When is Bankruptcy Right for Your Individual Client? - ABA YLD 101 Practice Series

By Nathan A. Carney

Bankruptcy can be a useful tool for an individual to maintain stability in the wake unexpected events. Depending on the facts surrounding your individual client's situation, filing a petition for relief under Chapter 7, 11, or 13 of the United States Bankruptcy Code may be a viable option. Understanding what your client wants to accomplish, coupled with the statutory requirements of the different chapters of the Bankruptcy Code, begins your determination of whether your client should file bankruptcy. This article provides the basic framework for evaluating whether your client should consider filing bankruptcy and, if so, under what chapter of the Bankruptcy Code.

  • The first step is to determine why your client wants to file for bankruptcy relief. The client should be aware that certain debts are not dischargeable under the Bankruptcy Code including certain domestic support obligations, taxes, student loans, and debts involving fraud. See generally, 11 U.S.C. § 523.
  • Once you know why your client wants to file for bankruptcy relief, a pre-filing questionnaire should be filled out by the client. In this questionnaire, the client should provide you with a detailed list of all assets, liabilities, any litigation the client is involved with, potential causes of action the client possesses, a copy of their most recent tax return, and other information that will give you a complete picture of your client's financial situation. Upon agreeing to represent the client, a Legal Services Agreement (LSA) with the language of 11 U.S.C. §§ 527 and 528 must be entered into. This LSA should delineate the scope of representation, which must be articulated in Form 2016(b) of your client's voluntary petition.
    • Through the questionnaire, you should also be able to determine whether your client is eligible for a discharge in bankruptcy, contingent on whether the client has previously filed for bankruptcy relief. See 11 U.S.C. §§ 727(a)(8), (9); 11 U.S.C. § 1328(f).
  • Examine your alternatives to filing for bankruptcy.
    • Negotiation with creditors, either by reducing the debt or working out a payment plan, can save your client money in avoiding filing fees, further attorney's fees, and lost time.
    • Counseling the client to seek financial education offered by various credit counseling agencies and community colleges. When the household finances are in shambles, the hole the client may have dug for herself is likely to persist post-filing.
  • Timing Considerations should be examined:
    • Recognition of the salient preference period for transfers, and whether any transfers would be deemed fraudulent pursuant to the Bankruptcy Code or under state law, must be considered. See 11 U.S.C. §§ 547(b)(4) and 101(31) (90 days before the date of filing for non-insiders; 1 year before the date of filing for insiders); see also, 11 U.S.C. §§ 548(a)(1) and (2) (two year look back period from the date of filing of the petition for relief).
  • If bankruptcy becomes the chosen route, your client must then decide under what chapter of the Bankruptcy Code to file, given your client's current situation and what the client hopes to accomplish in filing for bankruptcy.
    • The primary options your client has to choose from include filing: a Chapter 7, liquidating bankruptcy; a Chapter 11, reorganization; or a Chapter 13, an adjustment of debts of debtors with a regular income. Chapter 11 will not be addressed in this article. Individuals whom may benefit from such a filing include professionals ( e.g. doctors) and individuals conducting businesses as a d/b/a.
  • The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was drafted with the idea that those debtors who have the ability to repay their creditors should do so. See 151 Cong. Rec. 2459 at 2469-70 (March 10, 2005).
    • The standard for dismissal of a Chapter 7 case became more stringent under BAPCPA; a case will now to be dismissed for "abuse,"; as opposed to the former standard of "substantial abuse."; See 11 U.S.C. § 707(b)(1). It should be noted that dismissal may also occur under the auspice of 11 U.S.C. § 707(b)(3), either for bad faith or totality of the circumstances. An examination of your Circuit's case law will shape the definition of those respective phrases.
    • The BAPCPA formulaic determination of abuse is articulated in 11 U.S.C. § 707(b)(2)(A)(i)- from which springs Official Form B22A, Statement of Current Monthly Income and Means Test Calculation (Form B22A), the roadmap of the means test.
