Great bankruptcy paperwork makes for short 341(a) hearings. Short hearings mean happy clients and profitable cases. Happy clients mean more referrals and we all want more profitable cases. These are good things for everyone. Because I am a Trustee and also represent debtors, I want to offer some insight on how to accomplish this task.
We all know that tax returns are due 7 days prior to the first meeting of creditors (11 USC 521(e)(2)(A)). However, it is surprising how many debtors do not follow this requirement. While persons filing pro per may have an explanation (but not an excuse) there is no explanation or excuse for counsel who regularly file Chapter 7 bankruptcies not to follow this requirement.
Consider the task of the Trustee. On any given day a Trustee will handle between 60 to 120 cases. Theoretically, the tax returns for these cases are all reviewed the week prior to the hearing. Considering the enormity of this task, even at a small 1% error rate, one or two returns could be missed each day. Errors happen even though we strive to be perfect. Set up a system to be sure that the Trustee gets the tax return in a timely manner and be ready to prove receipt of the return.
Further, many Trustees are continuing cases where they have not received the tax return in a timely manner. This is not meant so much as a penalty as much as it is just necessary to effectively handle so many cases. It makes most sense to review a petition and then the tax return while all the facts are fresh in the Trustee’s mind. Many Trustees used to accept tax returns at the hearing, but it turned out to be just too difficult to review tax returns for as much as 30% of the calendar. Of course, a continued case results in an unhappy client and increases the cost of your handling of the case. This means less profit on a case and fewer referrals.
Accordingly, consider these suggestions:
When preparing a petition and schedules, one big goal as debtor’s counsel should be to convey the maximum amount of information in the shortest period of time. Before you sign the petition, take a minute and pretend that you are the Trustee reviewing the case for the first time. Think about what questions you might raise based upon the paperwork in front of you. If something is unusual or out of the ordinary, send a letter or note to the Trustee explaining these unique items. For example, if your debtor indicates that he has made $30,000 a year for the past several years but lives in a house valued at $2 million with a $2 million mortgage, it can raise a lot of questions. Explain the situation to the Trustee in advance or make a note in the paperwork.
Further, make sure that the paperwork looks like you put some effort into it. Where all the numbers in a petition are all rounded off to even numbers, or some items are not even filled in, it looks like there has been a lack of effort. This can lead to a much more extensive examination so that the Trustee is confident that they understand the whole picture. Conversely, do not put too much information in the paperwork. Some attorneys put so much information on a petition that it might cause one to wonder what they are trying to hide. Disclose, disclose, disclose, but be concise in the story you are telling.
When looking at a petition, make sure that there is internal integrity to the paperwork. For example, income on Schedule I should generally match the income on the means test. Admittedly, Schedule I and the Means Test measure income in different ways. However, if they are too different, be prepared to explain the difference or make a note on the paperwork. Further, it is surprising how many cases we see that show a monthly payment for a life insurance policy on Schedule J yet no corresponding life insurance policy on Schedule B. Even if the policy is a term policy, an unlisted policy should draw a series of questions from the Trustee, thus extending the time when your client is being examined. Finally, be sure that question 1 on the Statement of Financial Affairs bears some relationship to the income representations in the tax return. When they don’t match, the Trustee will certainly inquire why. Again, this should be checked prior to the filing of the case.
Any attorney who has sat in through several 341(a) hearings, knows the general questions that Trustees ask. In fact, the required questions are contained in the United States Trustee Handbook. The Trustee Handbook is no secret. It is on line at the US Trustee’s website. Take a look at it, understand the questions that they are supposed to ask and make a list of common questions. This list can be sent to your clients ahead of time so that they get comfortable with the general questions that they are going to be asked. This makes it much easier for the clients to respond and shortens the time at the hearing. Your clients will appreciate it.
For what is worth, we also send the clients a map where they need to go, a picture of the appearance attorney, highlight the need for them to bring the two types of ID and explain to them that they will need to read a green pamphlet at the hearing. Again, this takes some of the anxiety out of the hearing for the clients, lessens the possible of miscommunication. This results in a shorter, more accurate, less stressful, hearing for all involved.
