bankruptcy and the low-income clientpovertylaw.org/files/docs/article/chr_2001_march_april_yen.pdfin...

Between October 1, 1998, and September30, 1999, debtors filed 1,354,376 bank-ruptcy petitions in the United States.1 Inaddition to having a profound effect onthe petitioner, each had the potential toaffect many other parties, sometimes inunexpected ways. In this article I give anoverview of bankruptcy, discuss its advan-tages and disadvantages for low-incomeclients, and consider how low-incomeclients should respond when they becomeentangled in a bankruptcy proceeding filedby someone else, whether an employer,landlord, ex-spouse, or even a financecompany to which the client owes money.

I. Basic ConceptsThe U.S. Constitution authorizes Congressto enact “uniform Laws on the subject of

bankruptcies,” and Congress set forthbankruptcy law in Title 11 of the U.S.Code. 2 Congress enacted the currentstatutory scheme in 1978, substantiallyrevised it in 1984 and 1994, and amend-ed it on several other occasions.3 TheFederal Rules of Bankruptcy Proceduregovern bankruptcy cases.

A debtor usually commences a bank-ruptcy case by filing a voluntary petitionin Bankruptcy Court, a unit of the U.S.District Court.4 An individual may fileunder one of four provisions of theBankruptcy Code: Chapter 7 (Liquidation),Chapter 11 (Reorganization), Chapter 12(Adjustment of Debts of a Family Farmerwith Regular Annual Income), andChapter 13 (Adjustment of Debts of anIndividual with Regular Annual Income).5

MARCH–APRIL 2001 | JOURNAL OF POVERTY LAW AND POLICY 709

Bankruptcy and the Low-Income Client

By David S. Yen

David S. Yen is a supervisory

attorney, Legal Assistance

Foundation of Metropolitan

Chicago, 111 West Jackson

Blvd., 3d Floor, Chicago, IL

60604; 312.347.8372;

[email protected].

1 ADMIN. OFFICE OF THE U.S. COURTS, JUDICIAL BUSINESS OF UNITED STATES COURTS, ANNUAL

REPORT OF THE DIRECTOR 268 tbl. F (1999).2 U.S. CONST. art. I, § 8, cl. 4.3 The current law is known as the Bankruptcy Code; before 1978 the law was known asthe Bankruptcy Act. The 106th Congress passed H.R. 2415, which would have substan-tially changed the Bankruptcy Code, but the bill failed to become law when thePresident did not sign it. If the 107th Congress changes the Bankruptcy Code, a summa-ry of how the changes affect this article’s analysis will be on the National Center onPoverty Law’s Web site, www.povertylaw.org.

4 Creditors may also force an individual into involuntary bankruptcy by filing an involun-tary petition. 11 U.S.C. § 303; Official Form 5, Involuntary Petition. The debtor may con-test the petition. 11 U.S.C. § 303(d); FED. R. BANKR. P. 1011. If the court dismisses thepetition, it may assess costs and attorney fees, and if it finds that the petitioner filed theinvoluntary petition in bad faith, it may enter judgment against the petitioner for actualand punitive damages. 11 U.S.C. § 303(i).

5 Chapter 12 is not currently in effect, but bankruptcy practitioners expect Congress topass legislation reauthorizing it.

Corporations may file only under Chapter7 or Chapter 11. A next friend, guardian,or someone with a power of attorney mayfile on behalf of a minor or incompetent.6

The Supreme Court recognizes the“fresh start” that is a fundamental policyof the bankruptcy laws: “[I]t gives to thehonest but unfortunate debtor . . . a newopportunity in life and a clear field forfuture effort, unhampered by the pressureand discouragement of preexisting debt.”7

A successful bankruptcy relieves thedebtor of, or “discharges,” the obligationto pay certain debts (Chapter 7), createsa revised timetable for paying debts(Chapters 11, 12, and 13), or fashions acombination of the two approaches(Chapters 11, 12, and 13). The extent ofthe discharge depends on the type ofbankruptcy chosen; Chapter 13 may dis-charge a broader range of debts thanChapter 7. If the debtor owns nonexemptproperty when the debtor files the peti-tion, the trustee in bankruptcy may liqui-date the property and pay the proceeds tocreditors; this furthers another funda-mental policy of bankruptcy: equal dis-tribution of the debtor’s limited assetsamong creditors of equal priority.8

In cases under Chapter 11, 12, or 13the debtor proposes a plan to deal withthe debtor’s debts and may be able tokeep nonexempt property by payingcreditors an amount equal to the proper-ty’s value. In creating Chapter 11 Congressrecognized that reorganizing might be

“more economically efficient . . . than [liq-uidating] because it preserves jobs andassets.”9 Congress designed Chapter 13“to encourage consumer debtors to grad-ually use their earnings to repay theirobligations without resorting to a Chapter7 liquidation” and to “allow[] debtors toown property free and clear of creditors’liens after designing and completing aplan of reorganization.”10

A debtor’s filing of a bankruptcy peti-tion creates a bankruptcy estate, and anautomatic stay goes into effect.11 Withminor exceptions the estate includes “alllegal or equitable interests of the debtorin property” as of the filing date, regard-less of location of the property or whohas possession.12 The automatic stay is astatutory injunction against any acts—law-suits, garnishments, wage assignments,even letters or phone calls demandingpayment—to collect debts that the debtorowed when the debtor filed the case.13

The stay also prohibits any action torecover property from the bankruptcyestate and many actions to enforce liensagainst the debtor’s property.14 The auto-matic stay gives the debtor relief fromcreditors, preserves the debtor’s propertywhile the case is pending, and allows asingle court, the Bankruptcy Court, tosupervise orderly disposition of thedebtor’s assets.15

Actions in violation of the automaticstay are void, and the court may hold incontempt a creditor who has notice of the

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710 CLEARINGHOUSE REVIEW | MARCH–APRIL 2001

6 Regarding power of attorney, see In re Hurt, 234 B.R. 1 (Bankr. D. N.H. 1999); but seeIn re Smith, 115 B.R. 84, 85 (Bankr. E.D. Va. 1990) (requiring appointment of guardian).Regarding filing on behalf of minors, see In re Murray, 199 B.R. 165 (Bankr. M.D. Tenn.1996) (mother filed Chapter 13 as next friend of daughter, who had inherited propertyand was receiving social security survivors benefits; trustee’s motion to dismiss denied).Regarding filing on behalf of incompetents, see In re Zawiswa, 73 B.R. 929 (Bankr. E.D.Pa. 1987) (Clearinghouse No. 42,570); In re Clinton, 41 F.2d 749 (S.D. Cal. 1930).

7 Local Loan v. Hunt, 292 U.S. 234, 244 (1934).8 Begier v. IRS, 496 U.S. 53, 58 (1990).9 H.R. REP. NO. 595, 95th Cong., 1st Sess. 220 (1977), reprinted in 1978 U.S.C.C.A.N. 5963,6179.

10 In re Hernandez, 175 B.R. 962 (N.D. Ill. 1994).11 11 U.S.C. §§ 362(a), 541(a).12 Id. § 541(a)(1).13 Id. §§ 362(a)(1), (6).14 Id. §§ 362(a)(3)–(5) 15 In re Ionosphere Clubs Inc., 922 F.2d 984, 989 (2d Cir. 1990).

bankruptcy and proceeds in violation ofthe automatic stay.16 If a violation is will-ful, an individual debtor may sue for dam-ages and receive costs, attorney fees, andpunitive damages.17 The court may granta creditor relief from the stay if the cred-itor’s interest in property has inadequateprotection or for other cause.18 To theautomatic stay, the law specifies eighteenexceptions, including criminal proceed-ings, actions to establish paternity or toestablish or modify alimony or child sup-port, and actions by a governmental unitunder its police and regulatory power.19

II. Deciding to File a BankruptcyPetition

The client who is considering bankrupt-cy must face three major questions:whether to proceed with bankruptcy atall; if so, under what chapter (for mostclients the choice is between Chapter 7and Chapter 13); and when to file thepetition.20

A. Weighing the Benefits of Filing forBankruptcyFor one who is facing numerous

debts and harassment by creditors andcollection agencies, a bankruptcy filingand the automatic stay that accompaniesit will bring everything to a halt, enablingone to stabilize one’s financial situationand get a fresh start. The filing dischargesmost debts and ends wage garnishments.

