In Bankruptcy Information, Bankruptcy Questions

That’s how a lot of conversations with potential clients begin. I’m sure it’s said in the hope that because their case is “simple” it won’t be “expensive.” As Einstein taught us, everything is relative. In this post I’d like to explain a bit about what a simple bankruptcy is and why. It’s easier to explain why by looking at what makes a bankruptcy not simple.

Multiple Sources of Income
A simple bankruptcy has only one source of income. If a husband and wife file together and both have income, whether it’s from employment, retirement, disability or any source, it isn’t a simple bankruptcy. This is because the Means Test requires input and analysis of the last six months of income from ALL sources.

Self-Employment Income
In a simple bankruptcy, the single source of income comes from wages or salary, social security, retirement, or unemployment benefits. Self-employed individuals almost never have simple bankruptcies because they almost never have complete and accurate pay records from which the last six months of income can be determined.

Real Estate Ownership
Owning real estate compounds the time necessary to investigate and assess the risk of losing it. The exception to this is if the prospective client doesn’t care about keeping the house.

Non-exempt Assets
This takes a bit of explanation. When someone files bankruptcy, everything they own becomes “property of the estate” meaning it is subject to being sold by the bankruptcy trustee, who then uses the money she gets to make a partial payment to the creditors. State law provides a number of exemptions to creditors’ claims. An exemption is just that: the property is exempted, or excluded, from being taken by the trustee. In most Chapter 7 cases, the trustee files a “no asset” report, meaning there are no assets from which a distribution can be made. This is because the exemptions that are available to the debtor protect the property he owns.
Now, if there are non-exempt assets, such as an extra car (see below), an RV, a boat, a vacation home — anything not covered by the state exemptions, there is property that the trustee can reach. This means the case will remain open for months after the debtor receives a discharge while the trustee gathers the property, liquidates it, notices the creditors to file claims, reviews the claims and eventually makes a distribution to the creditors. As long as a case is open, we have to monitor it, review the actions of the trustee, communicate with the debtor and otherwise follow up. This adds to the cost.

More Than One Car Per Debtor
A debtor is entitled to a $3,000 exemption in an automobile. For a joint (husband and wife) filing, this means two cars with a total exemption of $6,000. Any more cars than that, or cars with more than $3,000 in equity in any one car, means the case is an asset case. The trustee will try to liquidate one or more of the cars. This requires us to spend more time negotiating with the trustee on the debtor’s behalf to try to save as much as we can. Once again, the exception may be if a debtor doesn’t care about losing one of the cars.

Inaccurate or Incomplete Records
Many people don’t have accurate or complete records of who they owe. Sometimes they want us to find all their creditors. We can order a credit report (at an additional cost); or the client can order a free report herself. But credit reports don’t always contain all the creditors a person might have. This is because a creditor gets on a credit report only if the creditor reports a debt to the credit reporting agency. We ask people to fill out forms listing all their creditors because the client is the one person who should know to whom she owes money. If those forms are incomplete, have incorrect addresses, or don’t include all creditors, the bankruptcy gets complicated. Either we have to research the correct information or the client risks not listing all her creditors, which could be a problem down the road. Creditors can be added after a case is filed, but that requires preparing and filing an amendment, and an additional fee to the bankruptcy court, as well as to the attorney.

Grab Bag of Other Issues
In addition to the above, here is a list of things that may have occurred in a particular case, any one of which means that case is not simple.
• Used credit cards in the 90 days prior to filing. This could raise a presumption that the debtor defrauded the credit card company because it is assumed that a person knows she is insolvent at least 90 days before she files, and incurring new debt when insolvent is an indication of fraud.
• Been sued. Being a party to a lawsuit means we must give extra notice to each of the courts in each of the cases in which the debtor is a party when he files.
• Judgments or garnishments outstanding. If a debtor has been garnished, he may be entitled to recover some of the garnishment. Assuming the debtor wants that, it requires more work from us.
• Car or other property has been repossessed. Again, a debtor might be entitled to recover the repossessed property, but that means more work for us to help accomplish that.
• Repaid a loan from a family member in the past 12 months. This constitutes a “preferential transfer” that we must deal with in your bankruptcy.
• Not all tax returns have been filed. This draws the scrutiny of the IRS and anytime the IRS gets involved, things get more complicated.
• Transferred property to anyone in the last two years for less than fair market value. This could be considered a fraudulent transfer that the trustee will investigate. Investigation usually means, at the least, providing more documentation to the trustee and could mean attending a deposition (Rule 2004 examination).

“Simple” bankruptcies are actually quite rare. Regardless of whether a bankruptcy is simple or not, we’re here to help you through the process. Contact us here, or call or text (801) 413-3708, or email

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