Posts Tagged ‘Overture’

The Two Roads of Bankruptcy

A Chapter 7 Bankruptcy is kind of like a road trip. It’s a trip on which all the players (the debtor, the debtor’s creditors, the case trustee, and the United States Trustee) get to embark. There are two roads to this trip: the debtor’s road, which pertains to the discharge, and the creditors’ road, which pertains to trustee’s administration of assets. The filing of a bankruptcy petition commences the beginning of the road trip. The trip is over, only after the parties have traveled all the way down both roads.

The Debtor’s Road: Obtaining a Discharge
This road is typically no longer than 105 days. It starts with the moment the petition is filed and usually concludes once the court enters a discharge order. Barring an objection, the court will automatically enter the discharge order about 67 days after the debtor’s 341 Meeting of Creditors. The 341 Meeting, is typically scheduled 4-5 weeks after the petition is filed. Hence the projection of 105 days.

In many cases, to earn the discharge, the debtor really only has to do a few things after the petition is filed: 1. submit certain documents to the Trustee (tax returns, bank statements, paystubs, etc.), 2. attend the 341 Meeting of Creditors, 3. and take a post-petition financial management course.

The 341 Meeting of Creditors is an important event in a chapter 7 bankruptcy case. Not only is it an opportunity for the trustee and any creditors to ask the debtor questions about its financial affairs, but it is also the point in the road trip where the two roads diverge. Starting with the first date set for the 341 Meeting of Creditors, the trustee, creditors, or the US Trustee will have 60 days to bring an action either objecting to the debtor receiving a discharge (known as a §727 action), or objecting to a creditor’s claim from being discharged (known as a §523 action). If no objection is raised in that 60 day period, the court will then go through its internal process of entering the discharge order (which takes about 7 days).

Now, with regards to §727 and §523 actions, a party in interest can request for an extension of time in which to bring its objection; and the court freely grants those requests. So the 60 day period CAN be extended if warranted. Further if a §727 action is filed, the court will naturally delay the entry of the discharge order until the outcome of the action is determined. If the objection is later overruled (which can be several, like 12-18, months later), the discharge will be entered. But if the objection is sustained, then the court will enter an order denying the debtor a discharge.

The Debtor’s Road will conclude when the Court either enters the discharge order or enters an order denying the debtor a discharge.

The Creditors’ Road: The Administration of Assets
The chapter 7 trustee is the individual appointed to administer the assets of the bankruptcy estate. It is one of the trustee’s duties to analyze the non-exempt equity of the bankruptcy estate and make a determination as to whether to liquidate the non-exempt equity. If the trustee chooses not to liquidate the non-exempt equity, the trustee will file what is known as a “No Asset Report” or a “Report of No Distribution.” Essentially this report is the trustee’s declaration that there is not a sufficient amount of non-exempt equity in the bankruptcy estate to make a meaningful distribution to the creditors. The filing of such a report typically concludes the Creditors’ Road. However, so long as the case remains open, the Trustee has the right to withdraw the No Asset Report, thereby reopening the Creditors’ Road.

Now, after inquiring with the debtor at the 341 Meeting of Creditors, the trustee might easily determine to file a No Asset Report. In some cases, however, such a determination may not be easily made. The trustee may simply wait to file the No Asset Report until after it has determined the size of the debtor’s tax refund. On the other hand, the trustee may choose to object to a debtor’s claim of exemption or initiate a lawsuit to avoid a certain pre-petition transfer in which the debtor voluntarily or involuntarily engaged. If successful, the estate may now have a sufficient amount of non-exempt equity for the trustee to liquidate.

If there is a sufficient amount of non-exempt equity, the trustee will notify the creditors that there will be a distribution and invite them to file a proofs of claim. The trustee also will begin the process of liquidating the assets in which non-exempt equity sits. Once time to file a proof of claim has elapsed, and the non-exempt equity is liquidated, the trustee will file its “Trustee’s Final Report” in which the trustee proposes how it will distribute the estate’s funds. Interested parties have 30 days to object before the Court approves the proposed distribution scheme. Once approved, the trustee will begin the process of distributing the funds.

After all the funds have been disbursed (and the checks have cleared the trustee’s bank account), then the Trustee will file a Final Accounting, in which the Trustee discloses how the funds were disbursed.
The Creditors’ Road will typically conclude when the trustee has filed either its No Asset Report, or its Final Accounting.

Bankruptcy Closure
The Bankruptcy case will close once the longer of the two roads concludes. In a vast majority of cases, there are no objections to a debtor receiving a discharge and the trustee files a No Asset Report shortly after the 341 Meeting; thus allowing a case to close 105 days after the petition is filed. However, each case is different and if there is an objection to the debtor receiving a discharge, or if the trustee desires to liquidate non-exempt equity, then its not uncommon for the case to remain open for a longer period of time.

The most important take away, however is that the case does not close simply because the debtor received a discharge or because the trustee files a No Asset Report. The trip is over once the longer of the two roads of bankruptcy has concluded.

Bankruptcy – The economy’s recycling tool

I dig bankruptcy.  I love how it empowers the individuals that must suffer through it.  A bankruptcy discharge (a permanent injunction enjoining the debtor’s creditors from collecting on debt from the debtor) provides debtors a financial fresh start.  It allows people to take chances, to try to make something of themselves, of their families, to try to be their own boss, to take financial risk with the understanding that should they fail, they can pick themselves back up and try again.

It is a wonderful pleasure to assist people in picking themselves back up and making their money theirs again.

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