Top Ten Topics in Bankruptcy for the Non-bankruptcy Attorney - February 2008 - Business Law

• Publication year: 2008
• Pages: 19
• Citation: Vol. 37 No. 2 Pg. 19

37 Colo.Law. 19 Colorado Lawyer 2008.

2008, February, Pg. 19. Top Ten Topics in Bankruptcy for the Non-Bankruptcy Attorney - February 2008 - Business Law

The Colorado Lawyer
February 2008
Vol. 37, No. 2 [Page 19]

Articles
Business Law
Top Ten Topics in Bankruptcy for the Non-Bankruptcy Attorney
by Robertson B. Cohen

Business Law articles are sponsored by the CBA Business Law Section to apprise members of current substantive law. Articles focus on business law topics for the Colorado practitioner, including antitrust, bankruptcy business entities, commercial law, corporate counsel financial institutions, franchising, and securities law.

Article Editors:

Bankruptcy Law: Curt Todd of Lottner Rubin Fishman Brown & Saul, P.C., Denver - (303) 383-7676,ctodd@lrflegal.com

Business Law: David P. Steigerwald of Sparks Willson Borges Brandt & Johnson, P.C., Colorado Springs - (719) 475-0097, dpsteig@sparkswillson.com; Rob Fogler of Kamlet Shepherd & Reichert LLP, Denver - (303) 825-4200,rfogler@ksrlaw.com

About the Author:

Robertson B. Cohen is managing partner of Cohen &amp Cohen, P.C., where he dedicates the majority of his practice to bankruptcy-related matters and civil litigation, including domestic relations. He welcomes any questions and is happy to offer assistance to attorneys regarding the contents of this article - (303) 933-4529, rcohen@cohenlawyers.com.

This article discusses the top ten topics in consumer bankruptcy law that the non-bankruptcy practitioner faces on a day-to-day basis or is likely to encounter in his or her practice. Where appropriate, the article also notes several important changes to bankruptcy law as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

The fundamental objective of an individual bankruptcy is to grant the honest but unfortunate debtor a "fresh start."(fn1) Bankruptcy legislation is designed to promote uniformity in debtor/creditor laws; prevent creditors from taking unfair advantage of a debtor; provide a mechanism for distributing the debtor's assets equitably among his or her creditors; secure a prompt and effectual administration and settlement of the debtor's estate within a limited period; and establish priorities and apportion assets among creditors with the same priority.(fn2)

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)(fn3) made many sweeping changes to the Bankruptcy Code, leaving very little untouched. This article discusses the top ten topics the non-bankruptcy attorney should consider when advising clients on bankruptcy-related matters, and provides answers to frequently asked questions about bankruptcy.

The Automatic Stay and Property of the Estate

When a bankruptcy case is filed, an automatic stay is imposed as to all property that is part of the bankruptcy estate.(fn4) The scope of the automatic stay is extremely broad and stays all acts and potential proceedings against the debtor, as well as proceedings that affect property of the bankruptcy estate.(fn5) Property of the estate is broadly construed and includes all legal or equitable interests of the debtor in property as of the filing date.(fn6) Property of the estate also includes preferential transfers, such as payments on debts within certain pre-filing time periods.(fn7)

The non-bankruptcy practitioner must be aware that remedies for violation of the automatic stay include actual damages, as well as punitive damages if the violation was willful.(fn8) The automatic stay remains in effect until (whichever occurs first): (1) the case is closed or dismissed; (2) a discharge is granted or denied; (3) a creditor is granted relief from the stay; or (4) the stay expires as applicable in specific circumstances.(fn9)

Although exceptions to the automatic stay and the procedural requirements to obtain relief from the stay are beyond the scope of this article, typically speaking, relief from stay may be granted "for cause."(fn10) As a general rule, after a bankruptcy case is filed, the first step is to review BAPCPA and bankruptcy rules, because any future action likely will be within the purview of the bankruptcy court.(fn11) In the context of pending litigation or a domestic relations matter, for example, filing a motion for abeyance, suspension, or even dismissal may be appropriate.

