.
If you owe taxes that are more than three years old, it’s possible some of that tax burden may be dischargeable after a specific date also.
In Nevada, there is a homestead exemption of $550,000 if you purchase the home more than 1215 days ago prior to the petition filing. If you purchased it less than 1215 days prior to the petition filing, the homestead exemption is then set at $155,675. So waiting past that 1215 day may be worth the difference in dollar savings to you.
If you think you’ll have large medical bills due in the near future, it may pay to wait at until after those bills were incurred to include them in the bankruptcy. You won’t be able to file another bankruptcy for least eight years.
Your debts will not be wiped out if you have filed a previous Chapter 7 case in the last eight years, or four years for chapter 13 case.
In many of these cases a few days, a week or a month mean the difference of thousands of dollars in assets that you may have to give up or may be able to keep.
I had a case where a husband and wife couple came in to consult with me that had over $2 million in their bank accounts, but were going to owe much more than the $2,000,000 in debts after 1 or 2 years when their creditors’ claims matured. They had transferred most of the $2,000,000 to potentially exempt assets beyond 2 years of their filing, therefore, they did not have to report on Question 10 of the statement of affairs that they transferred assets in the 2 year time frame before filing the petition.
If asked about the transfer in the 341 meeting, they would have to disclose the transfers because it happened within 4 years. As luck would have it, the bankruptcy trustee and creditors that did attend the section 341 first meeting of creditors did not know of the transfers beyond the 2 year period, having failed to request records of the debtors that reflected that the $2 million had been transferred to other asset forms many years before the bankruptcy filing.
If there is no questions asked about the time period after 2 years before filing the petition, and if there were no transfers within the two-year time frame of filing the petition that would be reportable under question number 10, there is no obligation on the part of the debtors to volunteer information relative to transfers that happened in year 3 and year 4 or other years beyond 4 years.
Therefore, in this instance, silence is golden. Had bankruptcy trustee or creditors asked about transfers in years 3 and 4 prior to petition filing, they would have found out about transfers to entities that were arguably exempt, or excluded assets, thereby triggering issues on the avoidance of these years 3 and 4 transfers under section 544, and the need applicable State of Nevada uniform transfer act.
The 9th Cir. previously held that transfers of nonexempt property to exempt property are not prohibited, so long as it is done not to defraud or hinder on delay creditors. If transferring non-exempt to exempt property within 6 months of filing is considered an act in furtherance of defrauding creditors, one must wait for 1 year, 2 years or more. The Ninth Circuit case site for transferring nonexempt and exempt is Sherwood. That case essentially held that transferring non-exempt assets to exempt assets status is legal, so long as it is done without the intent to defraud creditors.
All of the above examples perfectly illustrate why it is absolutely mandatory that you hire an experienced bankruptcy attorney to steer you through a chapter 11 bankruptcy case. I know there is a lot of information here so my advice is to call our office at (775) 786-7600 or (775) 690-2190 anytime to set up a complimentary and confidential consultation with me at your earliest convenience. You can also visit our new business Facebook Page for more information.
The steps for working your way through a Chapter 13 bankruptcy are pretty much the same in steps one through eight explained in a previous post. A Chapter 13 filing requires that you propose a plan to repay creditors over a period of 3 to 5 years. The trustee will oversee compliance with that plan. You must have a plan in place within 15 days after you file your petition and your first plan payment is due within 30 days of the petition filing.
The 341 Meeting
The 341 meeting for a Chapter 13 is very similar as in the case of the chapter 7, but the standing trustee will be more concerned with your income and expenses to see if your plan can reasonably be expected to succeed. The trustee and creditors may raise any questions, concerns or objections after submitting your plan to the court.
You and your lawyer may attempt to justify your plan and satisfy the questions. If you cannot satisfy the standing trustee or your creditors, you will have the opportunity to modify your plan and to schedule another hearing to have it approved. Occasionally, problems will be so severe or cannot be negotiated away that the court may consider the problem so serious they could dismiss your Chapter 13 bankruptcy case altogether. This is rare.
One of the places that tend to be stumbling blocks is the valuation that you place on assets that might be different from your creditor’s estimates. One of the issues that usually come up has to do with real property and the liens against it. Your attorney will probably attempt to strip off liens, depending upon the valuations of your real properties.
Lien stripping and lien strip downs are an important component of the Chapter 13 process. Many Chapter 13 debtors have a residence or a rental house that they are attempting to strip off any junior liens, and in the case of a rental house, strip down the value of the lien to the value of the collateral rental house. Lien stripping would be as follows:
The debtor has a homestead residence which they own and reside in. The residence is worth $100,000.00, but it has a first trust deed obligation of $125,000.00 and the second trust deed obligation of $75,000.00. In this instance, the Debtor has the potential for filing a Chapter 13 Plan for 5 years where the second trust deed obligation would be stripped off the debtor’s residence, assuming the debtor completes its 5 year Plan of Reorganization and timely makes the payments.