It brings to a standstill foreclosures andrepossessions; they then proceed onlywith court approval. The filing allows thedebtor to retain exempt property. Filing abankruptcy petition stops utility shutoffs;if the utility company has already dis-connected the service, the company mustrestore it upon adequate assurance of

future payment (usually in the form of asecurity deposit) without the debtor hav-ing to pay for past service.21

Public agencies may not discriminateagainst a debtor with a filed bankruptcyproceeding or a bankruptcy-dischargeddebt.22 For example, a debtor with a dri-ver’s license suspended solely because ofan unpaid judgment arising from a motorvehicle accident may recover the licenseby filing for bankruptcy.23 If the debtorfiles under Chapter 11, 12, or 13, thedebtor may be able to retain property lostotherwise. The debtor may also safelyacquire nonexempt property.24

On the other hand, there are disad-vantages. Bankruptcy is a negative eventin the debtor’s consumer credit history;credit-checking agencies may report it forten years while they may report unpaid

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16 Kalb v. Feuerstein, 308 U.S. 433, 438 (1940); Maritime Electric Co. v. United Jersey Bank,959 F.2d 1194, (3d Cir. 1991); but see Picco v. Global Marine Drilling Co., 900 F.2d 846,850 (5th Cir. 1990) (such actions are merely voidable, not void). In exceptional cases thecourt may annul the stay retroactively. In re Albany Partners, Ltd., 749 F.2d. 670 (11thCir. 1984); In re Fernstrom Storage & Van Co., 938 F.2d. 731 (7th Cir. 1991).

17 11 U.S.C. § 362(h).18 Id. § 362(d).19 Id. §§ 362(b)(1)–(18)20 A married couple must also decide whether to file a joint petition, as allowed by id.

§ 302, or whether only one spouse will file. Filing jointly requires no additional fees.21 Id. § 366; see discussion infra pt. III.C.22 Id. § 525(a).23 Perez v. Campbell, 402 U.S. 637 (1971) (Clearinghouse No. 1749).24 E.g., consider a debtor who is current on a home mortgage, whose home equity is with-

in exemption limits, and who has substantial unsecured debts. Absent bankruptcy, unse-cured creditors can reach the increase in home equity that results from the debtor pay-ing the mortgage. If the debtor files for bankruptcy and reaffirms the mortgage, and thecourt discharges the unsecured debts, the debtor keeps the benefit of the increasedhome equity.

Filing a bankruptcy petition brings everything toa halt, enabling one to stabilize one’s financialsituation and get a fresh start.

debts for only seven years.25 After bank-ruptcy, credit may be less available ormore expensive or both.26 A Chapter 7bankruptcy petition discharges debts onlyonce every six years; thus, if financialproblems recur during this period, thedebtor may not discharge new debtsthrough Chapter 7.

While employers and governmentalentities may not discriminate against adebtor solely because the debtor filed forbankruptcy, creditors and other private par-ties may. Depending on the debtor’s com-munity, this may be a significant detriment.

A bankruptcy proceeding can becostly. Although the debtor may pay thefiling fee in up to four installments, thecourt does not waive the fee even for anindigent client.27 In Chapter 12 and 13cases the trustee retains as a fee foradministering the plan a portion of thedebtor’s payments.28 Clients who do notqualify for free legal services and do notchoose to represent themselves must payattorney fees as well.

Even with the underlying debt dis-charged, liens on property generally sur-

vive.29 In a Chapter 7 case this means thateven after the court grants a discharge,the lien is enforceable unless the debtorpays the debt or makes it current.

A client may be “judgment proof.” Ifall a debtor’s property is exempt, andcreditors may not garnish or otherwiseseize the debtor’s income, a bankruptcyproceeding offers no tangible benefit.30

Other approaches may be moreappropriate. The client may be able tobring collection efforts to a halt withoutresorting to bankruptcy. If the concern isover a consumer debt, remedies may beavailable under the federal Fair DebtCollection Practices Act.31 While this Actapplies to collection agencies and notcreditors collecting their own debts, manystate laws give debtors similar protectionagainst creditors’ collection activity.32

Debtors may address debts in otherways, such as credit counseling that mayhelp the debtor develop a budget orarrange a payment plan. The Departmentof Education has programs that allow bor-rowers to defer a loan temporarily, workout a new payment schedule, or consol-

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25 15 U.S.C. § 1681c. Credit-checking agencies have no time limit on persons seeking over$150,000 in credit or on requests in connection with employment at a salary of $75,000or more.

26 However, in some cases credit may be easier to obtain after bankruptcy because thebankruptcy results in the discharge of other debts.

27 FED. R. BANKR. P. 1006; Bankruptcy Official Form 3, Application and Order to Pay FilingFee in Installments. The current fees are $200 for Chapter 7, $830 for Chapter 11, $230for Chapter 12, and $185 for Chapter 13. These figures include the filing fees set forth in28 U.S.C. § 1930(a) and the administrative fee and trustee surcharge set forth in para-graphs 8 and 8.1 of the Bankruptcy Court Miscellaneous Fee Schedule promulgated bythe Judicial Conference of the United States. Regarding the lack of a fee waiver, see 28U.S.C. § 1930(a); United States v. Kras, 409 U.S. 434 (1973).

28 In a Chapter 13 case this fee may not exceed 10 percent. 28 U.S.C. § 586.29 Long v. Bullard, 117 U.S. 617 (1886), codified at 11 U.S.C. § 522(c)(2).30 Under federal law, a debtor whose net weekly earnings are less than thirty times the

minimum wage is not subject to garnishment at all, except for child support and taxobligations. 15 U.S.C. § 1673(a). Moreover, the amount garnished may not exceed 25percent of the debtor’s wages. Some states have higher exemption levels, see, e.g., N.H.REV. STAT. ANN. § 512.21 (1997) (fifty times minimum wage), while others exempt agreater percentage of the debtor’s income, see, e.g., DEL. CODE ANN. tit. 10 § 4913 (1999)(85 percent of wages exempt). Other states have greater protections for certain cate-gories of debtors, see, e.g., FLA. STAT. ANN. § 222.11 (1998) (head of household’s wagesexempt if under $500 per week), or do not allow wage garnishment at all, see, e.g., S.C.CODE ANN. § 15-39-410, 420 (1976).

31 15 U.S.C. § 1692–1692m. In addition to banning abusive, unfair, and deceptive collectionpractices, the Act prohibits a collection agency from communicating with a debtor itknows has attorney representation, id. § 1692(a)(2), and authorizes the debtor todemand that the collection agency stop further communications. Id. § 1692c(c).

32 Id. § 1692a(6); see, e.g., IOWA CODE. ANN. §§537.7101–7103 (1997).

idate loans.33 A client who is over age 62and has substantial home equity but isunable to pay debts and living expensesmay be able to obtain a reverse mort-gage.34

B. Determining the AppropriateChapterThe debtor must consider what type

of bankruptcy petition would be mostbeneficial.35 Anyone who resides, has abusiness, or owns property in the UnitedStates may file under Chapter 7.36 Mostbusinesses, and even individuals notengaged in business, may file underChapter 11.37 Filing under Chapter 12 isonly for family farmers with regularincome.38 Only an individual with regu-lar income and debts below a certain levelmay file under Chapter 13.39

For most people the choice is be-tween Chapter 7 and Chapter 13. Chapter13 has two primary advantages overChapter 7: retention of more property anddischarge of a broader range of debts.40

A Chapter 7 debtor does not make anypayments toward debts existing on the

date the debtor files for bankruptcy.41 AChapter 13 debtor must propose a plan topay at least some of the debts and doesnot receive a discharge until the debtorcompletes the plan successfully. ThusChapter 13 is not an option for debtorswithout any disposable income after pay-ing necessary living expenses. A Chapter7 proceeding may end in as few as fouror five months, while a successful Chapter13 plan normally takes from three to fiveyears. Nationwide about 71 percent of thenonbusiness bankruptcy cases are underChapter 7; about 28 percent, underChapter 13.42 After filing a petition, adebtor may voluntarily convert from onechapter to another as long as the debtoris eligible under the new chapter and hadnot previously converted the case.43

C. When to Commence a BankruptcyProceeding If the debtor’s goal is to save prop-

erty, the debtor should file the petition assoon as possible. Once sold in foreclo-sure or its lease terminated, property isseldom savable through a bankruptcy

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33 See 20 U.S.C. § 2087. The Department of Education Web site includes a section onDefaulted Student Loans. www.ed.gov/offices/OSFAP/DCS/index/siteindex.html. A goodsummary of the alternatives for dealing with defaulted student loans is Northwest JusticeProject, What Can I Do About a Defaulted Student Loan?, www.nwjustice.org./docs/1170.html.

