What happens after I file my bankruptcy?
There is a significant amount of work that goes into preparing a bankruptcy case, whether Chapter 7, 13 or 11. However, once the case is filed, it is not over for the attorney or the debtor. There are somethings that can happen during a bankruptcy case, some normal and expected and some abnormal and unexpected. This blog seeks to answer some of these issues (although even this is not an all-inclusive list). This blog is written from the perspective of a bankruptcy attorney practicing in the Middle District of Florida, Tampa Division. The particular local rules in your area may change some of the analysis, so if you plan to file bankruptcy other than in Tampa (or if you’re reading this blog years from now) please check with a local bankruptcy attorney.
Questions Common to Chapters 7 & 13
341 Meeting – Section 341 of the Bankruptcy Code requires that there be a meeting of creditors, therefore, this meeting is often referred to as the “341 meeting.” The 341 meeting is simply an opportunity for the bankruptcy trustee, and any creditors, to ask the debtor questions under oath. These meetings are typically not confrontational and in most cases are concluded in about 5 – 10 minutes. Our recommendation is to get to the 341 meeting early, to listen to the questions that the trustee is asking other people that are going before you, to get a sense of what the trustee might ask you. Your attorney (if you hired one) will be at the 341 meeting in person or through substitute counsel, and should prepare you for the meeting, and debrief with you after the meeting. Although this is the meeting of creditors, the creditors rarely show or attend these meetings.
Documents needed for 341 – Your attorney should collect all documents necessary for the meeting of creditors when the bankruptcy petition is created. To the extent there are documents missing, these must be provided to your attorney so they can be provided to the bankruptcy trustee at least seven (7) days prior to the 341 meeting of creditors.
Amendments – From time to time, there may be an accidental inaccuracy in your bankruptcy petition; most often an omitted creditor. Bankruptcy petitions can often be amended to include or remove inaccurate information. There may also be strategic reasons to amend a bankruptcy petition once the trustee communicates with you at the 341 meeting of creditors, for example if you are in foreclosure and wanted to keep the house when you filed but changed your mind and want to now surrender your house to the bank.
Two required courses – Most everyone knows that one of the requirements to file a bankruptcy case is to obtain a certificate of completion of a pre-filing credit counseling course. The bankruptcy cannot be filed without this certificate. Most people forget, however, that there is a second course that must be completed prior to discharge, a money management course. Most companies that provide the pre-filing credit counseling course also provide the post-filing money management course. Our suggestion is to the take the second course after the 341 meeting and send the certificate to your attorney to be filed (many course providers will now file that certificate directly with the bankruptcy court).
Review of Claims – After the bankruptcy is filed, creditors will have the opportunity to file claims. In a Chapter 7 case where there is little pay out to the unsecured creditors, the claims are of little importance. For example, if the trustee is going to distribute $3,000 amongst all creditors, what difference does it make if one of your credit cards files a claim for $7,000 or $70,000? Regardless of the claim amount, that creditor is going to share some portion of the $3,000 distribution with all other creditors. My example is extreme to make the point; if a credit card falsely filed a claim ten times what they were owed, that company could be sanctioned by the bankruptcy court; but for the debtor, regardless of the amount of the claim, the creditor is going to receive some pro-rata share of the amount paid by the trustee.
In Chapter 13 cases, review of the claims may be much more significant. Is the claim correctly filed as secured or unsecured (which will affect your bankruptcy plan)? Is the claim amount accurate (like the analysis above)? You want to review claims with your attorney to confirm the impact of the claim on your bankruptcy case.
Conversion – Sometimes, cases are filed as Chapter 7 cases (liquidation) but should be Chapter 13 cases (reorganization) and vice versa. You can typically convert your case at least one time, but more than that and the Judge and Trustee are going to look unfavorably on a motion to convert the case to another chapter.
Dismissal – Sometimes circumstances change, and it is appropriate to dismiss the case entirely. Chapter 13 cases can be dismissed by motion of the debtor and are routinely granted by the Court. Chapter 7 cases can also be dismissed by motion, but the Trustee, United States Trustee, and Judge are much more critical of a Chapter 7 motion to dismiss (because it may take certain assets away from creditors who are awaiting payment). Also note that a bankruptcy cannot be converted from Chapter 7 to Chapter 13 and then automatically be dismissed.