Again, assuming the debtor’s homesteaded residence is worth $100,000.00, if the Debtor has a first trust deed obligation of $95,000.00, and second trust deed of $75,000.00, in this instance, the Debtor would not be able strip off the second trust deed, since there is potentially $5,000.00 equity that inures to the benefit of the second trust deed holder. Translated, any equity in a residence that the second trust deed holder may possess would prevent that lien from being stripped off by the debtor in a Chapter 13 Plan. In the case of rental houses, not only can the debtor do a lien stripping, but it can also do a lien strip down.
An example of this would be a debtor owns a rental house worth a $100,000.00, with a first trust deed obligation of $50,000.00 and a second trust deed obligation of $150,000.00. In this example, the debtor can propose upon a Chapter 13 Plan where the second trust deed obligation is reduced from $150,000.00 to $50,000.00, which reflects that amount of equity after the first trust deed obligation is subtracted from the valuation of the house that inures to the benefit of the second trust deed obligation. Therefore, after the debtor successfully completes the 5 year plan payment period, the second trust deed holder would be mandated to reduce its lien and would have a $50,000.00 of the lien paid off, and the remaining $100,000.00 would be discharged.
2. An example of lien stripping or lien strip downs are as follows: debtor resides in his homesteaded house that he owns, which house has a first trust deed against it for $100,000 and a second trust deed against it for a $200,000. If the house is worth $90,000, then the debtor is able to strip off the $200,000 second because there is no equity in favor of the second, thereby allowing the debtor in a Chapter 11 or Chapter 13 to strip off the entire amount owing on the second.
If you are using the same debtor in the same homesteaded house that the debtor resides in, the house is worth $125,000, the debtor owes a first trust deed of $100,000 and the second trust deed of the $200,000, then the debtor would not be able to strip off any of the $200,000 second trust deed, because of reported $25,000 equity above and beyond what is owed to the first. An important thing to remember in this situation is that the debtor is residing in the house and claims it as a homestead.
Using the same lien values of $100,000 for the first trust deed and $200,000 for the second trust deed, and a house valued $125,000, if the debtor is not residing in the house and rents the house to third parties, then the debtor could strip down the value of the second lien from $200,000 to $25,000, by reason of the $25,000 equity in the rental above, beyond $100,000 owed on the first lien.
In an extreme situation using a rental house, a debtor could have a house worth $125,000, owe $100,000 on the first, $200,000 on the second and $100,000 on the third. In this factual situation, the debtor could reaffirm the $100,000 first lien, strip down the $200,000 second lien to $25,000, conditioned on paying that $25,000 residence value for a five-year period in equally amortized monthly payments, unless the secured creditor consents otherwise, and to strip off the entire $100,000 third lien obligation.
If your lawyer is unable to negotiate the differences, then the bankruptcy judge will decide.
Repayment to Creditors
The other major difference between Chapter 13 and Chapter 7 cases is that Chapter 13 cases involve repayment to creditors, and the standing trustee may want to keep tabs on how you are doing. Each year you must file a statement with the court regarding your income and expenses for the past year. These reports will continue until the plan is fulfilled. You and your lawyer should set up the process for completing those reports annually. Also, you must file a copy of all tax returns that become due while your bankruptcy case is open. Potentially if your annual income significantly increases, then your plan payments may increase.
Since several creditors may be receiving payments from your Chapter 13 plan, you want to be sure that the money you pay will go toward satisfying those debts. The document called a proof of claim should be filed by the creditors up to 90 days after the 341 meeting. This ensures that they will receive the money that you are paying toward your plan. If the creditor does not file the proof of claim, you should file same on their behalf, with one exception.
That one exception is government agencies. They have up 280 days to file a proof of claim which are called priority debts. These debts would not normally be discharged in Chapter 13, but if they fail to file a proof of claim they could be discharged. Hopefully, their claim may fall through the cracks and you might be lucky indeed.
This article will primarily deal with the processes involved with the filing of chapter 7 bankruptcy, sometimes called ‘consumer,’ or ‘personal’ bankruptcy and is a continuation from the article of the same name.
Step 7 – Notification of Creditors
About 7 days after the court receives your chapter 7 bankruptcy petition, it will notify all those creditors that you have listed on your filed pleadings that you have filed bankruptcy. The court will announce the case trustee and the date and time for the section 341 first meeting of creditors.
Step 8 – Supplying Copies of Your Federal Tax Returns
At least one week before the 341 meeting, you must supply copies of your most recent federal tax returns to the trustee and certain financial documentation, such as three months bank statements incurred prior to filing.
In chapter 13 cases, you must supply the standing trustee the last four years of your tax returns. If you fail to supply these tax returns, your case may be dismissed.
Therefore, it is important to file your tax returns prior to filing the bankruptcy.
