Bankruptcy – Discussion of the process, including documents to be filed, law of exemptions, creditors rights

The bankruptcy process:

Title 11 of the U.S. Code, Chapter 7 provides for automatic appointment of a trustee who will liquidate all of the debtor’s nonexempt property and distribute proceeds to creditors, while Chapter 13 provides for the adjustment of debts of persons with “regular income”. Other Chapters apply to troubled municipalities, and reorganization of distressed debtors such as businesses, and family farmers and fishermen. Chapters 1, 3 and 5 contain general provisions that apply to all forms of relief unless otherwise specified. Bankruptcy procedure is set forth in the Federal Rules of Bankruptcy Procedure. The Eastern and Western Districts of Michigan have local rules, supplemented with bankruptcy court general orders, that must be followed.

A bankruptcy petition may be filed in the court for the district in which the debtor’s domicile, principal place of business, or principal assets have been located for 180 days before the date of filing. 28 USC § 1408. Chapter 7 debtors must procure prefiling credit counseling, file (electronically) certain documents with the bankruptcy court, appear for § 341 creditors’ meeting and provide all necessary disclosures to trustee, and perform other duties specified in the Code and Rules such as turning over property, and if they are not guilty of bad acts, they will be granted a general discharge of prepetition debts while retaining exempt property. During this process, a trustee is appointed to investigate the debtor’s affairs and liquidate nonexempt property for the benefit of creditors. The trustee may also file actions to recover preferences, fraudulent conveyances, and other voidable transfers. When all issues are settled, the trustee files their final report and account proposing to distribute proceeds. If the court approves, the trustee distributes the cash to creditors and closes the Chapter 7 case.

Documents to be filed:

Voluntary Petition starting with a 3 page form document which has boxed sections for Exhibits A, B, C, and regarding D, followed by:

• Exhibit D – Individual debtor’s Statement of Compliance with Credit Counseling Requirement
• Declaration Concerning Debtor’s Schedules
• § 342 Notice of Rights from Clerk
• Summary of Schedules – included in the Petition
• Statistical Summary of Certain Liabilities and Related Data (28 USC § 159)
• Certificate of Counseling
• Statement of Financial Affairs
• Schedules A through J: A- Real Property, Schedule B – Personal Property, Schedule C – Property Claimed as Exempt, Schedule D – Creditors Holding Secured Claims, Schedule E – Creditors Holding Unsecured Priority Claims, Schedule F – Creditors Holding Unsecured Nonpriority Claims, Schedule G – Executory Contracts and Unexpired Leases, Schedule H – Codebtors, Schedule I – Current Income of Individual Debtor(s), Schedule J – Current Expenditures of Individual Debtors
• Chapter 7 Individual Debtor’s Statement of Intention
• § 2016(b) Disclosure of Compensation of Attorney for Debtor(s)
• Verification of Creditor Matrix
• Asset Protection Report
• Chapter 7 Statement of Current Monthly Income and Means-Test Calculation
• Declaration of Electronic Filing
• Personal Financial Management Course Certificate

Law of exemptions, creditors rights, and automatic stay:

Michigan debtors will choose either federal (11 USC § 522) or state exemptions (MCL § 600.5451) depending on which scheme protects the desired property. Interest not to exceed a certain dollar value is exempted and these amounts vary between the state and federal. For example, there are exemptions for household items, burial plot, crops and farm animals, pets, a motor vehicle, computer, tools of trade, shares of an association, homestead, homestead – tenancies by entirety, homestead – 65 or older, wild card, jewelry, and life insurance. Michigan offers all but the wild card, jewelry and life insurance, while the federal plan allows all but burial plot, crops and farm animals, pets, computer, shares of an association, and homestead – tenancies by the entirety and 65 or older.

If you can file using a state’s exemptions other than Michigan’s, comparison of applicable exemption schemes and the federal scheme, must be made.

Also, use caution as to the uncertain outcome and possible litigation regarding Michigan exemptions and the constitutionality of MCL § 600.5451.

The trustee or creditors have the right to object to the granting of a discharge. The discharge shall be revoked after notice and hearing under the conditions of 11 USC § 727(d), which regard fraud and failure to cooperate or explain satisfactorily. The trustee or creditors may also object to a claimed exemption. Trustees typically do this on the basis that it is in excess of the allowable amount under certain subsections of 11 USC § 522. However, the trustee may negotiate a compromise in light of the time and cost of liquidating the asset. A creditor or trustee who timely objects to an improperly claimed exemption in writing has the burden of proof at the court’s scheduled hearing.

The automatic stay of 11 USC § 362 goes into effect upon the filing of the bankruptcy case. It provides an umbrella of protection that stops all collections actions or proceedings against the debtor that was or could have been commenced before the bankruptcy case. The discharge order continues the temporary effect of the automatic stay on a permanent basis as to dischargeable debts.

References: Handling Consumer and Small Business Bankruptcies in MI, Dec. 2011, ICLE

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