Specific Questions for Chapter 7 Case
Reaffirmation – Every secured debt is really two contracts: (a) the promissory note, and (b) the security instrument (mortgage). When the bankruptcy is filed, the promissory note is discharged, but the security instrument is unaffected. If you want to keep that secured asset, the creditor may require that you reaffirm your obligation to pay the promissory note. This means that if you fall behind again in the future, the promissory note is not discharged so you can be held liable for deficiency, or the forgiveness of debt income. Most people say that they “pulled the house out of the bankruptcy” or “didn’t file on the house.” What they most likely mean is that they reaffirmed the debt – meaning the house was included in the bankruptcy and then the debt was reaffirmed so it was unaffected by the bankruptcy.
Inspection of Assets – The trustee has the right to have an appraiser inspect your assets to determine if the values listed in your schedules are accurate. This does not happen often, and it is your attorney’s job to make sure assets are being valued accurately to avoid these inspections. Even then and although they happen rarely, the most competent and thorough attorneys cannot avoid inspections in every case.
Payment to Trustee – In a chapter 7 case, when the value of the assets exceeds the allowed exemptions, there will be some payment due to the trustee. This is an issue that should be discussed before filing because, while the trustee may allow you to pay in installments, it will be over a very short time period. For example, if your assets are worth $7,500 and you have available exemptions of $5,000, you would have to pay the trustee $2,500; if you don’t have a lump sum of $2,500 laying around (and very few do when they make the decision to file bankruptcy), then you might be able to pay the Chapter 7 Trustee over 6 months, or $400+ per month (which, again, may be unaffordable with your budget if you’re forced to file a Chapter 7 case).
“Surrender” of Assets – Many people use a Chapter 7 to surrender assets, to give up houses or cars for example. However, case law in Florida says that the intent to surrender in bankruptcy court, by itself, has no impact on the ownership of assets. The debtor must take the next step to give the asset back to the creditor either voluntarily or involuntarily through foreclosure or repossession. Most were caught by surprise when they surrendered houses during the foreclosure crisis and took no further action, only to learn years later (7 years for one particular client that comes to mind) that they still owned the house, now even further upside down and burdened by homeowner or condominium association liens (which are not dischargeable when incurred post-filing) or code enforcement liens and violations. If you want to surrender property in a bankruptcy, make sure you take the next step of ensuring the property winds up back in the hands of the creditor.
Specific Questions for Chapter 13 Cases
Provide annual tax returns – This is the issue that causes the most trouble for our Chapter 13 clients. Chapter 13 is a “fluid” thing and payments depend on disposable income. Therefore, the trustee wants to see the debtor’s tax returns annually, to get a sense of any increases or decreases in income and how those annual changes might impact the ability of the debtor to make monthly payments.
Tax Refunds – Other than providing the returns themselves, this is the other most common issue that causes trouble for our clients. The trustees in Tampa have concluded (supported by the Judges and United States Trustee) that the refund represents income earned throughout the year, and an asset that must be paid to unsecured creditors unless exempted. The tax refund really is a forced savings account that pays 0% interest. My personal goal is to have the smallest refund when I file my taxes, so I have more income month to month during the year. Accordingly, any portion of the refund that is not exempt should be paid to the Chapter 13 trustee. The trustee uses this as additional money to be paid to creditors, rather than as a payment towards whatever is owed through the bankruptcy. For example, if your monthly payments are $400, and you get a $2,000 refund, the trustee will not allow you to use the $2,000 to make 5 monthly payments, you must pay both the $2,000 refund and the next 5 monthly payments. The trustee may allow you to keep some portion of the refund, after filing a request with the trustee or upon motion to Court, to pay for unforeseen expenses like medical bills, home or car repairs, etc.