34 See 11 U.S.C. § 1715z-20; 24 C.F.R. pt. 206.35 Indeed, the debtor’s attorney must advise a client who primarily has consumer debts that

the client may proceed under Chapter 7, 11, 12, or 13 of the Bankruptcy Code. Pub. L.No. 98-353, § 322; Pub. L. No. 99-554, § 283(aa); Bankruptcy Official Form 1, Exhibit “B.”

36 11 U.S.C. § 109(a); however, there are limits on repeat filings. Id. § 109(g).37 Toibb v. Radloff, 501 U.S. 157 (1991).38 11 U.S.C. § 109(f). “Family farmer,” “family farmer with regular income,” and “farmer”

are defined at 11 U.S.C. §§ 101(18)–(20).39 Id. §109(e). The current limits are $269,250 in unsecured debt and $807,750 in secured

debt. A debtor who wants to reorganize higher debts in bankruptcy has two options.One is to file Chapter 11, which is more complicated than Chapter 13. The other option,for a debtor who is within the limits for secured debt but not for unsecured debt, is tofile a Chapter 7 to discharge the unsecured debt and then file a Chapter 13 (sometimesreferred to as “Chapter 20” bankruptcy). See, e.g., In re Metz, 67 B.R. 462 (B.A.P. 9th Cir.1986), aff’d, 820 F.2d 1495 (9th Cir. 1987). However, some bankruptcy judges view thisas bad faith, so before embarking on a Chapter 20 bankruptcy the debtor’s attorneyshould investigate the case law and practice in the applicable jurisdiction.

40 Compare 11 U.S.C. § 523(a) with id. § 1328(a).41 However, the debtor may reaffirm a debt. 11 U.S.C. § 524(c). See discussion infra pt.

III.A.2.42 ADMIN. OFFICE OF THE U.S. COURTS, supra note 1, at 32.43 For conversion from Chapter 13 to Chapter 7, see 11 U.S.C. § 1307(a) and FED. R. BANKR.

P. 1017(f)(3). For conversion from Chapter 7 to Chapter 13, see 11 U.S.C § 706(a) andFED. R. BANKR. P. 1017(f)(2).

petition.44 Sometimes the trustee or thedebtor may recover money or propertywhere there have been preferences orfraudulent conveyances, but only if thosetransfers occurred within a certain peri-

od.45 If the debtor may acquire and keepnonexempt property in the future, filingfor bankruptcy before acquisition may beadvisable.46

On the other hand, there are oftenreasons to delay. Some debts are dis-chargeable only if owed for a certain peri-od. For example, an income tax debt isdischargeable only if owed for at leastthree years.47 Debts resulting from cashadvances or luxury purchases in excessof $1,075 within sixty days of filing the

petition are nondischargeable.48 A debtorwho has committed certain fraudulent actsor made fraudulent transfers within oneyear of filing bankruptcy may not receivea Chapter 7 discharge.49

III. Bankruptcy Under Chapter 7As soon as the debtor files a Chapter 7petition, the automatic stay takes effect,and the clerk of the Bankruptcy Courtschedules a meeting of creditors.50 Theclerk also notifies the creditors of the filingof the case, the automatic stay, the timeand place of the meeting, and several keydeadlines.51 A debtor who is concernedthat a creditor may take some action beforereceiving official notice from the courtshould notify the creditor directly.

The trustee conducts the meeting ofcreditors. The debtor and the debtor’sattorney must attend; creditors may attendand ask questions but do not waive anyrights by their absence. The purpose ofthe meeting is to determine if the debtor’spetition and supporting documents areaccurate, to allow the trustee or creditorsto probe inconsistencies or omissions in

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44 See discussion infra pt. IV.A.45 Preferences may be set aside if the preferential payment was made within ninety days

or, if to an insider, within one year of filing for bankruptcy. 11 U.S.C. § 547(b)(4).Fraudulent transfers may be set aside if made within one year (id. § 548(a)(1)) or underprovisions of state law, such as each state’s version of the Uniform FraudulentConveyance Act or Uniform Fraudulent Transfer Act, which usually has a longer statuteof limitations. See, e.g., 740 ILL. COMP. STAT. §§ 160/10(a) (four years or within one yearof discovery) and 160/10(b) (four years) (1993).

46 However, if the debtor is expecting a tax return that is not subject to tax intercept, thedebtor may be better off to wait until the debtor receives the refund and spends it downto a level within the exemption limits. The debtor’s right to a tax refund or an earnedincome credit, or a potential refund or credit, is property of the estate. In re Doan, 672F.2d 831 (11th Cir. 1982) (tax refund); In re Johnston, 209 F.3d 611 (6th Cir. 2000)(earned income credit). Therefore the debtor who files before the tax year ends muststill list a prorated portion of the anticipated tax refund or earned income credit. SeeOfficial Bankruptcy Form 6, Schedule B, items 17, 20.

47 The exact period varies with the debtor’s tax situation. See 11 U.S.C. §§ 523(a)(1),507(a)(1).

48 Id. § 523(a)(2)(C).49 Id. § 727(a)(2)–(7).50 Id. § 341.51 See Bankruptcy Official Forms 9A to 9D. The notice includes deadlines for objecting to

the debtor’s exemptions, to discharge generally, and to the discharge of certain debts. Ifno assets appear to be involved, the court sets no deadline for filing claims. FED. R.BANKR. P. 2002(e); Bankruptcy Official Forms 9A and 9B. If the court recovers assets at alater date, it notifies creditors then. FED. R. BANKR. P. 3002(c)(5); Bankruptcy ProceduralForm B 204. In an asset case the court sets a bar date for filing claims and notifies credi-tors of that date. FED. R. BANKR. P. 2002(a)(7); Bankruptcy Official Forms 9C and 9D.

Chapter 13 has two primary advantages overChapter 7: retention of more property and discharge of a broader range of debts.

those documents, and to enable thetrustee to determine if any nonexemptassets are worth administering.52

The best outcome for the debtor isfor the trustee to adjourn the meeting andissue a report that the debtor appearedand that the trustee found no assets. Ifthe trustee decides to administer proper-ty, the debtor surrenders that property forsale by the trustee for the benefit of cred-itors. While the case remains open untilthe distribution of proceeds, this shouldnot delay the debt discharge, which thecourt enters if creditors file no timelyobjections to discharge.

A. Retaining PropertyA major concern of most debtors is

what property they may keep following abankruptcy proceeding. A debtor maykeep property if the debtor can claim it asexempt. However, if the property has alien, the court considers the secured cred-itor’s rights as well.

1. Exempt Property

The exemptions available depend onthe law of the debtor’s domicile for the180 days before filing the petition.53 Thedebtor may always claim exemptions thatstate or local law allows and federal non-bankruptcy exemptions such as socialsecurity, veterans, and EmployeeRetirement Income Security Act pensionbenefits.54 In sixteen jurisdictions thedebtor may also claim the federal bank-ruptcy exemptions.55 A debtor who electsthe federal exemptions may not claimexemptions under state law or federalnonbankruptcy exemptions.56 A factor infavor of filing bankruptcy is residency ina jurisdiction where the debtor has thisoption and the federal exemptions pro-tect more property than does nonbank-ruptcy law. Although the earned incomecredit is a federal benefit, whether it isexempt depends on state law.57

The filer should list exempt propertyon Schedule C; if creditors file no timelyobjection, the listing is conclusive.58 Some

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52 If an asset is not exempt and has minimal value, the cost of liquidation may equal orexceed its value. If the trustee decides not to administer such assets, the property isabandoned to the debtor when the case is closed. 11 U.S.C. § 554(c). If the property isnot scheduled, however, it is not abandoned and remains property of the estate evenafter the case is closed. 11 U.S.C. § 554(d).

