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Bankruptcy Basics: THE NEED

The need for quality legal representation for low-income consumer debtors continues to far outstrip the availability of such representation. One goal of this guide is to encourage attorneys who may not be consumer bankruptcy specialists to handle pro bono cases. This Chapter describes reasons why attorneys should feel comfortable volunteering their services in bankruptcy cases and provides information about pro bono resources.

Bankruptcy Basics: In General

Several statutory provisions of the Bankruptcy Code and Rules of Practice and Procedure in Bankruptcy govern attorney conduct in bankruptcy matters. Local rules of court may contain additional requirements. Bankruptcy Rule 9011 sets forth the requirements for signing papers and making representations to the bankruptcy court. Like its counterpart, Rule 11 of the Federal Rules of Civil Procedure, this rule permits courts to sanction attorneys who file unwarranted or frivolous pleadings, or who file pleadings for an improper purpose.

Bankruptcy Basics: Attorney Fees

Attorney compensation in bankruptcy proceedings is generally subject to more rigorous court supervision than in many other areas of legal practice. The debtor’s attorney must file in every case a disclosure of fees paid or agreed to be paid. 11 U.S.C. § 329; Bankruptcy Rule 2016(b).

Bankruptcy Basics: Credit Counseling

Bankruptcy law requires that, before filing bankruptcy, a consumer must first meet with an approved credit counseling agency. This requirement is discussed in Chapter 5, infra. Because most consumers who are considering bankruptcy are already too deep in financial trouble, the approved bankruptcy counselors are often unable to recommend any viable options in credit counseling.

Bankruptcy Basics: Consolidation Loans and Reverse Mortgages

It is usually not a good idea for a debtor to mortgage a home to pay off credit card and other unsecured debt. By trading in credit card debt for a mortgage loan, the debtor risks the loss of the home if financial problems persist. Refinancing an existing mortgage may make sense, but usually only if the debtor is having difficulty paying the current mortgage payment and the new mortgage will provide a lower payment and better terms.

Consumer Bankruptcy Law and Practice: 11.1 Introduction

One of the greatest advances for consumers under the Bankruptcy Code came in the powers they were given with respect to secured debts. Under the prior Bankruptcy Act, relatively little could be done to protect consumer debtors from the holders of secured claims. A straight bankruptcy generally did not affect the status of otherwise valid liens or security interests and, as a practical matter, few Chapter XIII plans could get very far with respect to secured claims unless the holders of those claims agreed to the plan or were not affected by it.

Bankruptcy Basics: Overview

Preparing and filing the required documents completes the first phase of debtor representation in a consumer bankruptcy case. The remaining steps help the debtor achieve the ultimate goal in most bankruptcy cases, the granting of a discharge. These steps include representation of the debtor at the meeting of creditors, satisfying the document production requirements, dealing with secured debt, and completing the financial education course.

Bankruptcy Basics: Providing Tax Returns to the Trustee.

At least seven days before the first date set for the meeting of creditors, the debtor must provide to the trustee a copy of the federal income tax return (or tax transcript) for the most recent tax year ending before the commencement of the case and for which a federal income tax return was filed. 11 U.S.C. § 521(e)(2)(A). Although the statutory language is somewhat unclear, the better view is that the section requires the debtor to provide a tax return or transcript only for the most recent year.

Bankruptcy Basics: Review and Object to Improper or Invalid Claims

Creditors generally must file a proof of claim in the debtor’s bankruptcy case in order to receive payment from the bankruptcy estate. Bankruptcy Rule 3002(c) provides that a creditor must file a proof of claim within ninety days after the first date set for the meeting of creditors (180 days for governmental entities). After this “bar date” has passed, the attorney should review the claims that have been filed to ensure that they are valid, not overstated, and comply with the requirements set out in Bankruptcy Rule 3001.

Bankruptcy Basics: Evaluating Dischargeability of Debtor’s Student Loans

Section 523(a)(8) provides that student loans can only be discharged if the debtor’s payment of the debt “will impose an undue hardship on the debtor and the debtor’s dependents.” Many bankruptcy courts have adopted a three-prong test for determining undue hardship, based on the decision in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). The Brunner test requires the debtor to show that:

Consumer Bankruptcy Law and Practice: Introductory Materials

Guide to Judiciary Policy

Vol. 4: Court and Case Management

Ch. 8: Bankruptcy Case Policies

§ 810 Overview

§ 815 Applicability

§ 820 Chapter 7 Fee Waiver Procedures

§ 820.10 Filing Fee Waiver Application and Initiation of the Chapter 7 Case

§ 820.20 Judicial Determination of Filing Fee Waiver Applications

§ 820.30 Developments in the Case

§ 820.40 Waiver of Additional Individual Debtor Fees

§ 830 Guidance for Protection of Tax Information

Bankruptcy Basics: Finding an Approved Course

The debtor must take an education course that has been approved by the United States Trustee Program for the jurisdiction where the debtor is filing the case (debtors located in North Carolina or Alabama must use counseling agencies approved by the local bankruptcy administrator). Course requirements are set out in 28 C.F.R.

