Bankruptcy Basics. Second Edition. Produced by the Center for Professional Development Credit Union National Association Madison, Wis. Stock No.

Transcription

1 Bankruptcy Basics Second Edition Produced by the Center for Professional Development Credit Union National Association Madison, Wis. Stock No

2 Written by Alan Stabler Second edition by Samuel T. Wyrick, III 2012 by Credit Union National Association Center for Professional Development CUNA To order additional copies, call CUNA Member Service at , press 3. Ask for Stock No This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is not, however, intended to be an exhaustive treatment of all issues and questions that may arise. It is sold with the understanding that the publisher, Credit Union National Association (CUNA), is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright owner. With respect to the content of this manuscript, neither CUNA nor any of its affiliates or its or their respective employees make any express or implied warranty or assume any legal liability or responsibility for the accuracy, completeness or usefulness of any information, commercial product, service, process, provider, vendor or trade name/mark that is disclosed. Reference to any specific commercial product, service, process, provider, vendor, or trade name/mark in this manuscript also does not necessarily constitute or imply that such product or provider is endorsed, recommended or warranted by CUNA. The views and opinions of the authors expressed herein do not necessarily state or reflect those of CUNA and such reference shall not be used for advertising or product endorsement purposes. ii

3 Foreword This book is provided as a ready reference to acquaint credit union employees with the concept of bankruptcy and to provide information that will be helpful in handling the most common situations encountered in consumer bankruptcies. However, in reading the materials, it is important to remember that even though bankruptcy courts are all part of the Federal Judiciary System, procedures and rules vary from one district to the next. Each court establishes its own set of local rules that can vary how claims, hearings, and documents are processed. Therefore, it is very important that each credit union employee familiarize themselves with the local rules and procedures that have been implemented in the area where they are located. If local rules are not followed, your credit union can find itself in the position of not being paid, not being allowed to pursue a valid course of action, or having a claim disallowed. Nothing contained in this book should be considered as legal advice. When adopting policies, each credit union should obtain the advice of its legal counsel. iii

4 About the Author Alan Stabler, author of the first edition, is vice president general counsel of America s First Federal Credit Union in Birmingham, Ala. In this capacity, his main concentrations are in the areas of regulatory compliance, collections, and bankruptcy. He initially joined America s First Federal in 1982 as a collections officer. During his tenure he has worked in many areas relating to lending and collections, including managing several full-service branches, the centralized lending department, and served as vice president of lending. He is a member of the Alabama State Bar, the Birmingham Bar Association, The Birmingham Bar Commercial Law and Bankruptcy Section, The Credit Union Executives Society, and has served on the CUNA Governmental Affairs Bankruptcy Subcommittee. He is the author and contributing author to several credit union books and articles. This book was revised in 2012 by Samuel T. Wyrick, III, a lawyer licensed to practice law in the state of North Caroliina and various federal courts. He is a member of the Raleigh, NC law firm of Wyrick Robbins Yates & Ponton. iv

5 TABLE OF CONTENTS Foreword About the Authors Summary of 2005 Bankruptcy Law Revisions Affecting Credit Unions Part One: Introduction to Bankruptcy Chapter 1: Introduction to Bankruptcy 3 Bankruptcy Courts are part of the Federal Judiciary 3 The Source of Bankruptcy Law 4 The Creation of the Bankruptcy Estate 4 Types of Bankruptcy Relief; Liquidation or Reorganization 5 Option 1 Liquidation or Straight Bankruptcy 5 Option 2 Reorganization Plans 5 Chapter 13 6 Chapter 11 6 Chapter 12 7 Bankruptcy Trustees 7 The U.S. Trustee System 7 The Role of the Chapter 7 Trustee 8 The Role of the Chapter 13 Trustee 8 Filing Deadlines 9 The Automatic Stay 9 The Automatic Stay and Criminal Matters 9 New Limitations on the Automatic Stay for Serial Filers 10 Secured vs. Unsecured Debts 10 Administrative and Priority Creditors 12 Chapter 2: Exemptions 13 Federal and State Exemptions 13 Impaired Exemptions 14 Chapter 3: Means Testing and Credit Counseling 17 Means Testing 17 Mandatory Credit Counseling 20 iii iv xi v

6 Chapter 4: Schedules and Other Documents 25 Initial Notification 25 Other Documentation for Each Bankruptcy Petition 27 Creditor Notification Requirements 28 Sanctions Imposed on Debtor s Attorneys 28 Chapter 5: Right of Offset 67 Right of Offset and the Strumpf Decision 67 Consent Orders to Offset Funds 69 Part Two: Chapter 7 Bankruptcy Chapter 6: Introduction to Chapter 7 Bankruptcy 73 Who Can File a Chapter 7 73 Filing the Case 73 Timeline for a Chapter 7 Case 73 The Automatic Stay/Order of Relief 74 Stop Communications and Flag the Account 74 Establish the Credit Union s Position 75 Assemble a File of Credit Union Loan Documents 75 Attending the Creditors Meeting 76 Filing a Claim in a Chapter 7 Case 76 Chapter 7: Retaining Collateral in Chapter 7 81 Reaffirm/Redeem/Surrender 81 Redemptions 81 Reaffirmation Agreements 82 All or Nothing Reaffirmation Policies 83 Voluntary Repayment Agreements 83 Lifting the Automatic Stay to Recover Property 84 Trustee s Abandonment of Property 85 Taking Possession of Property in a Chapter 7 Case 86 Chapter 8: Trustee Actions in a Chapter 7 95 Preferential Transfers 95 Turnover Orders 95 Fraudulent Conveyances 95 Transferring Assets to Self-Settled Trusts 95 Postpetition Transfers 96 vi