53 Id. § 522(b)(2)(A). A debtor with more than one domicile may claim the exemptions ofthe jurisdiction where the debtor had domicile the longest.

54 Philpott v. Essex County Welfare Bd., 409 U.S. 413 (1973) (Clearinghouse No. 1522)(social security benefits); 45 U.S.C. § 352(E) (veterans benefits); 29 U.S.C. § 1056(d)(1)(Employee Retirement Income Security Act benefits). See Guidry v. Sheet Metal WorkersNat’l Pension Fund, 493 U.S. 365 (1990). Note that under Patterson v. Shumate, 504U.S.753 (1992), a debtor’s interest in an Employee Retirement Income Security Act quali-fied pension plan is not part of the debtor’s estate, but the debtor should still list suchinterest on the schedules.

55 11 U.S.C. § 522(d). The sixteen jurisdictions are Arkansas, Connecticut, District ofColumbia, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico,Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, Washington, andWisconsin. The other jurisdictions have opted out of the federal bankruptcy exemptions,as allowed by id. § 522(b)(1). 4 LAWRENCE P. KING, COLLIER ON BANKRUPTCY, ¶ 522-13 n.3(15th ed. 1998).

56 11 U.S.C. § 522(b).57 Compare In re Brasher, 253 B.R. 484 (M.D. Ala. 2000) (earned income credits are

exempt as “public assistance” under Alabama exemption laws); In re Fish, 224 B.R. 82(Bankr. S.D. Ill. 1998) (exempt as “public assistance benefit” under Illinois law); In reBrown, 186 B.R. 224 (Bankr. W.D. Ky. 1995) (exempt as “public assistance” underKentucky law), and In re Jones, 107 B.R. 751 (Bankr. D. Idaho 1989) (exempt as a bene-fit received under “public assistance legislation”), with In re Collins, 170 F.3d 512, 513(5th Cir. 1999) (not exempt under Louisiana law) and In re Goertz, 202 B.R. 614 (Bankr.W.D. Mo. 1996) (not exempt as a “local public assistance benefit” under Missouri law).

58 Creditors must file objections within thirty days of the conclusion of the meeting ofcreditors, unless the court grants an extension. FED. R. BANKR. P. 4003(b); Taylor v.Freeland & Kronz, 503 U.S. 638 (1992).

states allow waivers of exemptions, butsuch waivers are unenforceable in bank-ruptcy.59

Through a practice known as “ex-emption planning,” a debtor may convertnonexempt property to exempt property inanticipation of filing for bankruptcy. Courtsgenerally regard the practice, much liketax planning, as legitimate, absent con-cealment or other fraudulent intent.60

However, some courts found exemptionplanning to be improper when the amountthe debtor converted to exempt assets wasexcessive.61 Also, some state exemptionlaws appear to prohibit the practice.62

2. Secured Property

A debtor who desires to retainsecured property has three (and in somejurisdictions four) options. The first is lienavoidance. The debtor may avoid non-purchase money, nonpossessory liens onhousehold goods, clothes, appliances, ani-mals, crops, musical instruments, jewel-ry, and tools of the trade if the propertyis exempt.63 The debtor may avoid judi-cial liens to the extent that they impairexemptions.64 However, the debtor mustfile a motion to avoid the liens; avoidanceis not automatic.65

Second, a debtor may redeem ex-empt tangible personal property by pay-ing the creditor, in a single cash payment,the lesser of the amount of the lien or thevalue of the property.66 The debtor mayredeem property by filing a motion.67

Third, if the creditor agrees, thedebtor may reaffirm the debt, reviving itas if the bankruptcy had never occurred.68

However, if the debtor defaults, the cred-itor may repossess or foreclose and, if adeficiency remains, collect the balancefrom the debtor. Therefore, a debtorshould avoid reaffirmation where possi-ble. A debtor who wants to repay a debtmay simply do so without signing a reaf-firmation.69

A valid reaffirmation agreement mustcontain a clear and conspicuous statementthat signing the reaffirmation is voluntaryand that the debtor may rescind it at anytime before discharge or within sixty daysafter the debtor files the agreement withthe court.70 Some creditors whose collat-eral has minimal value (e.g., used furni-ture) may negotiate a reaffirmation ininstallments for the value of the propertyeven when the value is less than the bal-ance due on the debt.

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59 See, e.g., ALA. CODE § 6-10-120 (1993); 11 U.S.C. § 522(e).60 See, e.g., In re Smiley, 864 F.2d 562, 566–67 (7th Cir. 1989) (Clearinghouse No. 23,168).61 In re Johnson, 880 F.2d 78, 81 (8th Cir. 1989) (conversion of nonexempt assets to

exempt homestead property allowed, case remanded to consider whether other exemp-tions were excessive).

62 See, e.g., 735 ILL. COMP. STAT. 5/12-1001 (1992) (property acquired with intent to convertnonexempt to exempt property is not exempt).

63 11 U.S.C. § 522(f)(1)(B)64 Id. § 522(f)(1)(A); Owen v. Owen, 500 U.S. 305 (1991).65 FED. R. BANKR. P. 4003(d).66 11 U.S.C. § 722.67 FED. R. BANKR. P. 6008. Some courts have held that redemption may be accomplished

only by motion; In re Lopez, 224 B.R. 439 (Bankr. C.D. Cal. 1998); In re Spivey, 230 B.R.484 (Bankr. E.D.N.Y. 1999). In other areas the practice has been to file a motion only inthe case of disagreement.

68 11 U.S.C. § 524(c).69 Id. § 524(f).70 Id. § 524(c)(2). If an attorney represents the debtor, the attorney must affirm in an affi-

davit that attorney has fully advised the debtor of the consequences, that reaffirmation isin the debtor’s best interests, and that a reaffirmation agreement would not cause unduehardship to the debtor or a dependent of the debtor. 11 U.S.C. § 524(c)(3). Attorneyswho sign such declarations without reasonably inquiring whether the totality of circum-stances supports their declarations violate their duties to the court and are subject tosanctions. In re Melendez, 235 B.R. 173 (Bankr. D. Mass. 1999) (attorneys subject tosanctions under FED. R. BANKR. P. 9011).

Some courts hold that a debtor whois not in default under a contract mayretain property by continuing to maketimely payments without having to reaf-firm the contract.71 The advantage of thisoption is that if the debtor defaults, thecreditor may repossess or foreclose butmay not collect any deficiency. Othercourts hold that a debtor who wants toretain the property must elect one of thefirst three options.72

B. Dischargeable DebtsThe second primary issue in bank-

ruptcy proceedings is which debts are dis-chargeable. In general, a debt is dis-chargeable unless it falls within one ofeighteen specific categories.73 The mostrelevant of these for low-income clientsare

� alimony or child support;

� taxes (with limited exceptions);

� debts incurred through fraud, embez-zlement, or theft;74

� student loans, unless denial of dis-charge would cause undue hardship;75

� willful or malicious injury that thedebtor intended to cause;76

� civil and criminal fines, penalties, andforfeitures payable to governmental units;

� death or injury that the debtor causedby driving while intoxicated; and

� unlisted debts if the debtor’s failure tolist them prejudices a creditor.77

The court may deny or revoke a gen-eral discharge if the debtor fraudulentlyconcealed or transferred property duringthe bankruptcy proceeding or within theprevious year, or destroyed books orrecords, unreasonably failed to keepbooks or records, lied under oath in theproceeding, failed to explain missingassets satisfactorily, refused to obey a law-ful order of the court, or engaged in othermisconduct related to the bankruptcy dur-ing the proceeding.78 If denied a dis-charge, the debtor may not—in a laterChapter 7 bankruptcy—discharge anydebts that the debtor owed when thedebtor filed the case.79

For the Bankruptcy Court to deny adischarge, the trustee or a creditor must

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71 Lowry Fed. Credit Union v. West, 882 F.2d 1543 (10th Cir. 1989); In re Belanger, 962F.2d 345 (4th Cir. 1992) (Clearinghouse No. 48,337); Capital Communication Fed. CreditUnion v. Boodrow (In re Boodrow),126 F.3d 43 (2d Cir. 1997), cert. denied, 522 U.S.1117 (1998); McClellan Fed. Credit Union v. Parker (In re Parker), 139 F.3d 668 (9th Cir.1998).

