How chapter 13 works
A chapter 13 case begins by filing a petition with the bankruptcy court serving the area where the debtor has a permanent residence. A corporation is domiciled in any state in which it is incorporated and in any state it has its principal place of business. An individual’s citizenship is that of physical residence, combined with intent to make the state or county a permanent home. For most people, deciding where to file a case is simple because they only have one home, but some people live in more than one place, like having a family home in Contra Costa County and a work home in Sacramento County when there is a long commute to work.
The attorneys at Rinne Legal, with offices in Walnut Creek, are members of the Eastern and Northern Districts of California. Sometimes when a debtor is represented by an attorney with an office far away from the courthouse, the debtor may be questioned why s/he engages an attorney so far away. A nonlocal attorney who advertises on tv or at seminars unlikely may not provide the same customer services as a local attorney. Some far away attorneys forward calls to voicemails, or push debtors off to law clerks or secretaries, with the debtor not getting to speak with an attorney for the most part of the case.
A debtor who engages an attorney in California to assist in filing court documents must make sure that the lawyer is licensed in the state and a member of the court. Just because an attorney is licensed in California does not mean that the lawyer is a member able to appear at a court. For example, an attorney who wants to represent a debtor in the US Bankruptcy Court, Eastern District of California, which covers Sacramento, Fresno, Tahoe, Yosemite, Redding, Bakersfield areas, must be licensed to practice law in California and a member of the Eastern District.
An attorney becomes a member of a court if the attorney applied for membership when the attorney was sworn in after passing the bar exam, or if another lawyer who is a member of the court vouches for the attorney in an application. An attorney who is not a member of a court may not file any petitions or documents on behalf of a debtor or appear at hearings or ask another attorney who is a member to make a special appearance to appear in the lawyer’s place when s/he cannot make it to a hearing.
The lawyer for the debtor discloses his/her compensation when filing the petition, and must inform the debtor if the attorney will be splitting fees with another attorney or if there will be another attorney contributing to the representation. The attorney’s compensation is a part of the court filings, and becomes public.
When filing bankruptcy, a debtor in Sacramento, Walnut Creek, Fairfield, San Francisco must use the official court forms. For instance, a person living in Sacramento County would file a petition that states “United States Bankruptcy Court, Eastern District of California” at the top. On the first page of the petition, a debtor completes name, address, social security number. If the person’s spouse files also, the spouse needs to provide name, address, social security number. Each debtor signs the petition. There are official bankruptcy forms downloadable at www.uscourts.gov/bkforms/index.html.
Unless the Northern or Eastern District court orders otherwise, the Sacramento, Walnut Creek, Fairfield, San Francisco debtor files with the court:
- schedules of assets and liabilities;
- schedule of current income and expenditures;
- schedule of executory contracts and unexpired leases; and
- statement of financial affairs.
The schedule on current income and expenditures of debtor requires the Sacramento, Walnut Creek, Fairfield, San Francisco debtor to disclose monthly income (from wages, independent contractor income, IRA account, real property rent), tax deductions, child support or alimony; and monthly expenses (such as car maintenance, income taxes, food, shoes, doctor, movie).
In the schedules of assets and liabilities, the debtor gives the address location of property s/he owns, amount of secured claim, and the current market value which may be estimated from the sales price of other homes in the area. The debtor lists everything that is not real estate like cash, checking accounts, furniture, shoes, pearls, guns, insurance, annuities. The debtor lists the creditor names, account numbers, addresses, debt amounts, collateral securing the debts. For unsecured priority claims, the debtor lists the creditor names, account numbers, addresses, debt amounts. On creditors holding unsecured nonpriority claims, the debtor lists the creditor names, account numbers, addresses, debt amounts. The bankruptcy estate pays nonpriority claims get paid last.
To complete the official forms that make up the petition, statement of financial affairs, and schedules, the Sacramento, Walnut Creek, Fairfield, San Francisco debtor compiles:
- list of all creditors, the amounts, and explanations for payments on claims;
- source, amount, and frequency of the debtor's income;
- list of all of the debtor's real and personal property; and
- list of the debtor's monthly living expenses (i.e. meals, shoes, rent, electricity, taxes, travel, pharmacy).
