Archive for the ‘ Trustee ’ Category

What happens when I meet the trustee?

Every bankruptcy case has a Meeting of Creditors, often called the “341 meeting.”  It occurs about 30 to 45 days after the petition is filed.  My clients often tell me that they are scared of the meeting: will they need to explain why they filed bankruptcy?  What if they say the wrong thing?  What if the trustee decides not to approve their bankruptcy?

The hearing takes place in front of the trustee.  It’s in a separate office from the courthouse.  In chapter 7 cases, trustees spend the whole day questioning debtors, who wait and watch the other debtors.  When it’s well-run, the 341 meeting lasts about five minutes; a debtor can expect to be at the office for an hour, waiting for his case to be called.

Some trustees require a debtor to complete a questionnaire, others don’t.  All trustees require the debtor to read a pamphlet with information on the bankruptcy process.

Each debtor has to produce identification (driver’s license, passport, military id) and proof of social security number (original card is best, but an original W-2 or health insurance card with the entire number will work).  The trustee’s assistant verifies the numbers and identification.

The debtor is put under oath, and the trustee records the proceedings.  So it’s natural to be a bit nervous about it.  The trustee has a standard patter of questions:   Are you who you say you are?  Did you intend to file bankruptcy?  Is that your signature on the petition?  Does your petition list everyone you owe and everything you own?  Are there any mistakes on it?  Did you read the green pamphlet Here’s a more complete list of questions from another district.

If the trustee is interested in any particular item on the petition, he’ll ask questions about it.  But because he has dozens if not hundreds of other debtors to question that day, he doesn’t want to spend much time on a single person.

My advice to debtors facing a 341 hearing: listen to the trustee’s question, answer only the question asked, and tell the truth when doing so.

The meeting usually goes very easily, and my clients tend to wonder what they were so worried about before the meeting.

Disclosing information

Attorneys often try to hide a client’s information, and disclose as little as possible about the client. This strategy sometimes has comical effects, as in this exchange I heard in a deposition:

“Q:       Do you remember where the main office for Gas del Lagarto  was located?

A:         Even though I was the officer and president of Gas del Lagarto at that time, four years ago today, I don’t recall if we had our main offices in El Paso or Ciudad Juarez.

Q:         How is it that you do you not recall whether the offices were in Texas or Mexico?

A:         You have to approach life like a movie: it has a beginning, a middle, and an end.”

 

Here is another highly amusing dramatization of hiding information. 

 

This kind of “hide the ball” mentality is incredibly frustrating for the questioning attorney, and litigants use it mostly to psych out the other side. It doesn’t make the witness look credible at all, and it benefits litigation attorneys handsomely because it drives legal fees up.

There is no place for this in bankruptcy. The debtor comes to the court seeking a release from his debts; in exchange, he needs to provide documentation that he has nothing to pay them with.  If anyone on the “other side” of the debtor, that is, the creditors, the trustee, or the judge, believes that the debtor is playing fast and loose with information, or hiding something, the debtor can only be hurt.  Penalties for failing to divulge required information range from the trivial to the criminal.

As a debtor, you should expect that a good bankruptcy attorney will give you advice on when and how to file bankruptcy. You should not expect that the attorney will dig you out of a hole you made by failing to provide documentation or information when you were asked for it.

We have been able to help debtors who thought it was to their advantage to hide information.  Usually, we counsel them to determine a coherent narrative that explains all the documentary facts, disclose the information, and advance the narrative. It works much better than trying to frustrate the other side.

Where can you file a bankruptcy case?

I had a client who lived in Europe – Luxembourg, of all places.  He went there because his business ventures in the US were going bad, so he took time away from this country.  His wife was a national of Luxembourg, so he moved his whole family to a house in the shadow of his inlaws.

But one creditor in the US didn’t like this.  The creditor sought a judgment and managed to get the Luxembourgish authorities to garnish the debtor’s wages for a prospective US judgment.  So the debtor contacted me and asked me to file a bankruptcy petition in the US.

There is a statute (28 USC 1408, if you’re interested) that tells us what bankruptcy courts have jurisdiction over a case.  The debtor may file in any judicial district in the U.S. in which he has had his residence, his domicile, his principal place of business in the U.S., or his principal assets in the U.S., for the greater part of the 180 days preceding the case filing.

My debtor had moved into his mother’s house in Simi Valley prior to moving to Luxembourg two years earlier.  He intended to move back to his mother’s house when his children finish high school in another five years.  He had two failed businesses in Canoga Park, both of which were now-inactive corporations.

The debtor didn’t have residence.  The trustee and I fought over whether he had domicile: that tricky concept requires physical presence in a spot in which you have the intent to live permanently; having created domicile, you can move around, so long as you don’t change your mind about where you want to end up.  The trustee said it wasn’t clear that my client intended to come back to California.