72 In re Burr, 160 F.3d 843 (1st Cir. 1998); Matter of Edwards, 901 F.2d 1383 (7th Cir. 1990);Taylor v. AGE Fed. Credit Union, 3 F.3d 1512 (11th Cir. 1993); Johnson v. Sun Fin. Co.(In re Johnson), 89 F.3d 249, 252 (5th Cir. 1996) (per curiam).

73 11 U.S.C. § 523(a) (1)–(18).74 In cases alleging actual fraud, creditors must prove an intentionally and materially false

statement upon which they “justifiably relied”; this is a lower standard than “reasonablereliance.” Field v. Mans, 516 U.S. 59 (1995).

75 Courts have developed several tests to determine undue hardship. See, e.g., In reJohnson (Bankr. E.D. Pa. 1979); Brunner v. New York State Higher Education ServicesCorp., 831 F.2d 395 (2d Cir. 1987). A debtor whose student loan is federally insuredshould explore relief available from the U.S. Department of Education. 20 U.S.C. § 2087;information about the Direct Consolidation Loan Program is on the Department ofEducation’s Web site, www.ed.gov/DirectLoan/consolid.html.

76 Kawaauhau v. Geiger, 523 U.S. 57 (1998).77 Unlisted debts are discharged if the creditor had actual knowledge of the debt in time to

file a claim or object to discharge. See, e.g., In re Barnes, 969 F.2d 526 (7th Cir. 1992).The majority view is that in a “no asset” case an unlisted debt is nonetheless discharged,as long as it is not otherwise nondischargeable. In re Madaj, 149 F.3d 467 (6th Cir.1998); In re Beezley, 994 F.2d 1433 (9th Cir. 1993).

78 11 U.S.C. §§727(a)(2)–(a)(6), 727 generally.79 Id. § 523(a)(10); they may, however, be discharged under Chapter 13.

file a timely complaint with the court andprove one of the grounds for denial.80 Inorder to have the court deny discharge ofa particular debt on the basis of theexceptions for fraud, theft, embezzlement,willful and malicious injury, or obligationsarising out of a divorce or separation thatare not in the nature of support or alimo-ny, the creditor must file a timely com-plaint and prove that the debt falls with-in the applicable exception.81 If a disputearises over whether any other debt fallswithin an exception to discharge, thedebtor or the creditor may file a complaintto determine dischargeability.82 If the dis-pute arises after the court has closed thebankruptcy case, the court may reopenthe case or a state court may rule on thematter.83

The court may dismiss a Chapter 7case and deny discharge for cause or forsubstantial abuse. “Cause” includes unrea-sonable delay, failure to pay the filing fee,and failure to file schedules and the state-ment of financial affairs.84 If the debtorcould repay the debts without difficulty,the court may dismiss the case for “sub-stantial abuse,” but a presumption favorsthe debtor.85 A debtor does not have theabsolute right to seek dismissal of aChapter 7 case.

C. Particular Concerns for Low-Income Clients For twenty days after a debtor files

for bankruptcy, a utility company may notalter, refuse, or disconnect service to thedebtor solely because the debtor filed forbankruptcy.86 The debtor should notifythe utility of the bankruptcy filing sincethe utility may not receive the notice fromthe court within that time. If within twen-ty days the debtor does not give adequateassurance—usually in the form of a secu-rity deposit—of future payment, the util-ity may then disconnect the service.87

Before restoring service, a utility may insiston repayment for any service the debtorobtained through fraud or theft if the util-ity would also demand such restitutionfrom a customer who had not filed forbankruptcy. A debtor in this situationshould also consider filing Chapter 13.

Several courts hold that a publichousing authority may not evict tenantsfor nonpayment of rent dischargedthrough Chapter 7.88 A debtor living inprivately owned, publicly subsidizedhousing, however, may not keep the leasewithout paying all rent the debtor owes.89

This usually requires filing for bankrupt-cy under Chapter 13.

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80 The trustee or the creditor must file the complaint within sixty days of the date first setfor the meeting of creditors, unless the court grants an extension. FED. R. BANKR. P.4004(a) & (b).

81 Id. § 523(a)(2), (4), (6), 15, 523(c)(1). Timely means within sixty days of the date first setfor the meeting of creditors, unless the court grants an extension. FED. R. BANKR. P.4007(c). A dispute concerning discharge of a debt is decided through an “adversary pro-ceeding”—a separate lawsuit filed with the bankruptcy court. FED. R. BANKR. P. 7001.

82 FED. R. BANKR. P. 4007(a).83 11 U.S.C. § 350; FED. R. BANKR. P. 5010. If the court reopens the case for this purpose, it

does not charge the filing fee for reopening a case. FED. R. BANKR. P. 4007(b).84 11 U.S.C. § 707(a).85 This applies only if the debts are primarily consumer debts. Id. § 707(b).86 Id. § 366(a); Whittaker v. Philadelphia Electric Co. (In re Whittaker), 882 F.2d 791 (3d

Cir. 1989).87 11 U.S.C. § 366(b).88 In re Gibbs, 9 B.R. 758 (Bankr. D. Conn. 1981), supplemented, 12 B.R. 737 (Bankr. D.

Conn. 1981), aff’d in part and remanded in part, Gibbs v. Hous. Auth. of New Haven,76 B.R. 257 (D. Conn. 1983) (Clearinghouse No. 29,975); In re Curry, 148 B.R. 966 (S.D.Fla. 1992); In re Sudler, 71 B.R. 780 (Bankr. E.D. Pa. 1986); In re Szymecki, 87 B.R. 14(Bankr. W.D. Pa. 1988). But see Robinson v. Chicago Hous. Auth., 54 F.3d 316 (7th Cir.1995) (dicta) (Clearinghouse No. 50,334); In re Bacon, 212 B.R. 66 (Bankr. E.D. Pa.1997) (housing authority could evict tenant if there was a waiting list for units).

89 See, e.g., In re Lutz, 82 B.R. 699 (Bankr. M.D. Pa. 1988). See discussion infra pt. IV.Aregarding retaining leases in default through Chapter 13.

IV. Bankruptcy Under Chapter 13 Chapter 13 offers more options for adebtor to keep property than doesChapter 7. It also allows discharge of awider range of debts. The most importantaspect of the proceeding is the Chapter 13plan. The debtor must file the plan alongwith the bankruptcy petition or within fif-teen days thereafter and begin makingpayments within thirty days.90 The planmust provide for full payment of prioritydebts.91 It may classify claims, modifyclaims except for those secured only bythe debtor’s principal residence, curedefaults, assume or reject leases, andinclude any other provisions not incon-sistent with the Bankruptcy Code.92 If thedebtor proposes a plan in good faith, theplan pays creditors at least as much asthey would receive in a Chapter 7 case,the plan allows for appropriate treatmentfor secured claims, and the plan is feasi-ble, the court will confirm the plan.93 Ifthe plan pays less than 100 percent ofunsecured claims, it must last three yearsand payments must equal the debtor’sprojected disposable income.94

The main purpose of the Chapter 13creditors’ meeting, which the trustee con-ducts, is to determine whether the plan isfeasible, that is, the debtor can afford tomake the payments, and whether theplan complies with the requirements ofthe Bankruptcy Code and the debtor pro-posed it in good faith. After reviewingthe case, the trustee makes a recom-mendation to the court, and creditors mayobject or agree to the plan. If the courtconfirms the plan, the plan’s provisionsare binding on the debtor and all credi-

tors.95 Following the court’s confirmation,the trustee administers the plan: thetrustee reviews claims from creditors anddisburses payments from the debtoraccording to the plan’s terms. The courtmay order anyone obligated financiallyto the debtor to pay the trustee instead.96

However, the court may not direct suchan order to the Social Security Admin-istration or to a pension fund.97 For some

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90 FED. R. BANKR. P. 3015(b); 11 U.S.C. § 1326(a)(1).91 11 U.S.C. § 1322(a)(2).92 Id. § 1322(b).93 Id. § 1325(a).94 Id. § 1325(b)(1)(B). Tithes and other charitable contributions up to 15 percent are not

included in “disposable income.” Id. § 1325(b)(2)(A).95 Id. § 1327(a); In re Harvey, 213 F.3d 318 (7th Cir. 2000) (Clearinghouse No. 53,134). If

the court denies confirmation of the plan, the debtor may propose a new plan thatmeets the court’s objections.

