A Practical and Pragmatic View to Practicing Bankruptcy
An Excerpt from the Connecticut Attorney Magazine - August, 2013
- Max L. Rosenberg
I recommend not dabbling in bankruptcy not only because there are so many local rules and forms to master as well as federal rules but because you are taking a person's life in your hands. They are putting their trust in you with their finances and the various intricacies of their life and their family. They need to know that at the end of the day, you will have the answer for them and be able to tell them everything will be ok.
If you are going to enter in on this endeavor, be warned. Bankruptcy is a law constantly in flux. The United States Bankruptcy Code governs the practice of bankruptcy law. This is federal law and bankruptcy is held in federal bankruptcy courts. Federal bankruptcy judges hear bankruptcy cases. Originally bankruptcy was intended as a way to liquidate an estate for the purposes of the creditor obtaining payment and only became an idea for giving a debtor a "fresh start" in the 1970s. (Wetmore v. Markoe) The laws have always been changing, although it feels like they change more often recently. There have been three major revisions of the code in modern times.
i. 1898 – establishment of modern code
ii. 1978 – First Pro-Debtor revisions
iii. October 15, 2005 – the BAPCPA – a pro-creditor revision
Without review ancient history, there are many different types of bankruptcy. Individuals may choose to file Chapter 7 or Chapter 13 and in rare circumstances a Chapter 11.  In Chapter 7, the most common aspect of bankruptcy, a trustee is appointed to administer your property. Any property of value that can not be exempted under either federal or state exemption laws will be liquidated to pay creditors. Roughly translated, an attorney handling bankruptcy needs to have a strong grasp and understanding of the exemption laws and even the case law around the exemptions as complexities do abound.
Someone dabbling in bankruptcy may mix and match state and federal exemptions. Many attorneys embarking on a career in bankruptcy have made this mistake. Unfortunately, an attorney is limited to one set of laws when exempting property. Furthermore, depending on the state, you may be limited to only the state's set of exemptions. We, in Connecticut, live in what is called an "opt out" state which means we can opt out of state exemptions and elect to employ federal exemptions. An attorney with a good understanding of the exemptions will be able to assure or warn their client usually in the first consultation whether or not any of their personal or real property will be subject to abandonment by the trustee (left to the debtor) or will be assumed by the trustee (taken for liquidation). For the most part, it is rare that an attorney will file a Chapter 7 petition if there is a danger that a client/ debtor will lose their car or money in a bank account or some other asset. However, if the need is great enough, and the cost / benefit analysis proves out, an attorney might file the petition regardless of the risk of losing an asset (with informed consent) and inform their client that they may negotiate or pay the trustee the balance of the un-exempt asset.
In a Chapter 13 bankruptcy, the client/ debtor may keep your property, but you must earn wages or have some other source of regular income and you must agree to pay part of your income to your creditors. The court must approve your repayment plan and your budget. A trustee is appointed and will collect the payments from you, pay your creditors, and make sure you live up to the terms of your repayment plan and must be voluntary. Chapter 12 – Like chapter 13, but it is only for family farmers and family fishermen. Chapter 11 – This is used mostly by businesses. In chapter 11, you may continue to operate your business, but your creditors and the court must approve a plan to repay your debts. There is no trustee unless the judge decides that one is necessary; if a trustee is appointed, the trustee takes control of your business and property.
Now that we have a basic overview of the terrain, we should examine our dedication and investment to this practice. Having the right tools to start your practice is critical for the success of the bankruptcy attorney. First it is essential that the attorney be barred by the United States District Court of Connecticut or whatever District Court the attorney intends to practice bankruptcy within. The proper process to become barred in the District Court can be found on the District Court Website. It is highly recommended that you complete this process prior to your signing up your first bankruptcy client. Once you are properly barred, you must pass the test and obtain a user name and password for the CM/ ECF (case management / electronic case files) system.
It is highly recommended that you take the CM/ECF training course. CM/ECF is the website where all of the bankruptcy filing occurs. It will become the hub of your communication with the District Court through the email announcements, and email scheduling updates. There are hundred of selectable events when filing, so the novice attorney should become quickly familiar with the required order and selection of electronic events.
At this point, you are ready to start advertising that you are a Bankruptcy Attorney. Per the ethics committee of the State of Connecticut, you will immediately need to add the required language to any and all advertising for your Bankruptcy Practice to include: that you are "a debt relief agency, and help people file bankruptcy under the Bankruptcy Code." Failure to add this to your advertisement may lead to sanctions against your firm.