Rinne Legal, with staff able to translate in Russian, Korean, and Spanish, assists San Francisco Bay Area and Sacramento region debtors to complete official bankruptcy forms by having potential clients complete an intake form that involves organizing the above information prior to a free consultation that evaluates whether bankruptcy is the option for taking care of debts.
A husband and wife may file a joint petition or individual petitions. Married individuals gather the information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse files. When one spouse files, the income and expenses of the non-filing spouse is required for the court, trustee and creditors to evaluate the household's financial health.
Executory contracts are unexpired contracts where both parties have performance obligations. If a party stops performing, the non-performance would be a breach. In bankruptcy, a debtor can reject, continue with, or assign executory contracts. A non-debtor party continues to perform post-petition contractual obligations, and is not able to end the agreement because of bankruptcy. For example, a vendor who provides software services to a debtor cannot stop providing services because the debtor files bankruptcy. When there are payment difficulties by a debtor, the non-debtor party may request adequate assurance of due performance. If the other side is unable to provide adequate assurance, it is anticipatory repudiation, allowing the non-breaching party several options:
- walk away from the contract;
- wait for the debtor to perform;
- suspend its own performance.
When a debtor agrees to carry out an executory contract, the debtor has to fix any material breaches like non-payments, and show it can perform in the future. The court approves the assumption by the debtor. If a debtor assumes and assigns the executory contract to someone else like a buyer of its assets or an outsource provider, at a minimum the debtor has to fix any defaults and the buyer or outsource provider has to show that it can carry out under the contract in the future.
An executory agreement may be assigned even when it has an anti-assignment provision in the contract. A debtor may assign its agreement to a third party like a family member or a subsidiary to take over performance even when the non-debtor party negotiates a requirement that its consent must be obtained prior to assignment. Usually a party negotiates an anti-assignment clause because it thinks the services are unique and does not want the quality to deteriorate when the services are delegated to another to provide without consent. A party that thinks another party will likely file bankruptcy, and does not want to continue a contract when bankruptcy arises, may bargain for a contract to be a personal service agreement. Personal service agreements are easier to end because they are less assignable. A party can make agreements more personal by naming staff not a business entity to do work.
Refusing to carry out a contract is automatic if the agreement is not assumed within a certain time. Rejection of an executory agreement means a pre-petition breach of the agreement, with damages treated as an unsecured claim. The non-party becomes a creditor in the bankruptcy and needs to file a claim to get the bankruptcy estate to pay the damages.
The individual debtor in Sacramento, Walnut Creek, Fairfield, San Francisco files a certificate of credit counseling and a copy of any debt repayment plan developed during credit counseling with the court. In the bankruptcy petition, the individual debtor signs asserting s/he met the credit counseling requirement. The counseling provider must be approved by the United States trustee.
Most people enjoy learning to swim when they are little kids. It is tough at first with all the possible drowning, but once someone gets the swimming mojo, swimming in a California ocean brings new scenery and adrenalin. Much of reaching financial security is like getting the swimming mojo back. Like swimming, where safety requires understanding weather conditions, putting on the right gear, and maintaining a fit body, credit counseling before bankruptcy teaches debt repayment plans, bankruptcy laws, and calculating income status.
As to gear in swimming, California swimmers wear goggles. In credit counseling, the gear a debtor gets are the negotiations skills to work out debt settlements with creditors. According to Nolo Press in “The New Bankruptcy, Will it Work For You?”, if a credit counselor proposes a settlement that repays about 60% of a debtor’s debts, and the creditor does not accept the proposal, the creditor may be penalized by collecting only up to 80% of the claim, when a debtor’s property gets distributed in bankruptcy. Bankruptcy forgives.
