Cancer is an extreme example of how a sudden and unexpected life event can rocket someone into bankruptcy.  The study’s authors highlighted a few of the reasons that cancer correlates to an increased risk of bankruptcy filing: 1) cancer is extremely expensive, even with health insurance; 2) cancer treatment leads to income disruption or job loss; 3) support networks are unable to take up the slack; and 4) existing debt becomes unmanageable.  These factors, however, are just as present with any sudden and unexpected life event, not just cancer.

Debt problems have a way of kicking you when you’re down.  Most of us – bankruptcy lawyers included – have personal debt, whether it’s student loans, mortgages, car loans, or credit cards.  The bottom line is that debt is a necessary part of everyday economic existence.  What none of us want to admit is that it doesn’t take much for your economic existence to be knocked off balance.  You can be the most responsible credit card user out there and have a modest mortgage, but if you lose your income for six months, you are almost certainly going to start missing payments.

Once you start missing payments, you will begin to spiral deeper into debt.  It’s simple.  You have a mortgage, you have to pay your utilities, you have to buy food, and you go through an income disruption.  If you don’t pay your mortgage, your home will go into foreclosure.  If you don’t pay your utilities, the lights will be shut off.  You have to buy food.  Even at that minimal level of existence, it is easy to spiral into debt if you lose your income for even a few months.

Most of my clients have been financially responsible their whole lives.  It just takes a few months of financial disruption like lost income or unexpectedly large medical bills for them to spiral into debt and end up in bankruptcy.  The bottom line is that any kind of disruption whether it is extreme and life threatening like cancer, a layoff, a furlough at work, or anything that radically increases your expenses or radically decreases your income can put the most responsible person into bankruptcy.

Tax debt is one of the most common and complicated debts that our clients face.  It is also one of the least understood.  Every bankruptcy lawyer can recite the tax discharge rules off the top of their head; but that isn’t enough.  Tax resolution should be part of every bankruptcy lawyer’s tool kit.  Understanding tax resolution is a sound business practice and a sound professional practice for bankruptcy attorneys.  If you don’t have a proper understanding of tax resolution you are losing out on a major source of business, client service suffers, and you increase your malpractice risk.

Some Tax Resolution Background

Tax resolution is the area of tax practice that involves tax debts.  It is discrete from tax preparation and tax planning.  Generally, people who owe $10,000 or more to the IRS will require some professional assistance with their tax debts.  Most people only qualify for the basic streamlined installment plan or the voluntary repayment plan.  However, another large group of people will qualify for the more extensive relief that you can obtain from a partial payment installment agreement, innocent spouse relief, or an offer in compromise.

Tax resolution is a troubled practice area.  You probably recall the TV ads that promised people that they could settle their taxes for “pennies on the dollar.”  Most of those companies were running boiler room operations that preyed on taxpayers’ fear of the IRS.  Those companies are gone now; because the IRS and state regulators shut them down.  However, there are still many fly by night operations bombarding people with direct mail or running PPC ads online.

Tax resolution is also a difficult practice area to fit under any one category.  Tax preparers such as enrolled agents and CPAs can represent taxpayers in front of the IRS; however, they do not necessarily have the background in litigation and negotiation to be effective advocates.  Tax attorneys are often more focused on transactional law, entity formation, and tax planning.  However, bankruptcy lawyers are a great fit for tax resolution; because there is extensive overlap between the two practice areas.

Bankruptcy Lawyers Make Great Tax Resolution Lawyers

Many lawyers assume that in order to be an effective tax lawyer you need an LLM in tax; or at the very least, a full course of tax classes in law school.  That’s probably true if you want to do sophisticated transactional work or sophisticated tax planning.  That couldn’t be further from the truth for tax resolution.

Yes, you need to understand the basics of taxation.  However, most tax lawyers took baby tax in law school.  Even if you didn’t take baby tax, a good Enrolled Agents prep course will give you the background you need in understanding things like the definition of income, allowable deductions, tax basis, pass through entities, gift tax, and the like.

The fact is that the core of tax resolution is virtually indistinguishable from bankruptcy practice.  If you can fill out a bankruptcy petition and confirm a chapter 13 plan, you can setup an installment payment agreement or get an offer in compromise approved.  I won’t get into the mechanics, but I was blown away by how similar the IRS’ tax resolution forms are to the bankruptcy petition.  Also, you’re already familiar with the IRS expense guidelines; because, they are the basis for the means test.

But most importantly, tax resolution and bankruptcy are the same intellectual discipline.  In both practice areas, you are dealing with clients who have debt problems and are under a tremendous amount of stress.  The IRS is probably the most feared creditors out there, except for the maybe the mafia.  However, unlike the mafia, the IRS can be very reasonable and very fair if you know how to talk to them; and the truth is, an IRS collection agent is no more difficult to deal with than a trustee or secured creditor.  It’s the same conversation, just in a different context.

You’re Taking A Risk If You Don’t Understand Tax Resolution

Have you ever told a client to wait out either the tax discharge period before they could file a case or put them into a chapter 13 because they couldn’t wait?  How do you handle cases where the client can’t afford a chapter 13 but can’t discharge all of their tax debt in a chapter 7?  What do you do with a client who is at risk of losing property in a chapter 7, but needs to file to get the IRS off of their back?  Have you ever had a client whose only problem creditor was the IRS?