Now that you are able and ready to practice bankruptcy, and you have advertisements encouraging clients to your door, it would be helpful to have a computer program that will assist you to file the bankruptcy. Please note that there are many programs available to attorneys to fill out forms in filing; however, using these programs does not remove your responsibility to know each and every form sufficiently to be able to explain them to your clients, and to understand how they are filled out. The programs will automatically fill out the certain data or pre-inputted information for you, however, you are still responsible for the accuracy of all the calculations and figures you submit to the bankruptcy court. It is imperative that you have a reputable bankruptcy program to create petitions and keep updated on required forms. A program will assist you in filling out the complex forms, properly apply the means test, create the creditor matrix and some automatically filed documents.
Although each program has its pros and cons it is wise to take time to get to know your choices and research the best program for you. Some of these programs include Best Case, EZ-Filing, Inc., New Hope Software, Inc, and LegalPRO Systems, Inc. Once you have chosen a program, make sure that you consistently update the forms as they change on a regular basis. All of that being said, I would still advise the new bankruptcy attorney to know how to file a basic petition manually. On several occasions I have had my own software fail me or input improper data, but keeping a close eye on all documents and filed events, I was able to prevent any misfiling.
Recently, Connecticut Trustees began employing another electronic filing system known as DOCLINKS, which is a website that an attorney is required to upload non-filed documents that a Trustee will need to review the case. Previously, each trustee had their own system whether by fax, email or mail and their own list of requested documents that an attorney would comply with. Doclinks has made this process more uniform and possibly more facile.
Client management is the next essential part of your Bankruptcy practice. Over the course of your representation, it is essential that you get to know you client, if not for the reason that you will be viewing a wide variety of personal information but for the reason that mistakes and omissions that you fail to notice may come back to haunt you if the trustee will be looking at you for answers. It would be helpful to your clients if you supply them with a checklist of the necessary documentation that you will require to complete the filing. These documents will include but are not limited to six months bank statements, six months pay stubs/profit loss, two years of taxes, documents regarding any IRA/401K, copies of Deeds and title of all assets.
Before accepting a client, you must have a fair grasp on whether your debtor will qualify for bankruptcy. Only a person that lives or has a domicile, place of business or property in the US may be a debtor. Government units cannot be debtors. If you represent a Railroad you should note that they can only file a chapter 11. The dead can not file, however if the decedent filed before dying the estate is already in bankruptcy. Domestic Insurance Companies and Banks cannot file. Foreign Insurance Companies or banks operating in the United States cannot file.
Some clients teetering on the decision of filing bankruptcy, sometimes do not understand all of the benefits of filing. As their counsel you have an obligation to inform them of both the positive and negative aspects of their decision. In a chapter 7, the filer will receive a discharge of all unsecured debt owed prior to filing. It also allows discharge of tax debt that was assessed more than three years before filing and provides an automatic stay of all court proceedings. Therefore, if your client has tax debt that was assessed in 2007 and is also in the middle of being foreclosed upon as well as being sued for a car accident (not involving the debtor's use of drugs and/or alcohol) a chapter 7 bankruptcy stay will effectively end the litigation regarding the car accident, keep the debtor in his house for a longer period of time, as well as discharge the tax debt and all other unsecured medical bills and credit card debt.
Also, you can discharge the deficiency on a home mortgage and abandon the property without fear of reprisal, stops wage garnishment, and end bank executions. If the execution happened recently enough, you can sometimes even have the funds reversed and put back in client's account. Chapter 7 bankruptcy will stops all creditors and debt collectors from contacting your client by any methods*  In a Chapter 13 you will save your home and force the bank into a payment plan on your arrearage. You can discount your unsecured debt to a smaller percentage based on your current income. You can keep valuable assets as long as you can make your payments.
On the converse, there are disadvantages to filing bankruptcy which you shoud make your client aware of. After filing Chapter 7, if you inherit assets within 6 months of filing, it becomes an asset of the bankruptcy estate and can be attached and liquidated by a trustee. A bankruptcy may be reported on a credit record for as long as ten years. It can affect the ability to receive credit in the future. It does not discharge child support, alimony, almost all student loans, court fines and criminal restitution; and personal injury caused by driving drunk or under the influence of drugs. It places your client under scrutiny which is problematic if they use creative book keeping methods. It does not discharge secured debts.
If you fail to list a debt on the schedule F it may or may not be discharged. (If the case filed is a "no asset" case, even unscheduled debts are generally considered discharged, but one should never become lazy or forget to schedule anything. Err on the side of caution). You can only receive a chapter 7 discharge once every eight years. A trustee can unwind a transaction that may have occurred by fraud or for less than fair market value such as in divorce agreements, gifts, etc. if within the last six years. I can not stress enough the importance of hitting your client over the head with the question as to whether their name is on a bank account or piece of property or car that they do not believe they own. In so many cases I have seen mothers and fathers put their children's names on bank accounts or houses or even cars for administrative purposes without intending to convey any ownership interest. This is not how a trustee will look at the matter. Trustees will seize any un-exempt asset because it is their job and because they receive a percentage of the asset that they liquidate. Otherwise, trustees make surprisingly little money for administering a Chapter 7 case and only turn a decent profit if they can find an unexempt asset.