96 11 U.S.C. § 1325(c). The court may enter a withholding order before confirmation underits authority pursuant to id. § 105 to enter any necessary and appropriate orders. In reTorres, 191 B.R. 735 (Bankr. N.D. Ill. 1996).

97 42 U.S.C. § 407(b); In re Buren, 725 F.2d 1080 (6th Cir. 1984) (Clearinghouse No.29,642); McLean v. Central States Pension Fund, 762 F.2d 1204 (4th Cir. 1985).

clients, this is helpful in making the planwork.98

If the debtor cannot complete a con-firmed plan as the debtor originally pro-posed it, the debtor has four options. First,the debtor, the trustee, or an unsecuredcreditor may propose a modification.99 Ifthe client’s net income has decreased, theplan may lower the monthly payments,

but the term of the plan becomes longer.The previous order of confirmation is resjudicata as to findings of fact and issuesthat creditors could have raised in oppo-sition to confirmation.100 To modify aplan, the debtor need not show a changeof circumstance.101

Second, if the debtor had not previ-ously converted the case from anotherchapter of the Bankruptcy Code, thedebtor has a right to convert to Chapter 7either before or after confirmation.102

Third, the court may grant the debtor ahardship discharge, provided that the fail-ure to make payments is due to circum-stances for which the court cannot justlyhold the debtor responsible, that creditorshave received at least as much as theywould have in a Chapter 7 case, and thatmodification is not possible.103 When adebtor receives a hardship discharge, all ofthe exceptions to discharge apply.104

Fourth, the debtor has an absoluteright to dismiss a Chapter 13 case at anytime as long as the debtor had not con-verted the case from another chapter.105

Sometimes the best option is to dismissthe case and start over. However, if acreditor filed a motion for relief from thestay and the debtor voluntarily dismissesthe case, the debtor may not file anotherbankruptcy case under any chapter for180 days.106 If the debtor does not makethe payments that the plan requires, thetrustee—rather than seeking conversionto Chapter 7—usually moves to dismissthe case.

A. Retaining PropertyWhen property is worth less than a

debt the property secures, the Coderegards the remainder of the debt as unse-cured for bankruptcy purposes.107 Adebtor’s Chapter 13 plan may deal withsuch an undersecured claim by provid-ing that the debtor, while retaining theproperty, pays only what the property isworth and interest. The debtor pays theunsecured portion of the claim at thesame percentage as other unsecuredclaims, which may be less than 100 per-cent of the claim. Bankruptcy parlancerefers to this as “stripping down” a lien;debtors commonly use this for car loansand purchase money security interests inhousehold goods and appliances.108

If a creditor has not repossessed aproperty, the debtor may keep it either bystripping down the lien or by proposing aplan to catch up on the payments in arrears

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98 “Chapter 13 debtors are frequently required to petition for bankruptcy relief because oftheir inability to prioritize the expenditures they make from their wages. It was undoubt-edly due to concerns that this situation might continue after bankruptcy that Congressprovided specific authorization for postconfirmation wage deduction orders.” Torres, 191B.R. at 737.

99 11 U.S.C. § 1329(a).100 In re Pence, 905 F.2d 1107 (7th Cir. 1990).10111 U.S.C. §§ 1329(a)(1)–(3); In re Witkowski, 16 F.3d 739 (7th Cir. 1994).10211 U.S.C. § 1307(a).103 Id. § 1328(b).104 Id. §1328(c).105 Id. § 1307(b).106 Id. § 109(g).107 Id. § 506(a).108The debtor may avoid nonpurchase money, nonpossessory liens in exempt household

goods in Chapter 13 as well as in Chapter 7.

Clients may not realize how broad some bankruptcy concepts are or how comprehensivethe debtor’s schedules should be.

while maintaining current payments. If thecreditor has already repossessed the prop-erty, the creditor may have to return it if thedebtor’s plan provides for payment of thesecured portion of the claim.109

If the debtor is facing a foreclosureand the mortgagee has accelerated thepayments, the debtor may stop the accel-eration and cure the default through pay-ments to the Chapter 13 trustee whilemaking current payments.110 The debtormay save the debtor’s primary residenceuntil a foreclosure sale takes place.111 AChapter 13 plan may also extend the termof a mortgage, as long as the debtor paysthe balance in full within the term of theplan.112 If the debtor owns the propertybut is not personally liable on the debt,there is no bar to using Chapter 13 to savethe property from foreclosure.113 A debtormay not “strip down” only partiallysecured mortgages on the debtor’s prin-

cipal residence to the amount of thesecured claim unless the debtor securesthe debt with additional property.114

However, the debtor may “strip off” whol-ly unsecured mortgages, and the courtwill treat as unsecured debt the amountthe debtor owes on the mortgage.115

The debtor’s plan may assume unex-pired leases and executory contracts.116

For leases not in default, the debtor sim-ply elects to assume the lease as part ofthe Chapter 13 plan. The debtor mayassume a defaulted but unterminatedlease if the debtor can promptly cure anydefaults and give adequate assurance offuture performance.117 In many states alease does not become completely termi-nated until the entry of an order of pos-session in favor of the landlord or untilthe tenant’s eviction.118

A plan that proposes retention ofnonexempt property must provide for

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10911 U.S.C. § 524 (turnover of estate property); United States v. Whiting Pools Inc., 462U.S. 198 (1983). But see In re Lewis, 137 F.3d 1280 (11th Cir. 1998) (under Alabama law,the vehicle having been repossessed, debtor had only a right of redemption, whichwould not support action for turnover). If the custodian of the property does not returnit voluntarily, the regulations require an adversary proceeding. FED. R. BANKR. P. 7001.

11011 U.S.C. § 1322(b)(3), (b)(5); Grubbs v. Houston First American Sav. Ass’n. (In reGrubbs), 730 F.2d 236 (5th Cir. 1984) (en banc); In re Taddeo, 685 F.2d 24 (2d Cir.1982).

11111 U.S.C. § 1322(c)(1); the Bankruptcy Reform Act of 1994 added this section, supersed-ing cases such as In re Roach, 824 F.2d 1370 (3d Cir. 1987), which held that the foreclo-sure judgment extinguished the debtor’s right to cure. H.R. REP. No. 835, 103d Cong., 2dSess. 52 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3360–61.

11211 U.S.C. § 1322(c)(2).113 Johnson v. Home State Bank, 501 U.S. 78 (1991).114Nobelman v. American Sav. Bank, 508 U.S. 324 (1993); 11 U.S.C. § 1322(b)(2); In re

Hammond, 27 F.3d 52 (3d Cir. 1994).115 In re McDonald, 205 F.3d 606 (3d Cir. 2000); Bartee v. Tara Colony Homeowner’s Ass’n

(In re Bartee), 212 F.3d 277 (5th Cir. 2000) (Clearinghouse No. 53,117).11611 U.S.C. §§ 365, 1322(b)(7). If a Chapter 7 trustee rejects a residential lease, it is aban-

doned to the debtor and, absent default, may continue as if bankruptcy had notoccurred.