Aside from goggles in California swimming, swimmers buy swimsuits that help them swim fast. With credit counseling, the second skill a debtor develops from financial training is how to calculate income. In 2005, bankruptcy laws changed to make higher income individuals with mostly consumer debts file chapter 13. High income persons who have regular income are not able to file chapter 7 to discharge debts because they are capable of paying some of them. The debtor uses the average gross income received during the 6 months prior to the month a debtor files bankruptcy to find out the current monthly income.
Current monthly income includes regular contributions to household expenses from nondebtors like working adult children who live at a parent’s home, and income from the debtor's spouse if the petition is a joint petition, but not social security income or restitution made because the debtor is the victim of certain crimes.
Other Filing Requirements
In Sacramento, Contra Costa, San Francisco counties, the debtor files evidence of payment from employers received 60 days before filing bankruptcy (e.g. paystubs); a statement of monthly net income and any anticipated increase in income or expenses after filing; a record of any interest the debtor has in federal or state educational loans; and provides the chapter 13 trustee a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began).
A California Northern or Eastern District court may dismiss a case if the debtor does not file a tax return. An attorney who takes on a case where a debtor is not able to file a tax return because of the inability to find or pay for a tax preparer will need to return any fees taken from the debtor when a court dismisses the case.
The California Northern or Eastern District courts charge a $235 case filing fee and a $39 miscellaneous administrative fee. The debtor pays the fees to the court clerk upon filing, unless the court permits installments. The maximum installments are four, and the debtor must make the final installment no later than 120 days after filing the petition. The court may extend the time of any installment, as long as the last installment is paid no later than 180 days after filing bankruptcy. The Sacramento, Walnut Creek, Fairfield, San Francisco debtor may pay the $39 administrative fee in installments. If debtors file a joint petition, court charges one filing fee and one administrative fee. Failure to pay the fees may result in case dismissal.
If a chapter 13 converts to a chapter 7, a fee of $25 is charged.
When an individual files a chapter 13 petition in California, a trustee is appointed to administer the bankruptcy case. The trustee may be a government employee, part of the US Department of Justice, or a private self employed individual who provides trustee duties as a small business. To become a trustee, qualified applicants usually send a resume to a senior level trustee. The applicants generally have to go through an interview and get fingerprinted. Most qualified applicants have a college degree and at least 5 years of experience in law, tax, accounting, or credit counseling. The trustee does not need to be a California licensed lawyer, and may engage attorneys, accountants, and other professionals if s/he needs legal or other professional advice.
The trustee undergoes a criminal background check so to prepare for a future career as a trustee, a person should not engage in any criminal acts like shoplifting. The court wants to ensure the trustee does not steal from the bankruptcy estate when managing the bankruptcy estate. The trustee needs to have a clean credit record and not filed bankruptcy in the past 7 years. The trustee is bonded. This means the trustee puts up a certain amount of money, and if there is some violation of the trustee duties, such as a breach of the duty of care or duty of loyalty, the trustee forfeits the bond. Usually during the first year as trustee, the person pays for the bond, but after the first year, the bond payments may come from the bankruptcy estates the trustee works on.
In a duty of care, the trustee must comply with the prudent investor rule to exercise the degree of care, skill and prudence that would be exercised by a reasonably prudent person in managing property or a business. The duty of loyalty requires the trustee to avoid conflicts and self dealings, and treat creditors impartially.
The trustee reviews cases for abuse, fraud, or discharge denial. The court listens to the recommendations of the trustee, and during confirmation hearings and status conferences, the trustee may be more in charge of proceedings and the debtor’s financial future than the judge.
The trustee leads 341 Hearings, the creditors’ meeting, and considers whether there are preferences or fraudulent transfers that can be recovered from the debtor to payoff creditors. In a chapter 13 bankruptcy, the trustee goes over the debtor's repayment plan, and distributes payments made by the debtor to creditors on a monthly basis. Trustees get paid depending on the debtor assets liquidated. The trustee may have a team of professionals, such as accountants, sitting with him/her during court hearings and creditors’ meetings. The team gets paid from the bankruptcy estate, but all work for the creditors.