Many long time bankruptcy attorneys know that in years past secured creditors sent representatives to the hearings to ask questions. They wanted an opportunity to examine the debtor as to whether they still have the merchandise in which they felt they had a purchase money security interest. After Sears issue, representatives of secured creditors dropped off and, finally, seemed to disappear. At least one creditor is currently running a pilot program to question debtors. As a result, clients need to be prepared to answer questions by secured creditors and not be surprised if they are there. Usually the questions are “Did you buy this merchandise?; Do you still have this merchandise?;Does it still work?” Anything past this should probably be handled between the office and the secured creditor as very few clients are prepared to announce that they have made any decision regarding surrendering, redeeming or reaffirming the collateral at the hearing.
It is ironic that the biggest decision that any debtor makes is made at a free consultation. This is the decision whether or not to file bankruptcy. A full 50% of the clients that have consulted with our firm over the years have been advised that is not appropriate for them to file for one reason or another. Take the time to make a very thorough analysis of their financial circumstance. Obviously, if they have assets at risk, or if it is questionable whether they qualify under the Means Test, sometimes it is simply better to advise them not to file.
Several times a year I will see a case where an individual is receiving substantial residual income yet the residual rights are not listed on Schedule B. Most times, the debtor is shocked to learn that those residual rights can be taken and sold by the Trustee. Any debtor who has a significant amount of residual rights is rarely a good candidate for Chapter 7 bankruptcy.
The Supreme Court ruled more than a year ago in Ransom v FIA Card Services that an individual cannot take a deduction on the Means Test for vehicle ownership when they do not have a corresponding expense ( car payment) to acquire the vehicle. It is surprising how often we will see a debtor taking an allowance for car ownership and then no corresponding ownership payment listed immediately under that allowance on lines 23 and 24 of the Means Test. This is an easy problem to spot for the Chapter 7 Trustee.
The Bankruptcy Rules provide that when an attorney files a document with the Court it is filed in accordance with existing law or a reasonable extension thereof. Accordingly, some Trustees, including me, are requiring counsel to submit a declaration indicting why they believed that a vehicle ownership allowance without any corresponding expense complies with the Ransom decision or a reasonable extension of that decision. Don’t get caught needing to come up with an explanation. Just follow the Ransom decision.
Appearance attorneys are a convenience for debtor’s counsel. They are usually not convenient for the debtor and certainly not convenient for the Trustee. (Although there are several appearance attorneys who are many times more dialed into bankruptcy issues than perhaps the attorney who drafted and filed the petition.) Allowing appearance attorneys is something that has been discussed on and off over the years. The use of appearance attorneys is something that is necessary especially when attorneys try to make legal services affordable to debtors in financial distress. However, this means that we need to be sure that the appearance attorney knows the file and can respond to most reasonable inquires by the Trustee. Many Trustees, including myself, will immediately continue a matter if they are told by the appearance attorney that they have not reviewed the petition. We need to all be very careful that this practice is allowed to continue.
The book “Dress for Success” cites studies that show that the vast majority of all communication in a face-to-face meeting are visual. In fact, in our very visual, multimedia, world, many have unfortunately argued that form is more important than substance. Why immediately put yourself at a disadvantage with the Trustee? Jeans, T-shirts, etc., simply gives away credibility that you may have. I even had one attorney show up one day wearing a poncho. Fellas, take the time to shave. The close shaven look is certainly fashionably and can work. However, it is surprising how many fellas show up looking like they haven’t shaved properly in several weeks. I can’t even imagine what the client is thinking in these situations. The visual language in these situations is that you are not prepared or paying attention to detail. This can spill over into the paperwork and, ultimately, lengthen the examination process.
When thinking this article out, I didn’t want to make it simply a list of pet peeves. Certainly Trustees and debtor’s counsel could put together a list of a hundred items or more of pet peeves. This is not productive. However, both Trustees and debtor’s counsel need to realize that we are both stakeholders in this bankruptcy system which delivers a discharge to the honest, but unfortunate, debtor. At the same time, it allows Trustees and debtor’s counsel to generate a reasonable living being part of this system. Understanding how the other side looks at the system helps to make it work better and, ultimately, leads to shorter, more productive 341(a) examinations.