When looking at filing a Chapter 13, it is very important to educate your client on all the pitfalls of this legal process. It is very difficult for clients to keep up with a chapter 13 plan over the course of three or five years. This is a regimented plan that does not leave much room for mistakes once it is confirmed. Affording a Chapter 13 is very difficult because your client must pay their normal installment on top of an arrearage payment as well as a ten percent premium to the trustee. Attorney fees are higher because of the time commitments, the amount of work and hearings. Your client must be diligent in making their payments in the proper form with the proper identification to the proper PO BOX and always ON TIME! The good news is that trustees are not looking for unexempt assets and in fact, a steady stream of income is imperative to be able to confirm a chapter 13 plan. In this process the trustee will be looking to make sure that your client can afford a plan. This is also the determining factor in whether there is a three year or five year plan.
While most Chapter 13 bankruptcies never reach completion and never reach discharge, they may still achieve their goals. Most people filing a 13 bankruptcy are actually in need of the automatic stay to avoid a strict foreclosure or foreclosure by sale. The filing of such a case will immediately stop the foreclosure process and give your client enough time to make other plans such as raising enough money to come up to date with the mortgage or entering into a modification or forbearance agreement with the bank. I think of this chapter mostly as a stalling process. As the attorney, you are keeping the wolves at bay while your client regroups and prepares to mange their finances and reorder their life.
In some ways, a Chapter 13 is an easier filing that a Chapter 7. You are not struggling to fit your client under the Means Test. You are not as concerned about exempting assets. However, the attorney filing a Chapter 13 must be prepared to showing up at many excess and unnecessary hearings in court when your client fails to timely make their payment to the Trustee. Bankruptcy clients are always forgetting about their payments. That's how they became bankruptcy clients in the first place. So the attorney must prepare to spend much more time in court for a Chapter 13.
Finding the right client is as important as filing a clean bankruptcy. Every bankruptcy attorney should be aware of and look for the initial basic requirements. The residency requirement under 28 USC Sec.1408 states that a case should be filed where the debtor has lived, "for the one hundred and eighty days immediately preceding such commencement, or for a longer portion of such one-hundred-and-eighty-day period." This means that the case should be filed in the bankruptcy district in which the debtor has lived for the greatest portion of the last six months.
Furthermore, your client must first complete a mandatory credit counseling class within six months before they can file. Also, most importantly, if your client has received a Chapter 7 discharge within the last 8 Eight years, you should not file for another Chapter 7. If your client has received a Chapter 13 discharge within 2 Two years of another Chapter 13 discharge you should not file a 13. Your client should not file for a 13 discharge if they received a discharge in a 7, 11 or 12 within the last four years.
I think a good bankruptcy attorney must always eyeball their client and make sure they are a good bankruptcy candidate. In fact, it is important that the bankruptcy attorney be prepared to send away the potential client. Every new bankruptcy attorney has taken cases that as a more experienced attorney they regret. In some instances a potential client will walk in that just "feels wrong". Sometimes the bankruptcy attorney is best served to trust that feeling. However, there are certain methods I employ in an initial consult to better feel out the potential client.
Certain key questions can often illuminate the potential client's situation. These questions can be uncomfortable "Do you spend time at the casino?" is something I try to fit conversationally into an initial consult. Gamblers may have excess hidden assets or income and also large losses. I also try to fit family and parents into conversation. It is important to find out several elements of your client's life. Do they have the added expense of taking care of an elderly or infirmed relative? Are they expecting a windfall or inheritance shortly that may or may not be exempted? Do they have another "dependant" in the house they can claim? The answers to these questions can all factor into a petition.
Some potential clients are very cagey and tight lipped. It is important for the attorney to remember what a difficult decision and situation this is for the debtor. They will often open up if they are met with warmth and made to feel comfortable. If that does not seem likely, then that is not a client I would want to work with. There are many more personal questions that need to be asked and can factor into the filing of a successful bankruptcy. If the client can not trust you and more importantly if you can not trust the client, it is likely going to be a very difficult bankruptcy. I have had clients lie to me about property they own or have transferred and how they came to own or transfer it. Clients have lied to me about how many people (illegal immigrants) live in their house. I have even had clients lie about their income, their jobs, and their identities. Remember to be diligent.
Now you have found a proper bankruptcy client you can work with. The next question the attorney should ask is if bankruptcy is right for the client. The first part of this answer is to look at a debt to income ratio. Most bankruptcy attorneys can feel this out by speaking with the client. The average American has an estimated $8,000 in credit card debt. In addition car loans have become a fact of life. Most people have a car loan for over $21,000. A good hallmark for whether your client should file bankruptcy is if they have more debt than twice their annual income. It is important that the client filing has enough debt or benefit to make the filing worth while.