117 Id. § 365(b).118 See, e.g., In re Stoltz, 197 F.3d 625 (2d Cir. 1999) (Clearinghouse No. 52,764) (under

Vermont law lease did not terminate until issuance of writ of possession or expiration oftime to appeal judgment); Ross v. Metro. Dade County, 142 B.R. 1013 (S.D. Fla. 1992)(Clearinghouse No. 48,192), aff’d without op., Metro. Dade County v. Ross, 987 F.2d 774(11th Cir. 1993) (because lease termination could be reversed under antiforfeiture doc-trine even after judgment, lease had not expired and could be assumed); Sudler, 71 B.R.at 787 (under Pennsylvania law, right to cure lasts until the constable physically ejectsthe tenant from the property). See also In re Morgan, 181 B.R. 579 (Bankr. N.D. Ala.1994) (lease could be assumed until writ of restitution executed); In re Talley, 69 B.R.219 (Bankr. M.D. Tenn. 1986) (allowing assumption after judgment because tenant stillretained some rights, and therefore lease had not expired). But cf. In re Williams, 144F.3d 544 (7th Cir. 1998) (lease could not be assumed when cure period in notice of ter-mination had passed and lawsuit had been filed, even though court had entered nojudgment).

payments to the trustee equal to the valueof such property and interest.119 This iscommonly referred to as the “best inter-ests of creditors” test.

B. Dischargeable DebtsIn a Chapter 13 case many of the

exceptions to discharge of particular debtsdo not apply. A Chapter 13 discharge cov-ers all debts except alimony and childsupport, student loans, debts based onjudgments resulting from driving underthe influence, criminal fines, and restitu-tion orders.120 On the other hand, onetype of debt is nondischargeable only ina Chapter 13 case; if a plan provides formaintaining payments on a long-term debtsuch as a mortgage, the debt survives thebankruptcy.121 Debts for utility serviceobtained by fraud or theft may be dis-chargeable under Chapter 13. Therefore,a utility should not deny service on thisbasis to a Chapter 13 debtor.

V. A Brief Guide to Filing aBankruptcy Case

The documents that the debtor must filewith a bankruptcy petition call for com-prehensive disclosure of the debtor’sfinancial situation. If a client is unso-phisticated or lacks good records, theattorney may need to question the clientquite thoroughly. A recent copy of a cred-it report can uncover debts that the clientthought had been resolved but were not,debts the client has forgotten, and debtsthat have been transferred without notice

to the client. In some cases the attorneymay have to review property records orcourt files as well. Clients may not real-ize how broad some bankruptcy conceptsare or how comprehensive the debtor’sschedules should be. Many have mis-conceptions about bankruptcy that theattorney needs to correct; otherwise thedocuments the debtor files may be in-complete or inaccurate.

Even if the client has good recordsand seems to understand the bankruptcyprocess, the attorney should review asmany of the client’s documents as possible.Review may lead to discovery of claimsunder the Truth-in-Lending Act, the FairDebt Collection Practices Act, state con-sumer protection laws, usury laws, or otherviolations of the debtor’s rights. Theseclaims are assets that the debtor must list.

In all types of bankruptcy, the debtorfiles a petition, schedules, and a statementof financial affairs.122 In a Chapter 7 casethe debtor may also file a statement ofintention; in a Chapter 13 case the debtorfiles a Chapter 13 plan.123 The officialforms are available at most legal stationeryand office supply stores and on theInternet.124 The debtor must file either alist of creditors, including their addresses,or Schedules D, E, and F.125 Unless thecourt grants an extension, the debtor mustfile within fifteen days documents that thedebtor does not file with the petition.126

The petition must follow the precise for-mat that the Judicial Conference of theUnited States prescribes.127

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11911 U.S.C. § 1325(a)(4).120 Id. § 1328(a). Civil fines, which are nondischargeable in a Chapter 7 case, id.

§ 523(a)(7), are thus dischargeable under Chapter 13. However, while taxes are dis-chargeable, in order to receive a Chapter 13 discharge the debtor must pay, in full, pri-ority debts, which include nondischargeable tax debts. Id. § 523(a)(1).

121 Id. §§ 1322(b)(5), 1328(a)(1)122FED. R. BANKR. P. 1007. These are Official Forms 1, 6, and 7, signed under penalty of

perjury. FED. R. BANKR. P. 1008.123Official Form 8 is used for the Chapter 7 statement of intention. There is no official form

for a Chapter 13 plan, but some districts and Chapter 13 trustees have suggested Chapter13 plans.

124One such site is that of the Administrative Office of the U.S. Courts, www.uscourts.gov/bankform/index.html.

125FED. R. BANKR. P. 1007(a)(1).126 Id. 1007(c).127 Id. 9009; Official Forms, Introduction, and General Instructions.

In a Chapter 7 case with consumerdebts that the debtor secures with prop-erty of the estate, the debtor must file astatement of intention with regard to thesecured property within thirty days of fil-ing the case or before the meeting ofcreditors, whichever occurs first.128 Thedebtor should carry out the debtor’sintentions within forty-five days of filingthe statement.129

Unlisted property is neither exemptnor abandoned to the debtor, and failureto list all assets can have dire conse-quences. For example, if a client fails tolist a potential lawsuit or other cause ofaction, receives a discharge, and then filessuit, the defendant in that case may moveto dismiss because the trustee, not thedebtor, owns the asset.

Some debtors believe that they mayor should deliberately omit a creditor ifthey intend to pay a particular debt ordo not want that creditor to know aboutthe bankruptcy. Such omission is a crimeand grounds for denial of discharge.130 Adebtor who inadvertently omits creditorsmay amend the schedules as long as thecourt has not closed the case.131 Somecourts have allowed the debtor to reopena case to add omitted creditors if creditorshave not been prejudiced.132 Others haveheld that, at least in a no-asset case,reopening would serve no purposebecause the debt, although not listed, isdischarged.133

When completing the schedules, thedebtor need not admit that a debt isnondischargeable, although that may beimplicit in the debtor’s answers.134 Con-versely the debtor’s characterization of adebt is not binding on any other partyand, unlike a pleading, does not requirea response by a creditor who disagreeswith the debtor’s position.

VI. Responding to Someone Else’sBankruptcy

A client who is a creditor should be onthe debtor’s schedules and receive anotice from the court. However, a cred-itor who learns through other means thatan adverse party has filed for bankrupt-cy should not assume that nothing needbe done until the creditor receives officialnotice from the court.135 If a creditor evensuspects that a bankruptcy case is underway, the creditor should investigate andfind out whether the creditor is listed forthe correct amount on the schedules andhow the debtor proposes to treat thecreditor.

A. Strategies for CreditorsIf the debtor has filed under Chapter

7, 12, or 13, the creditor must file a proofof claim to receive any dividend from thebankruptcy.136 When doing so, creditorsshould make all claims to which they maybe entitled; they should place each in themost favorable category that they can jus-

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12811 U.S.C. § 521(2)(A); Official Bankruptcy Form 8.12911 U.S.C. § 521(2)(B).13018 U.S.C. § 152; 11 U.S.C. §§ 727(a)(4)(A), 727(d)(1). See Beezley, 994 F.2d at 1439 n.3

(O’Scannlain, J., concurring). The debtor may always pay a debt voluntarily, as dis-cussed supra, pt. III.A.2.

131FED. R. BANKR. P. 1009(a).132 In re Stark, 717 F.2d 322 (7th Cir. 1983); bankruptcy courts have often criticized this

decision. See cases collected in Beezley, 994 F.2d at 1438 n.2.133 See, e.g., In re Madaj, 149 F.3d 467; Beezley, 994 F.2d 1433.134E.g., a debtor who lists a priority debt for child support is admitting that the debt is

nondischargeable. On the other hand, the schedules do not ask whether a debt is theresult of fraud or many of the other exceptions to discharge.

135 In re Barnes, 969 F.2d 526 (7th Cir. 1992).136FED. R. BANKR. P. 3002(a). If the debtor has filed under Chapter 11, has listed the creditor

on its schedules, and the claim has not been listed as disputed, contingent, or unliqui-dated, a creditor who agrees with the amount listed need not file a claim. FED. R. BANKR.P. 3003(c)(2). However, filing a proof of claim may be both simpler and safer thandetermining how the debtor listed the creditor’s claim on lengthy schedules the debtorfiled in a distant forum.

tify.137 A claim should so indicate if it isboth secured and a priority claim. A cred-itor with a right of setoff is considered asecured creditor, up to the amount owedby the creditor to the debtor.138 One pos-sible disadvantage of filing a proof ofclaim is that it waives a creditor’s right toa jury trial.139 Thus, if a landlord in bank-ruptcy is evicting a tenant and the tenanthas counterclaims based on poor condi-tions, submitting a proof of claim mayjeopardize the tenant’s right to a jury trial.