The US Bankruptcy Court has several California locations: Sacramento, San Francisco, San Jose, Oakland, Santa Rosa, Bakersfield. The US Bankruptcy Court in Sacramento, CA is located at 501 I St # 3200, Sacramento, CA 95814-7303, accessible by public transportation, in the downtown district, close to other federal buildings like the public defender’s office, and ample shopping and tourism like Old Town. The San Francisco location is at 235 Pine Street, 19th Floor, San Francisco, CA 94104-2791, away from other courthouses, close to big name banks like Chase, Wells Fargo, Bank of America. After a debtor files a chapter 13 bankruptcy petition, the court notifies the debtor of a meeting of creditors between 20 and 50 days after the debtor files bankruptcy. Known as the 341 Hearing, the meeting gives an opportunity for the trustee to evaluate the bankruptcy petition to question the debtor on the truthfulness of court filings.
The trustee reads every part of the petition and schedules ahead of the meeting. During the meeting, the trustee may be seen with a red pen marking and circling certain points in the petition to question. Before the meeting, trustee may let the debtor know of missing information the debtor needs to bring to the meeting to make the filing complete. The missing information may include tax returns, profit and loss statements, paystubs. Creditors may appear at the meeting to ask the debtor about debts for discharge. The creditors may attend in person or by telephone. The trustee usually asks during the meeting if there are any creditors present. In most 341 Hearings, few creditors appear. If a business files bankruptcy, a representative of the business such as the chief financial officer, attends the 341 Hearing.
If a husband and wife file a joint petition, they both must go to the creditors' meeting. They will be asked the same questions by the trustee and creditors, and must answer separately, not taking the answer by one spouse as the same answer for both parties.
To keep independent judgment, bankruptcy judges are not allowed to go to a creditors' meeting.
Bankruptcy courts are usually located at federal buildings, with offices for other federal matters like taxes or social security, besides bankruptcy. Security guards check identification and bags at the entrance. It is almost like going to the airport, with people taking off shoes and belts. Everyone must tell the guards where they are going and show identification like a driver’s license or California ID card. Even if a person visits the bankruptcy court before, s/he cannot expect the security to remember his/her name. For example, a person who goes to court in the morning for a hearing, and then again later in the afternoon, after a lunch break, must pass through security another time. Any arguing with security will only create delay so it is best to do as told unless there is a severe invasion of privacy. A debtor scheduled for a 341 Hearing should arrive half an hour early to allow time for security screening. The trustee may dismiss a case if the person is late to a hearing.
Once inside the trustee’s office, the 341 Hearing is open to the public. This means anyone can go to the hearing, even a nosy next door neighbor. Even though bankruptcy involves someone’s financial affairs, all the information related to a bankruptcy case is not confidential. Before entering the trustee’s office, the debtor may discuss the 341 Hearing process with an attorney and fill out any trustee questionnaires, but should be careful not to speak too loudly because if something is overheard by someone close by, the discussion may lose confidentiality. Discussions between an attorney and a client are protected by the attorney-client privilege from disclosure during litigation discovery.
Outside the trustee’s office, a calendar lists each case by line number. The same calendar may be found on the court Internet website. There may be 10 cases on the list. A debtor must be ready when called, but a trustee may pass to another case to give someone additional time to prepare like if the person’s attorney is running late because of a case in another room. The trustee generally goes through all of the cases on the calendar in 30 minutes, and has other lists of cases waiting in subsequent calendars for the day.
When the trustee calls the line number, the debtor goes to the front of the room. The trustee swears in the individual, and turns on a recording. All bankruptcy proceedings are recorded so that if a person contradicts him/herself later, there is a tape of what is said. If the debtor is dishonest or omits information, it is perjury, subject to civil penalties and criminal charges.
If the debtor prefers a foreign language, like Spanish, Korean, German, Russian, s/he may request a translator. The debtor may not bring a translator to the hearing. The trustee does not want misinterpretations. Sometimes people accuse a translator for making them misstate an answer. The trustee dials into a telephone court translation service to get a translator that gives an oath that s/he will provide proper translations.