Step 9 – Chapter 7 Bankruptcy 341 Meeting; First meeting of Creditors
Most petitioners dread the 341 meeting because they do not know what to expect. This fear is usually way overblown. Since these meetings are open to the public, we suggest that you attend a meeting for other positioners prior to attending your own. Since 341 meetings are little different between Chapter 7 and Chapter 13, be sure to attend the correct kind of filing meeting. This will give you a complete and accurate picture of what actually goes on at a 341 meeting and enables you to be thoroughly prepared for your own.
In Chapter 7 cases, seldom do any creditors show up at the meeting, although one or two might. They do have the right to ask questions, but this does not frequently happen. The 341 meetings are not emotional affairs. There are conducted to gather, clarify and affirm the statements that you made in your bankruptcy filing documents, with respect to assets and liabilities.
The 341 meeting usually takes place 30 to 40 days after you file. The trustee conducts the meeting, and you and your attorney must attend. Also bring proof of your Social Security number and a photo identification document, like a driver’s license.
Typically, the trustee will ask you if you have any nonexempt property that can be sold to pay off creditors. They may also ask about any payments or transfers you made in the two years preceding the bankruptcy. They will probably also ask about the value of your home, value of your car, any retirement plans, and other questions that meet the requirements of the state you live in.
They may also ask about nonexempt assets that you may want to keep, and if so, arrange for you to pay for them. If you do not want to keep nonexempt property, the trustee arranges to have those assets evaluated and picked up. They will then be sold for the benefit of creditors.
Your attorney will review 341 meeting questions with you before the meeting. An experienced attorney can usually anticipate any areas of uncertainty and will usually deal with those before the 341 meeting. In most chapter 7 cases there will be little or no nonexempt assets. Usually this is the end of 341 meetings. In about 60 to 90 days after the 341 meeting, the bankruptcy debts are discharged, assuming the debtor passed and file their post condition credit counseling certificate.
There are a few milestones and chapter 7 bankruptcy processes that you want to keep in mind:
The trustee has 10 days after the 341 meeting to decide whether you passed or failed the Means test. If you fail, the trustee will ask the court to dismiss your case.
The trustee and creditors have 30 days after the 341 meeting to object to any of your claims of exempt property. If you have amended exemption claims, the 30 day clock starts from the time of any amendments.
Creditors have 60 days to object to the discharge of certain kinds of debt. If they don’t file objections, it’s too late for them to do it later, and you are over the last bankruptcy hurdle.
All these deadlines assume you have supplied accurate information and have answered questions accurately.
Section 341 first meeting of creditors are important for the debtor filing the petition, in that they will have the opportunity to answer questions the bankruptcy trustee for their case might have with respect to the extent location and availability of assets to pay creditors’ claims, as well as information regarding the liabilities of the petitioner. For creditors, some opportunity to ask questions of the petitioner with respect to his available assets and liabilities in the case as well as asking questions about inconsistencies found in the schedules of assets and liabilities, and statement of financial affairs filed by the debtor.
Additionally, this section 341 first meeting of creditors date triggers the time for filing complaints objecting to discharge then go 90 days after the time first set the 341 meeting, as well as time for the debt of the bankruptcy trustee to object to the debtor’s claim of exemptions – 35 days from the date last set for the section 341 meeting. Extended 341 first meeting of creditors are not encouraged by the bankruptcy trustee and the debtor’s attorneys, especially if the question becomes too intense at the 341 meetings specific to a creditor’s particular issue concerning the debtor.
After 15 to 60 minutes of questioning the chapter 7 bankruptcy trustee will more than likely suggest and/or recommend to the creditor or the creditor’s attorney asking the questions to notice a rule 2004 examination in order to ask the debtor questions in a formal atmosphere with no time constraints. Normally there are time constraints at a section 341 first meeting creditors because there are other scheduled debtors to give testimony and to answer questions to the bankruptcy trustee, normally anywhere from 3 to 8 cases every half hour.
Assets in Chapter 7 cases
In a few Chapter 7 cases that have assets that need to be liquidated or distributed for creditors, the case will remain open until all those assets are dealt with. Sometimes, depending on the kind of assets, their disposal can take quite a long time, sometimes years. Once your case is filed the non-exempt assets are turned over to the trustee and those assets become property of the bankruptcy estate, and no longer yours to do what you want.
You must, of course, cooperate with the trustees to dispose of those non-exempt properties and assist with collecting any monies or properties that might be owed to you. You may have tax refunds that are outstanding at the close of bankruptcy, or outstanding real estate or personal notes that needs to be collected or sold to pay your creditors.
Those are the steps that you must go through to finalize your Chapter 7 bankruptcy case. Barring any foreseen complications, you should be done with your bankruptcy case in about 120 to 180 days after the 341 meeting.
Portrait of Stephen R. Harris, Esq. local Nevada bankruptcy lawyer. He has been providing financial protection and debt-relief for 46 years.
At Harris Law we have been providing financial protection and guidance in the Reno area for the last 46 years. Bankruptcy may not be your only option. Let’s explore all of the alternatives and possibilities that could exist for you.
Let me work with you. Please call 775-786-7600 to make an appointment for your free, confidential and personal consultation to talk things over.