It is my personal feeling that filing a bankruptcy with less than fifteen thousand dollars of unsecured debt is often not advantageous enough considering some of the drawbacks and risks. I feel most comfortable if the debt level is higher than Twenty Thousand Dollars. If your client is unemployed, recently divorced, very ill, or has recently suffered a death in the family that has produced unexpected costs, they are likely a good client for bankruptcy. If your client has medical bills in excess of tens of thousands, if they have been sued by their creditors, if they can not make even the minimum payments then bankruptcy may be a good option.
Can your client reduce expenses, increase income, negotiate rates or sell assets to make it possible to avoid a bankruptcy. If your client's assets are all covered by exemption statutes and they have nothing to lose, it becomes a more viable option. If your client is about to be foreclosed upon, is having their wages garnished or facing a repossession, bankruptcy is a good consideration. If your client has not been making preferential payments or buying luxuries within the six months prior to filing; if your client has attempted to work with debt settlement agencies, then they are most likely good candidates.
Most debt settlement agencies are predators that take a clients money and never pay out to any creditors due to fine print that dictates they keep the first certain percentage of the total debt owed. The client is ignorant enough to not have read that fine print or researched the debt settlement agency and is likely living far beyond their means. The client has likely spent whatever reserve assets they have on the nefarious debt settlement agency. Sometimes your potential client has even done something incredibly stupid like take out a Payday Loan.
Payday loans are illegal in the state of Connecticut. Basically, payday loan companies masquerade as real creditors offering small loans to people in need over the internet. They rarely exist anywhere on paper. They are almost never licensed as debt collectors. For four hundred dollars your client has given up their social security number, the bank account and routing numbers, their mother's maiden name and just about every other piece of personal information that a person would need to steal your identity or pull money directly from your bank account. They are criminals and thrive on fraud. If your client is filing bankruptcy as a result of payday loans, you may want to give the option a second thought. Payday loan criminals do not follow the law or observe the automatic stay or even a bankruptcy discharge. They will continue to attempt collection long after a bankruptcy and they can not be sued because they can not be located.
Beyond payday loans, a bankruptcy attorney must inform their client that certain debts do not discharge in bankruptcy and can also influence their decision. For example, secured claims survive discharge (ie. Judgment liens, car loans, mortgages and the often forgotten home equity loan). Taxes assessed within the last three years survive discharge. Alimony and Child Support survive discharge and almost all student loans survive discharge.
In advising the new bankruptcy attorney of other red flags, I would tell you to watch out for people with lots of motor vehicles and commercial vehicles (construction workers and contractors), be careful with people who own their own businesses. Make sure you keep aware of your clients' marital status. Watch out for the high income producing spouse. Look out for new 521 Education accounts, IRA or 401k accounts just opened or recently funded as debtors will try to conceal their assets. And always ask about recent personal injuries within the last three years.
Without a proper due diligence to your client's life, their assets, income and family situation, a bankruptcy attorney can find themselves up to the ears with complications. Likewise if the bankruptcy attorney does not keep track of new local rules, forms and the Bankruptcy Code and Class requirements, they can find themselves needlessly amending, refilling, and endlessly correcting what could have been done once with ease. The bankruptcy attorney will find themselves with many many plaits spinning, and must find a method to maintain order and cohesion with all the elements of the debtors life and all bankruptcy requirements.
Finally, in advising the potential bankruptcy client, I often refer to sacred texts that may hold some weight with the debtor. The Old Testament teaches that every seventh year was decreed as a Sabbatical year wherein all debts were released. Foreigner's debts were released on the Jubilee Year (The 49th or Seventh Sabbatical year) I refer you to Leviticus 25:8-54, and Deuteronomy 15:1-3. The Quaran states, "And if someone is in hardship, then let there be postponement until a time of ease. But if you give from your right as charity, then it is better for you, if you only knew."- Sura Al-Baqara Verse 280. Bankruptcy has been with us throughout the course of human history. It is a safety valve with which society tempers commerce and credit. The anathema attached is an odd social context that must be overcome quickly with your client if you intend to make steady progress. Of course I temper this advise with the fact that the Yassa of Genghis Khan contained a provision that mandated the execution of anyone who became bankrupt three times. Therefore, go forth into bankruptcy forearmed with knowledge and gather experience along the way, but above all observe adequate caution.
 If your client filed bankruptcy under one chapter, you may be able to change your case to another chapter.
 This opens an interesting interplay between bankruptcy and the FDCPA. An attorney would be wise to collect all debt collection letters and have their client keep a diary of all contacts made for review by an experienced FDCPA attorney. FDCPA is a complex area of law with a steep learning curve and can garner much needed settlement funds for your client