7 Chapter 9: Collection Strategies 97 Cross-Collateral Clauses 97 Strategies for Collecting Unsecured Debt 97 Co-Makers and Guarantors in a Chapter 7 99 Chapter 10: Dismissal/Discharge and Things to Do in a Chapter 7 Case 101 Dismissal/Discharge of a Chapter 7 Case 101 The Effect of a Discharge 101 Things TO Do in a Chapter Things NOT To Do in a Chapter Part Three: Chapter 13 Bankruptcy Chapter 11: Introduction to Chapter 13 Bankruptcy 111 Who Can File? 111 The Automatic Stay in Chapter The Co-Debtor Stay of Section Filing a Chapter 13 Petition 112 Important Chapter 13 Dates to Remember 112 Property of the Estate in a Chapter 13 Case 113 Filing a Plan in a Chapter 13 Case 113 Plan Requirements 113 How Long Does a Plan Last? 113 Chapter 12: Secured Debts in Chapter Modifying Secured Claims 125 Valuation of Collateral 125 Replacement Value Adopted in the 2005 Revisions 125 Cramdowns Are Now Limited on Vehicles 125 Cramdowns and Real Estate Loans 126 Interest Rate on Chapter 13 Secured Claims 127 Secured Claims Not Released Until Full Debt Is Paid or Discharge 127 Insurance Verification 127 Adequate Protection Payments 127 Surrender of Collateral in Full Satisfaction of the Debt 127 vii

8 Chapter 13: Ensuring Payment in Chapter Filing Claims 129 Direct Payments 130 Composition Cases 130 Objections to Your Claims 131 Adversary Proceedings in Chapter 13 Cases 131 Chapter 14: Confirmation of the Plan 137 The Good Faith Test 137 Good Faith Part II 137 The Feasibility Test 137 Disposable Income Test 138 The Liquidation Test 138 Income Tax Returns 138 Domestic Support Obligations 138 Lien Retention 138 Payments Before and After Confirmation for Secured Claims 139 Plan Payments 139 Objections to Confirmation 139 Effect of Confirmation 140 Modifying the Plan 140 Chapter 15: Postconfirmation Strategies 141 Monitoring Payments in a Chapter 13 Plan 141 Monitoring Real Estate Arrearage/Cramdown Balances 141 Chapter 16: Dismissal/Discharge of a Chapter 13 Case 143 Dismissal of the Chapter 13 Case 143 Discharge in a Chapter 13 Case 143 Hardship Discharge 143 Things TO Do in a Chapter Things NOT To Do in a Chapter viii

9 Part Four: Adversary Proceedings Chapter 17: Fighting Back with Adversary Proceedings 147 Preadversary Considerations 147 Rule 2004 Examinations 147 Types of Adversary Proceedings Creditors May File 149 When To File an Adversary Proceeding 149 Creditor Reliance 150 Willful and Malicious Injury 151 Debts That Are Not Listed or Scheduled 151 Denial of Discharge Cases 151 Conclusion 153 Glossary 155 Resources 159 Index 163 ix

10 Figures, Forms, and Schedules Figures Figure 1.1 Federal Appellate Circuits 4 Figure 2.1 States that Opted Out of the Federal Exemptions 13 Figure 2.2 States Allowed to Use Federal or State Exemptions 13 Figure 2.3 Federal Exemptions Allowed by the Bankruptcy Code 14 Figure 2.4 Personal Property 15 Figure 2.5 Household Goods 15 Figure 3.1 Deductible Expenses 18 Figure 3.2 Census Bureau Median Family Income by Family Size 19 Figure 5.1 Sample Consent Order 66 Forms and Schedules Form B22A Chapter 7 Statement of Current Monthly Income and Means Test Calculation 22 Form B22C Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income 23 Form B23 Debtor s Certification of Completion of Postpetition Instructional Course Concerning Personal Finance Management 24 Form B1 Voluntary Petition 30 Schedule A Real Property 33 Schedule B Personal Property 34 Schedule C Property Claimed as Exempt 37 Schedule D Creditors Holding Secured Claims 38 Schedule E Creditors Holding Unsecured Priority Claims 40 Schedule F Creditors Holding Unsecured Nonpriority Claims 43 Schedule G Executory Contracts and Unexpired Leases 45 Schedule H Codebtors 46 Schedule I Current Income of Individual Debtor(s) 47 Schedule J Current Expenditures of Individual Debtor(s) 48 Form 6 Summary of Schedules 49 Form 6-Decl. Declaration Concerning Debtor s Schedules 51 Form 7 Statement of Financial Affairs 52 Form 8 Chapter 7 Individual Debtor s Statement of Intention 63 Form B9A Notice of Bankruptcy Case, Meeting of Creditors, & Deadlines 79 From B240a Reaffirmation Documents 88 Form 18 Discharge of Debtor 106 Form B9I Notice of Chapter 13 Bankruptcy Case, Meeting of Creditors, & Deadlines 116 Chapter 13 Plan 118 Form B10 Proof of Claim 134 x