  • The "means test"; is the basis for determining whether a presumption of abuse arises in a case where the debtor's current monthly income exceeds a state's median income for a household of the same size as that of the debtor. Should a debtor's current monthly income exceed the debtor's state medium income, an examination of the debtor's allowed deductions and expenses, pursuant to IRS standards, is conducted.
    • If after filling out Form B22A, the debtor's disposable current monthly income is in excess of $167.67, the debtor's case is presumptively abusive, and but for special circumstances, is properly filed under Chapter 13. See generally, 11 U.S.C. §§ 707(b)(2)(A) and (B).
  • Client information an attorney should possess, as it relates to Form B22A, includes the following:
    • CURRENT MONTHLY INCOME- With certain exceptions, current monthly income is the average monthly income that the debtor receives from all sources, and includes any amount paid by any entity other than the debtor...on a regular basis for the household expenses of the debtor or the debtor's dependents. See HR Rep. No 31, 109th Cong., 1st Sess 102 (2005). So the attorney should obtain the following from the client:
      • Tax returns, both for the current year and the last year in which income taxes were prepared, for all regular contributors to debtor's income (this includes dependents). Furthermore, tax returns must be submitted to the chapter 7 or 13 trustee at least 7 days prior to the First Meeting of Creditors. See 11 U.S.C. § 521(e)(2)(A).
      • Six months of pay advices are needed to determine monthly wages to compute the Current Monthly Income for the Means Test. Additionally, a copy of all payment advises received by the debtor within 60 days before the date of filing a petition for relief are to be filed with the court. See 11 U.S.C. § 521(a)(1)(B)(iv). For greater accuracy, if debtor's pay advises do not have a year to date (YTD) figure, you should counsel the debtor to speak with her employment's payroll department to see if such a YTD figure can be generated.
    • HOUSEHOLD SIZE- Whatever number you list, have documentation from the debtor explaining how this number was determined. To determine dependents, reference IRS Publication 501 (2005).
    • DEDUCTIONS PURSUANT TO IRS STANDARDS- The IRS provides the mandatory allowances. See http://www.usdoj.gov/ust/eo/bapcpa/20061001/meanstesting.htm.
      • The debtor should provide you with their house note and evidence of the previous month's mortgage payments.
      • You should obtain a copy of the note and evidence of the previous months lease payments for any automobiles the debtor will claim ownership expenses on. If the debtor is claiming additional operating expenses for older/high mileage cars, you must have documentation to this effect.
    • ADDITIONAL EXPENSE DEDUCTIONS- Any continued charitable giving should be predicated on previous years' activities and income tax returns should reflect the giving. You should be aware of previous year's amounts and such amounts should reconcile with the amount provided on the Means Test.
    • CREDIT COUNSELING- Debtor, in the 180 day period preceding the filing of the petition for relief, must have received credit counseling, and a credit counseling certificate, from an approved credit counseling agency. See 11 U.S.C. § 109(h)(1). This Credit Counseling Certificate is to be filed along with the petition. To find an approved Credit Counseling Agency, look to: http://www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm.
  • Occasionally, a client may be best served by filing under Chapter 13, even in an instance where the client's voluntary petition would not be presumptively abusive under the Means Test. A Chapter 13 filing may be proper for your client because a Chapter 13 filing can provide: (1) an ability to cure arrearages on a foreclosed upon residence; and (2) an opportunity to pay non-priority tax obligations through a plan. Open dialogue with specific creditors is the most efficient way to move towards plan confirmation. A Chapter 13 plan may either be filed with the petition or within 15 days thereafter. See Fed. R. Bankr. Pro 3015(b). Check with the local rules of your court for further guidance.

In summary, there are many things to consider when trying to decide whether or not to file bankruptcy for your client. Of great importance is that the client is forthcoming in their statements on their schedules and that they provide any requested information expeditiously. Always check with your local bankruptcy court's Clerk of Court's office and web page for local rules and updates as to procedures and forms.

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About the Author

Nathan A. Carney is an attorney with Trenam Kemker in Tampa, Florida. He practices in the areas of commercial litigation and business reorganization and bankruptcy.

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