Unfavorable Recommendation – After the meeting of creditors, the trustee will issue an Unfavorable Recommendation (there are rumors of trustees issuing Favorable Recommendations, but most attorneys I talk to rarely see them here in Tampa). Most debtors are intimidated by this document but it is the roadmap of issues the trustee wants us to correct, amend, or change before the trustee can recommend confirmation (where the debtor, attorney, creditors, judge and trustee all approve of the bankruptcy plan).
Mortgage Modifications – Mortgage modifications are slightly easier in bankruptcy court. The systems to obtain modifications are easier; the mediators, bank representatives and attorneys are a bit more sophisticated than their state-court counterparts; other debt is eliminated by the bankruptcy, freeing up income to fund the modification; and the bankruptcy court is more strict than the state courts. That all being said, modifications are still an exercise in paper-pushing and now that the foreclosure crash is over, borrowers are having a harder time qualifying for modifications.
Payment Increase at Confirmation – A bankruptcy plan must be 60 months or less, and no more. Therefore, the debtor must complete their plan within 5 years. If you undershoot your payments at the beginning of the plan, there is no mechanism to catch up those payments without spreading them over the remaining term of the plan. For example, assume you file a Chapter 13 proposing to make payments to the unsecured creditors in the amount of $500 per month ($30,000 over 60 months), and you make 10 months of payments before confirmation. At the confirmation hearing (where the debtor, attorney, creditors, judge and trustee all approve of the bankruptcy plan) the trustee calculates that your payments should have been $600 per month ($36,000 over 60 months). However, recall that you’re 10 months into the case and have paid in $5,000. Now, you must pay $31,000 ($36,000 owed – $5,000 paid) over the next 50 months remaining in the case. Your payments increase to $620 per month ($31,000 divided by 50 months). Even though the actual payment should have been $100 more from the start, the payments increase $120 to spread that $100 deficit from the first 10 months over the remaining life of the plan.
Failure to Pay Trustee – Obviously, failing to pay the trustee will cause the case to be dismissed. The payments are due the day of the month that the case was filed. If a case is filed January 13, then payments are due February 13, March 13, April 13, etc. The trustee does not charge a late charge but will move to dismiss the case if it becomes more than 30 days delinquent. For this reason, I counsel my clients to pay on the 1st, 15th or end of the month consistently, regardless of the date of filing. If we file January 13 and the client wants to pay the first payment March 1 and each month after on the first, that’s okay, so long as they don’t miss a payment (the payment due Feb. 13 would be paid March 1, March 13 paid on April 1, etc.). Of course, the best idea is to pay on the due date, but you can structure your Chapter 13 to fit your budget, so long as the payments are not more than 30 days late.
What happens if you do fall behind? The Court gives you three months to catch up. The wording of the Order is confusing, but it will require that you make two payments on time and catch up with the third payment. Therefore, any combination of payments will work so long as your minimum payment is your plan payment and you catch up by month 3. For example, if your monthly payment is $500 and you’re two months behind (so $1,000 owed), you could pay $500 in month 1, $500 in month 2, and $1,500 in month 3; or you could pay $1,000 in month 1, $1,000 in month 2, and $500 in month 3; or you could pay $800 in month 1, $800 in month 2, and $900 in month 3. In all of those examples, the monthly payment was at least the plan payment ($500) and by month 3 the trustee received $2,500 to catch up the payments.
While it is hard to foresee every possible issue that could arise in a bankruptcy case, these are the most common. Some are minor and will have little impact on the case, others are major issues and must be addressed immediately. You should consult with your local bankruptcy attorney to see if these are issues in your area or what other issues may exist, and how your attorney will handle them should they arise.
For more information on bankruptcy, please contact us to schedule a free initial consultation to discuss your options at 813-774-5737 or email me directly at firstname.lastname@example.org. You can also order Crushing Debt: 9 Strategies to Eliminate Financial Bullies on Amazon.com. Please also subscribe to the Crushing Debt Podcast, on Apple Podcasts, Spotify, and other podcast players, including Amazon Echo (“Alexa”) for more free information about these topics.
Shawn M. Yesner, Esq., is the host of the Crushing Debt Podcast and founder of Yesner Law, P.L., a Tampa-based boutique real estate and consumer law firm that helps clients eliminate the financial bullies in their lives. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Clearwater, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay Area.