A creditor who believes that thedebtor’s plan could pay a higher dividend,classifies the claim improperly, or includesinappropriate or illegal provisions mayobject to the plan. In some situations thecreditor or a group of creditors may pro-pose their own plan.140

The creditor may decide that pro-ceeding outside of bankruptcy or dis-missing the case would be more advan-tageous.141 Although the court maydismiss for substantial abuse a Chapter 7bankruptcy primarily involving consumerdebts, only the court or the trustee maymake such a motion.142 A creditor whobelieves that the court should dismiss thedebtor’s Chapter 7 proceeding on thisbasis should not ask the court to dismissbut rather should submit supporting infor-mation to the trustee.143

A third strategy for the creditor is topreserve the debtor’s ability to pay thecreditor after the bankruptcy by object-

ing to the discharge generally or to thedischargeability of the particular debt.Before undertaking such litigation, thecreditor should assess whether the debtorwill have income or assets after the bank-ruptcy. A creditor who is consideringobjecting to discharge on the grounds offraud should be aware that, in additionto the normal sanctions for frivolous law-suits, a creditor who files a complaint onthose grounds without substantial justifi-cation is liable to the debtor for costs andreasonable attorney fees.144

Often the best result for a creditor isfor the court to find the debt to be nondis-chargeable and for the debtor to receive adischarge. This reduces the number ofcreditors who will be able to reach thedebtor’s future income and assets. A cred-itor who lacks grounds to exclude a debtfrom discharge should, before objecting todischarge, consider whether the other cred-itors have a higher priority under state law.

B. Typical Bankruptcies That MayAffect Low-Income Clients asCreditorsLow-income clients may figure in

bankruptcy petitions as creditors, notdebtors.

Spouse or Ex-Spouse. The auto-matic stay does not apply to collection ofalimony or child support from propertythat is not property of the estate.145 In aChapter 7 case this means that the credi-

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137The creditor signs a proof of claim—to which the creditor should attach supporting doc-uments—under penalty of perjury. See Official Form 10, Proof of Claim.

13811 U.S.C. § 506(a).139 Langenkamp v. Culp, 498 U.S. 42 (1990).140 In a Chapter 13 case, only the debtor may propose a plan before confirmation. After

confirmation, an unsecured creditor may propose a modification. 11 U.S.C. § 1329(a). Ina Chapter 11 case, the debtor has the exclusive right to propose a plan in the first 120days after the debtor files the case. 11 U.S.C. § 1121(b). The court may shorten orextend this period. 11 U.S.C. § 1121(d).

141The creditor does not waive the creditor’s right to seek relief from the automatic stay ordismissal by filing a proof of claim.

14211 U.S.C. § 707(b).143This will not taint the actions of the trustee, who must make an independent judgment

about whether to bring the motion. In re Clark, 927 F.2d 793, 797 (4th Cir. 1991).14411 U.S.C. § 523(d).145 Id. § 362(b)(2)(B).

tor (client) may collect alimony or childsupport from the debtor’s postpetitionwages. If the debtor files under Chapter13, the automatic stay applies. If thedebtor’s plan does not provide for pay-ment of current support and full paymentof any arrears, the creditor should objectto confirmation of the plan.146 Obligationsincurred as part of a property settlementare dischargeable if the debtor cannotpay; if the benefit to the debtor of obtain-ing a discharge outweighs the harm tothe debtor’s spouse, former spouse, orchild; or if the spouse, former spouse, orchild fails to file a timely complaint seek-ing nondischargeability.147 The nonfilingspouse must file an adversary proceed-ing by the bar date or lose the benefit ofthose provisions of the divorce or sepa-ration. The parties should consider thesedifferences when negotiating a settlementif either is likely to file for bankruptcyafter the divorce. However, a state court’sdesignation of a debt is not binding onthe bankruptcy court, which will consid-er on its own whether the obligation isfor alimony, support, or a property set-tlement.148

Employer. Wages, salaries, or com-missions, including severance, vacation,and sick leave pay, in amounts up to$4,300 that the employee earns withinninety days before the employer files forbankruptcy or ceases business, are a pri-ority claim.149 An employee to whom theemployer owes wages should file a proofof claim and allege priority status.

Former Employer. If the worker hasa claim against the former employer that

could include reinstatement, and theemployer is continuing to operate thebusiness, the worker should claim “frontpay” as well as back pay. The worker mayalso need relief from the automatic stay toproceed with the employment claimbefore the court allows the claim to bepaid through the bankruptcy.

Lender or Merchant. If the customeris one of many creditors, a class claim maybe appropriate.150 A customer with a rightto set off amounts that the customer owesthe debtor is a secured creditor. Thedebtor may not initially acknowledge thissecured status, so the customer may haveto object to the plan in order to be treat-ed as a secured creditor.

Landlord. The landlord must con-tinue to comply with state or local laws,such as building codes and landlord-ten-ant statutes.151 The landlord may try toevict the tenant by suing in bankruptcycourt for turnover of the property (therental unit is considered the debtor’s prop-erty). The tenant has the right to a jurytrial, although the summons is unlikely toinclude notice of this right.152 To preservethe right, the tenant should file a jurydemand no later than the date the tenantanswers or appears in court. If the tenantraises defenses, some bankruptcy courtsmay abstain to allow the state courts toapply their expertise.

In some jurisdictions landlords maynot commingle tenants’ security depositswith their general funds. If this is the case,the tenant should ensure that other cred-itors do not take the security deposit andthe landlord does not use it for operating

Bankruptcy


146Not including arrears assigned to another entity, such as the state child support collec-tion agency.

14711 U.S.C. § 523(a)(15), (c)(1).148 Id. § 523(a)(5)(B); Shaver v. Shaver, 736 F.2d 1314, 1316 (9th Cir. 1984).149 Id. § 507(a)(3).150Reid v. White Motor Corp., 886 F.2d 1462 (6th Cir. 1989), cert. denied, 494 U.S. 1080

(1990); In re Charter Co., 876 F.2d 866 (11th Cir. 1989), cert. dismissed, 496 U.S. 944(1990); In re American Reserve Corp., 840 F.2d 487 (7th Cir. 1988).

15128 U.S.C. § 959(b).152U.S. CONST. amend. VII; Pernell v. Southall Realty, 416 U.S. 363 (1974) (Clearinghouse

No. 8,963).

expenses. If the tenant has moved outand the landlord has failed to return thedeposit because the landlord did not keepit in a separate account as required bystate law, the debt may be nondischarge-able.153 The landlord’s violation of a land-lord-tenant statute may also be fraud andthus nondischargeable.154

Debtor as Plaintiff. If the debtor ortrustee files an adversary proceedingagainst a party for money or other legalrelief, that party has the right to a jury

trial as long the party has not filed a proofof claim or otherwise waived this right.155

Bankruptcy is a powerful tool. It is also acomplex process that can involve manytwists and turns and bring unanticipatedconsequences. Debtors should take ad-vantage of the process only after thor-oughly considering all its ramifications.Those who become entangled in some-one else’s bankruptcy may have remediesbut should proceed cautiously to avoidviolating the bankruptcy laws.

Bankruptcy


153 In re Christian, 172 B.R. 490 (Bankr. D. Mass. 1994) (nondischargeable); however, if thelaw allows the landlord to commingle the security deposit with the landlord’s ownfunds, the failure to return it would not render a debt nondischargeable. In re Paeplow,217 B.R. 705 (Bankr. D.Vt. 1998) (since Vermont law did not require that securitydeposit be kept in a separate account, no fiduciary relationship was created and debtwas dischargeable).

154Cohen v. De la Cruz, 523 U.S. 213 (1998) (landlord who had defrauded tenants wasassessed treble damages; court held that punitive damages as well as actual damageswere nondischargeable).

155U.S. CONST. amend VII; Granfinancieria, S.A. v. Nordberg, 492 U.S. 33 (1989).

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