The debtor brings identification such as a driver’s license, California ID, or passport, and a social security card. If the debtor does not bring this information, the hearing may not take place and may be rescheduled for as long as a month. If the debtor does not want to reschedule to another date since s/he perhaps took a day off work to attend the meeting, the debtor can ask the trustee for excuse to go home to get the information if s/he lives nearby, and then come back the same day at another time during the trustee’s other calendars. The trustee uses the information to verify the social security number and identification of the person on the bankruptcy petition.
The trustee interviews each debtor questions on the completeness of the petition, whether any events changed since filing, such as unemployment, death, and lawsuits. Example questions:
- Marital status (e.g. single, married, divorce)
- Current address where the debtor lives
- Filing status on tax returns (e.g. single)
- Whether personally read and signed the bankruptcy petition and schedules
- If information in bankruptcy filings are true, correct, accurate
- If listed all real and personal property in schedules
- If listed all creditors and debt amounts
- Any ownership interest like a joint tenancy in life insurance
- Whether filed bankruptcy previously
- Whether transferred or sold assets to anyone like a family member in last year
- If someone owes the debtor cash
- Recent family inheritance
- Home value and titling
- Lawsuits against anyone
- Employment changes since filing bankruptcy
If there are no creditors in the room, and the debtor answers the trustee questions completely, the communications with the trustee are complete. The debtor’s communications going forward on the bankruptcy case will be with the court. If the trustee asks for information, such as financial statements, and the debtor does not bring the missing information, the trustee schedules the debtor to return at a future meeting. This is what is meant when the trustee says it will continue the hearing. The trustee usually allows one or two continuances to give someone due process. The debtor may not need to show up at the future meeting if the debtor provides the trustee with the information by mail, email, or other means before the meeting date. Whenever the 341 Hearing continues, the confirmation hearing for the repayment plan gets delayed.
The parties typically resolve problems with the repayment plan either during or after the creditors' meeting. The debtor can avoid problems by making sure the petition and bankruptcy repayment plan are complete and accurate, and by consulting with the trustee prior to the creditors’ meeting to make sure the trustee is okay with everything.
The trustee liquidates nonexempt property and distributes it according to the priorities in the Bankruptcy Code. The Bankruptcy Code gives an order on which creditors get paid first. The debtor does not lose everything when s/he files bankruptcy. The debtor keeps exempt property. In the bankruptcy petition, the debtor lists everything in the schedules that s/he owns, but there is a schedule for the debtor to list exempt property. For example, retirement accounts, like 401(k) plan, are considered exempt property in California.
The bankruptcy process determines what assets to sell and how to value them. Bankrupt debtors surrender current assets that are above an exemption level set by the state in which they live. Examples of current assets are receivables of a small business or any other property with potential resale value (i.e. customer lists, pending contracts). States with higher bankruptcy exemptions are more attractive to debtors. Debtors with a headquarters in one state, and incorporation in another state, or residences in two different states, may choose the state that has the higher exemption in deciding where to file bankruptcy.
When a trustee no longer cares for certain property in a bankruptcy estate, the trustee may request the court to dismiss a case, and abandon the property. Abandoned property goes back to the debtor.
The trustee may let the debtor keep non-exempt property if the trustee is not able to sell the property to get funds to pay off creditors. For example, a trustee may not want an apartment in the San Francisco Bay Area that is heavily encumbered because the trustee does not want management responsibilities. In managing property in San Francisco, the trustee may incur liability that s/he does not want to deal with. For instance, with a house in San Francisco, management may require fixing sidewalk cracks to prevent personal injury.
The debtor may require an experienced Rinne Legal bankruptcy attorney, with offices in Walnut Creek to represent him/her in an abandonment of bankruptcy estate property, to avoid liens on property that impair exemptions. If a trustee abandons real property, the creditor can go after the debtor again to foreclose on the property to pay off the debt by filing a notice of default.