Hello again everyone! I’ve been away for the last week and unable to post, but thought I’d return and discuss more about the new bankruptcy reform legislation. In prior posts I discussed debtor education, means testing, changes to rules about discharging debts in both Chapter 7 and Chapter 13 and changes to specific Chapter 13 rules. In this blog, I want to discuss the increased burden the new legislation places upon debtors to produce more documentation and additional burdens placed on debtors’ counsel. I also want to point out that the pending legislation goes into effect on October 17, 2005 and if you are still sitting on the fence you’ve got to get into the game! I’ve already heard stories of lawyers refusing to take any new cases and my firm has had to set deadlines firm-wide for our clients to pay their fees and provide their information in order to insure filing before the new laws take effect. Be sure to call right away if you think bankruptcy could help you.
REQUIRED PRE-FILING DOCUMENTS
Chapter 7:
Tax returns: Debtors can expect to have to produce copies of your last four (4) years’ federal income tax returns along with all attachments and any amendments to the returns. If a debtor has not filed tax returns for some prior years, the law will now force the debtor to file the returns before the 341 meeting! If you are exempt from filing, you will have to provide an Affidavit of Exempt Status.
Some jurisdictions have been requiring debtors to provide proofs of their last year or two tax returns, but none have adopted a four year requirement, so this requirement will create an additional burden on debtors to produce paperwork.
Unfortunately, in my experience, most debtors are not very good record keepers, so while the requirement may seem very trivial, for most debtors, this could be a huge burden. Luckily, an experienced attorney can help debtors obtain copies of these documents without too much trouble.
Proof of Income: The new legislation requires debtors to file, with their petition and schedules, copies of all evidence of income received within 60 days (approximately 2 months) prior to the filing. Obviously this means debtors will have to save up paycheck stubs or any other evidence of money received as income. As I mentioned before, most debtors and most Americans for that matter, probably don’t keep paycheck stubs for the last two months laying around their houses. Once again this new legislation creates this insidious barrier to filing by requiring such information be filed with the bankruptcy clerk’s office. The message is loud and clear: if you’re going to seek bankruptcy protection, you better keep good records!
Moreover, since the means test requires debtor’s counsel to calculate “current monthly income” defined as the debtor’s income from all sources received within the last six (6) months, except for social security or certain victim’s reparation payments received by the debtor, counsel for the debtor will need a copy of all such income! Thus, I will be requiring my clients to bring me proof of their income for the last six (6) months.
Creditor Mail: The new legislation tries to protect creditors from damage claims by shielding their collection activity in the event that the debtor did not properly notify creditors of their bankruptcy case. The new legislation defines proper notice as the address the creditor wishes to receive correspondence as indicated on at least “two communications sent to the debtor” within the last 90 days. If you are a debtor who doesn’t receive any communications anymore, this could be problematic. Notice the law doesn’t require that you’ve received the communication, only that it was “sent” by the creditor. Addresses reported on credit reports may not be the proper address to send notice. Billing addresses would definitely not be the proper addresses. This requirement again illustrates the importance of debtor’s keeping good records.
The good news here is that if we have to “guess” at the address and use one from a credit report or something like that, and we find out it’s incorrect, the “faulty” address can be corrected by providing actual notice to the creditor. The bad news is that the creditor might be given additional time to object to discharge and is not liable for monetary damages caused to the debtor because the creditor didn’t have notice.
Statement of Income: Debtors must now file with the clerk’s office along with the rest of their bankruptcy documents a statement of the monthly net income itemized to show how the income is calculated. This is an additional document to Schedule I that shows the debtor’s income as of the time of filing. The debtor also must file a statement “disclosing any reasonably anticipated increase in income or expenditures over the 12-month period following the date of the filing” of the bankruptcy.
Credit Counseling Certification: Debtors must also file with the clerk’s office along with their other bankruptcy documents a Certificate from an approved credit counseling agency dated within 180 days of filing that certifies the debtor sought and received credit counseling. The U.S. Trustee is still accepting applications from agencies that wish to be “approved” credit counselors, but as of the date of this blog, I have not seen a list of approved counselors yet. Presumably it will be available from your local trustee or bankruptcy clerk’s office once it’s available.
Other Due Diligence Paperwork: Most diligent attorneys are also going to require their clients to provide some documentary evidence as to their assets. My firm has been doing this to some extent already and many jurisdictions have already been requiring debtors to provide certain documents, but for most, this additional requirement could be problematic for debtors. Such documents typically include: recorded deeds, recorded mortgages, copies of vehicle titles or transcripts of titles, copies of divorce decrees and property settlement agreements, and copies of child support orders. As you’ll see below, if your attorney isn’t asking you for these documents, he probably isn’t performing his due diligence and may be subjecting himself to sanctions.
Chapter 13:
In addition to the above documents required in Chapter 7 that will also be required in Chapter 13, most attorneys who are doing their due diligence may also require you to bring in copies of your security agreements and contracts with your secured creditors. An attorney can not possibly give the proper advice about how much money can be saved on secured debt in Chapter 13 until the attorney knows information about these creditors. The most important factor is the date the debtor and the creditor signed the contract. Since most people aren’t going to remember off the top of their heads, the contract is the best evidence to show this.
DOCUMENTS REQUIRED POST-FILING:
In addition to the laundry list above of documents needed to prepare your case prior to filing, the following documents will be required of debtors after their cases are filed.
Tax Returns Due During the Case: The new bankruptcy legislation requires debtors to file any tax returns due after the bankruptcy case is filed.
Annual Financial Statement: On request of any party in interest, debtors in Chapter 13 cases can be required to file annual financial statements. These annual financial statements must identify the source of all income the debtor received in the 12 months after the case was filed, identify the source of the income, disclose all people who along with the Debtor are responsible for supporting dependents and identify the amount of money contributed by the other person toward the debtor’s household. It can be anticipated that some Chapter 13 trustees will try to force the debtor to increase payments if their income and expense situation has changed since the filing.
SANCTIONS AGAINST DEBTORS’ COUNSEL: Another aspect of the new legislation imposes stringent sanctions on debtors’ counsel. Attorneys have long been responsible to perform a “reasonable investigation” into the facts that are being represented in papers signed by the attorney and that such paperwork is “well grounded in fact.” The new legislation inserts this language directly into the bankruptcy code and basically discourages attorneys from aggressively taking positions for their clients. The attorney can be sanctioned, for instance, if the U.S. Trustee successfully attacks the application of the means test used by the bankruptcy lawyer in advising the client about eligibility to file for Chapter 7 relief. Thus, many attorneys are going to require a lot more documentation from their clients to verify what their clients are telling them.