We also argued over whether his principal assets were in California.  He owned an overencumbered house in Luxembourg, but had a bank account with $600 and stock in a corporation owning a breakfast café in Woodland Hills (he was essentially a silent partner in that one, and it had no value).  The statute refers to “principal assets in the United States;” I argued that since he had no assets anywhere else in the U.S., his Luxembourg assets were irrelevant, and the court in the Central District of California had jurisdiction.

But the trustee finally agreed that the debtor had a principal place of business in the Central District.  He had opened and closed businesses here; he was a wage slave in Luxembourg, thus that wasn’t a “principal place of business.”  So the trustee agreed to no longer challenge jurisdiction, and my client in Luxembourg could file his bankruptcy case in Woodland Hills.

The trustee’s concession created new problems, because now the debtor had to show up at a meeting of creditors.  Sometimes the trustee will allow an out-of-country debtor to submit to the meeting of creditors by telephone or by written interrogatories; here, the trustee insisted that the debtor be present in the U.S. for the meeting of creditors. She would have been okay with the debtor landing in New York and sitting at a U.S. Trustee’s office and answering questions by phone; my debtors decided that since they needed to fly to the U.S. anyway, why not just go all the way to California?

Who is the Bankruptcy Trustee?

When you file a bankruptcy, you no longer own your own goods. They pass into a bankruptcy estate owned by a trustee, who is supposed to act for the good of your creditors.
This means that a debtor generally does not have the right to sell his own assets between filing bankruptcy and getting a discharge.
In chapter 7, or liquidation, bankruptcies, the trustee has the duty to investigate your assets and determine what he may sell off to satisfy creditor claims. Usually, because of the exemptions provided by state law, there is nothing to sell off. The debtor continues on his or her way by shedding debts but not goods. We call these “no-asset cases.”
In chapter 13 bankruptcies, which involve a personal reorganization, there are two trustees: the debtor himself, and the chapter 13 trustee. Here, the bankruptcy estate includes the next five years of the debtor’s income. The debtor keeps legal title to goods, and the chapter 13 trustee ensures that the debtor is making his best efforts toward paying into the plan.
In chapter 11 bankruptcies, the debtor is also the trustee, a position known as the “debtor-in-possession.” In corporate cases, the company’s former management may continue to serve as the debtor-in-possession; in cases of willful mismanagement, the court may oust the former management and install a new trustee.

Bankruptcy and the self-employed worker

Self-employed persons face special challenges in filing bankruptcy. When I hear that a potential debtor has a business, a slew of questions come up: is the business incorporated, a partnership, or a sole proprietorship? Does the debtor want to reorganize and continue, or just let the business fold? Is the business a service business catering to walk-in customers? What kind of insurance does the business have? What kind of debts is the debtor discharging?
One solution – incorporation
One debtor had a computer repair shop that wasn’t doing well, but he wanted to keep it running. He had so little income he could qualify for a chapter 7 bankruptcy; however, a chapter 7 trustee might have required that he shut the business.
In this case, the debtor incorporated the business prior to the bankruptcy, and put all the business assets into the corporation. He then reported this transfer of assets on his bankruptcy schedules, and reported the corporation’s stock (rather than the individual assets, such as motherboard diagnostic stations) as his asset. Here, the trustee was convinced that the business had no value if sold as an ongoing business, and that the business assets and liabilities transferred into the corporation canceled each other out such that there was no value.
Another solution – shutting down
If the business does something dangerous, or caters to walk-in clientele, the trustee will probably shut it. One debtor had a business filling propane tanks for people living in the hills above Santa Barbara and Goleta. After I filed the case, the trustee called me and said: “John, this business scares the s*** out of me.” He was much relieved to hear that the debtor had stopped his activities, and would give him the keys to his warehouse at the creditors’ meeting.
The secret solution – ignoring the trustee
Another client had a consulting firm he ran from an office, advising people how to market their business. He spent most of his time meeting clients at their offices and working on their matters at his own office; no walk-in traffic. The business was a sole proprietorship (no corporation, no partners), and he used a fictitious name (for instance, “Aardvark Advertising”). The trustee told him in public that he needed to shut it down right away. I called the trustee back and asked what that would look like: does he have to stop visiting his office? His home office? May he mail out the billing statements he has ready? Does he have to swear not to turn on his computer, or make a phone call? The trustee replied that, under local guidelines, he has to tell people to shut down their businesses, but no one would be able to enforce this, so he should continue to work. And so I advised the client.
Had any of these clients filed bankruptcy on their own, they might not have been able to reach the discharge they eventually got. Using an attorney for a bankruptcy is just a very wise decision.