Types of Bankruptcy

Most bankruptcy issues encountered by the non-bankruptcy practitioner will involve individual debtors who file Chapter 7 or Chapter 13 cases. This article does not cover bankruptcy cases filed under Chapter 11 (business reorganization) or Chapter 12 (family farmer), which often are complicated. The non-bankruptcy attorney who faces one of these cases should contact an attorney who specializes in bankruptcy law.

Chapter 7

The most common type of bankruptcy is Chapter 7; 83 percent of bankruptcy cases filed from January 1, 2007 to November 30, 2007 were filed under Chapter 7.(fn12) In a Chapter 7 case, the assigned trustee liquidates all non-exempt assets and distributes the proceeds to creditors.(fn13)

Businesses also may file under Chapter 7. The trustee would liquidate the business's assets and thereby help satisfy any fiduciary duty owed to creditors.(fn14)

The vast majority of Chapter 7 cases are "no-asset cases." A no-asset case is one in which all of the debtor's assets are protected by the applicable state or federal exemption laws and cannot be liquidated by the trustee. The practical result of a no-asset case is a complete elimination of the debtor's unsecured, non-priority debts, such as credit cards, medical bills, and unsecured loans, without any distribution to the creditors.

Chapter 13

A Chapter 13 bankruptcy case essentially is a reorganization, whereby the debtor proposes a plan to pay some or all of his or her debts.(fn15) In some ways, Chapter 13 provides debtors more flexibility than Chapter 7:

1. The Chapter 13 plan can be for a period of three to five years.(fn16)

2. The debtor may retain property that would have been seized and liquidated by a Chapter 7 trustee.(fn17)

3. The case can be dismissed by the debtor at any time, as long as it was not converted from another chapter.(fn18)

4. A co-debtor stay is in effect for the duration of the plan.(fn19)

5. The debtor may strip down and remove negative equity for certain secured debts, such as mortgages and vehicle loans.(fn21)

6. A Chapter 13 case is less complex than a Chapter 11 case, and a Chapter 13 discharge is broader than the discharge provided in a Chapter 7 case.(fn21)

7. A debtor may file a Chapter 13 case even if a discharge is not possible, which is beneficial for a debtor who is ineligible for Chapter 7 relief but still needs bankruptcy protection.

Attorneys for Creditors

Attorneys representing potential creditors in the context of a Chapter 7 or 13 case first should determine whether the claim is dichargeable (discussed below). Even if the claim is dischargeable, the creditor still may share in proceeds in an asset case or a Chapter 13 reorganization.

In a Chapter 7 case, the creditor should look for a "Notice of Possible Dividend" sent by the trustee. In a Chapter 13 case, the creditor should make sure to timely file a proof of claim; failing to do so generally will preclude the creditor from sharing in any distributions.(fn22) It may be wise to seek the advice of bankruptcy counsel, as creditors have myriad rights that should be protected.

Bankruptcy and Domestic Relations Issues

BAPCPA made several changes to bankruptcy law that may affect domestic relations matters. The most frequent question posed regarding bankruptcy and family law is whether to file a bankruptcy petition before or after dissolution. The short answer is that it depends. Factors that the domestic relations practitioner should consider in discussing bankruptcy options include the nature of the parties' relationship; whether immediate action or a decree of dissolution is necessary; the relative financial strength of the parties; and other factors unique to the clients' circumstances.

If the parties' relationship is amicable and their wishes are in relative accord, it may be beneficial to do a joint bankruptcy petition prior to the decree of dissolution. Otherwise, it may be best to have the parties file separate petitions, especially with a Chapter 13 case, where the duration of the plan is likely to extend past the decree of dissolution date.

The practitioner should be mindful of timing issues. For example, if a foreclosure is likely, a Chapter 13 filing could stop the foreclosure and preserve the marital residence for the benefit of the minor children. If the parties are being sued for joint debts, the co-debtor stay will stop the legal action for the duration of the bankruptcy case, subject to modification of the automatic stay.

If the parties wish to file a bankruptcy petition prior to the dissolution, it is important to discuss how the discharge of debts might affect determinations regarding maintenance and property settlement in the domestic relations case. In the event that one party discharges all of his or her debts the divorce court could consider the discharge as a factor in awarding maintenance or allocating a fair and equitable property settlement....