Bankruptcy Basics: Revocation of Discharge

Although rarely exercised, the Code permits an interested party to seek revocation of the debtor’s discharge, generally if it can be shown that the debtor obtained the discharge by fraud and that fraud was not known to the requesting party until after the discharge was granted. See 11 U.S.C.

Student Loan Law: 11.1 Overview

The Higher Education Act (HEA) includes a number of statutory discharges available to borrowers who work in particular professions. This chapter focuses primarily on the largest of such programs—Public Service Loan Forgiveness (PSLF), which fully discharges the eligible remaining loan balances of borrowers who accrue 120 months of qualifying payments while employed in a qualifying public service job.1 This chapter also covers the eligibility criteria, relief available, and application process for the following types of discharge:

Consumer Bankruptcy Law and Practice: 12.3.3 Use of the Good Faith Test Prior to the Enactment of the Section 1325(b) Disposable Income Test

When the Code first went into effect, many courts were dissatisfied that the best interests of creditors test looked only to the debtor’s assets and not to income. Faced with plans proposing little or no payment to unsecured creditors from debtors who clearly had sufficient income to make substantial payments, they devised a wide variety of standards for confirming plans, under the general standard of section 1325(a)(3) that the plan be proposed in good faith.

Consumer Bankruptcy Law and Practice: 12.3.4.1 Generally

Some of the issues that so troubled the courts that interpreted the good faith test under the original 1978 Act were resolved by the 1984 amendments to the Bankruptcy Code. In a new section 1325(b), courts were given express instructions regarding whether and how to take into account the debtor’s income.

Bankruptcy Basics: Plan Confirmation

The court will evaluate the debtor’s plan at a “confirmation hearing.” This generally occurs some time following the meeting of creditors, depending upon local practice. The confirmation hearing must be between twenty and forty-five days after the meeting of creditors. The court will inquire into whether the requirements of chapter 13 have been met and will hear any objections to approval of the plan raised by creditors or the trustee. In many courts there is no formal hearing at the time of confirmation unless there is an objection to the plan.

Bankruptcy Basics: Right to Cure Defaults

One of the most significant advantages of chapter 13 is the right to cure defaults on loans, even when this right does not exist outside of bankruptcy. For claims based on long-term loans that the debtor may not be able to pay within the three to five years of a chapter 13 plan, such as a home mortgage, section 1322(b)(5) permits the debtor to cure a default on such loans within a reasonable time by making payments on the arrears and the ongoing postpetition payments during the course of the plan. Section 1322(b)(3) can also be used to cure defaults on short-term loans.

Consumer Bankruptcy Law and Practice: 11.6.1 Modification of Secured Creditors’ Rights in Claims Not Secured Only by Real Estate That Is the Debtor’s Principal Residence

11.6.1.1 Generally

Perhaps the greatest powers to affect the rights of secured creditors are found in the provisions of chapter 13. Bankruptcy Code section 1322 provides that the debtor’s plan may modify the rights of holders of most secured claims, other than some claims secured only by a security interest in real property that is the debtor’s principal residence. In addition, section 1322(b)(3) and (b)(5) provide that as to any claim, including a claim secured only by the debtor’s principal residence, the plan may provide for the curing of a default over a reasonable period of time.

Bankruptcy Basics: “Hanging Paragraph.”

Another major limitation on claim bifurcation applies to a purchase money security interest for a debt incurred within 910 days preceding the filing of the petition, if the collateral for the debt consists of a motor vehicle that was acquired for the personal use of the debtor.

Bankruptcy Basics: Granting of Discharge

The final step in a successfully completed chapter 13 case is the discharge. As in chapter 7, the debtor must complete an educational course on personal finances before the discharge will be granted. A certification that the debtor has taken the course must be filed before the last chapter 13 payment required under the plan is made. Bankruptcy Rule 1007(c).