These are all scenarios that every bankruptcy lawyer has faced.  These are also scenarios where you run the risk of failing to get your client the best possible deal or even of committing malpractice.  This is because tax resolution and bankruptcy are hand in glove with each other.

The new standards for offers in compromise mean that people with non-dischargeable tax debt may get a much better deal if they go through tax resolution, instead of filing a chapter 13.  If you can get the client an offer in compromise and then follow it up with a chapter 7, you may have just saved that client thousands of dollars.  Additionally, you can use an “effective administration” application for offer in compromise for a client who has non-exempt property that is either vulnerable in a chapter 7 or going to pump up a chapter 13 plan payment.  However, you should also know when an offer in compromise application creates the risk of adding to non-dischargeable tax debt.

Also, have your read IRS Circular 230?  Because if you haven’t, you may be surprised to find out that you are already a tax lawyer in the eyes of the IRS Office of Professional Responsibility.  At a minimum, you need to know how the IRS defines “covered opinion” and “reliance advice” before you answer any question about taxes in bankruptcy, particularly if the client has any unfiled tax returns or unassessed taxes.

You’re Losing Business

How many clients have come to you with unfiled tax returns and you sent to a CPA or tax preparer and then they never came back?  How many clients had a tax problem that bankruptcy couldn’t fix?  It happens.

I used to get clients all the time who needed tax returns prepared – very simple 1040s – and I’d tell them to get the returns prepared and then come back and we’d file their bankruptcy; and, then they’d just never come back.  I used to get clients who had a tax problem but couldn’t file bankruptcy for some reason, and I’d say “I’m sorry, good luck.”  I used to get clients who had spent thousands of dollars on useless tax advice, where I could have gotten them the same result or better for a fraction of the cost of what they spent on some boiler room tax resolution service.

Bottom line, a client wants a lawyer who can offer full service debt relief, including tax debts; and they’ll be impressed by a lawyer who not only provides full service debt relief but can take care of their unfiled tax returns at the same time.

Tax used to make me nervous.  Now it is a central part of my bankruptcy practice.  I feel like I’m a better lawyer because I can offer my clients a more complete set of services with a higher level of professional skill.

One question is whether you should file bankruptcy; and then, whether it makes more sense to file bankruptcy before your divorce or after your divorce.  There is no right answer.  Here are some factors to consider if you want to file bankruptcy before your divorce.

• It’s Cheaper To File Bankruptcy Together:  A married couple can file jointly; and they can pay a single filing fee and a single attorneys’ fee.  If you file bankruptcy after the divorce, you will pay twice as much because you are paying for two separate bankruptcy cases.
• You Don’t Have To File Bankruptcy Together:  Even if you are not divorced yet, you can still file bankruptcy and still reap many of the benefits of a getting a divorce after a bankruptcy is complete.  It may be to your advantage to file bankruptcy before the divorce is complete, even if your spouse does not file with you.
• It Will Simplify Your Divorce:  Washington State is a community property state.  This means that all property acquired during a marriage and all debts acquired during a marriage are share equally between the spouses.  The Divorce Petition requires you to divide the community debts.  If you file bankruptcy before the divorce, then the division of debts can be handled with ease.  This will save you time and attorneys’ fees in the divorce.
• It Will Simplify the Division of Community Property:  I have seen many Divorce Decrees that are extremely complicated because the community property division is full of offsets for debt.  By simply getting rid of the debt ahead of time, you can simplify the community property division.  This will save you time and attorneys’ fees in the divorce.
• It Will Make It Easier To Find A Family Lawyer:  If you have lots of debt that you have to pay each month, it will be harder to pay for your divorce lawyers.  Also, if you file bankruptcy before getting a divorce, your family lawyer will not be worried that you’ll file bankruptcy on their attorneys’’ fees.  This makes it easier to find a family lawyer and pay for that family lawyer.
• It Will Make The Divorce Less Stressful:  Divorce is stressful enough, without having to worry about whether bills are being paid.  It is easy for a credit card bill or a medical bill to slip through the cracks during a divorce.  Taking care of your debt before you get divorced means you don’t have to worry about your creditors.
• You Will Rebuild Your Credit Sooner:  Divorce tends to hurt people’s credit scores.  This is because it is easy for a bill to slip through the cracks and go to collections or it is easy to fall behind on bills because it is more expensive to live as a single person than as a married couple.  What many people do is get divorced, suffer through several months or years of just scraping by, and then file bankruptcy.  Then they have to wait for their credit score to rebound from the bankruptcy.  The sooner you file bankruptcy, the sooner your credit score will start to rebound.

If you want to file bankruptcy first, and then get a divorce there are a couple of requirements:

• You Have To Sign A Conflict Waiver:  You need to inform your attorney that you are planning on getting a divorce so that your attorney can prepare a conflict waiver for you.  A conflict waiver is required so that both of you understand what happens if you can’t agree on something during the bankruptcy or if you want to keep information from your spouse.
• You Need To Be Able To Be Able To Work Together:  Bankruptcy is a collaborative process.  You will need to be able to communicate and work together to prepare the bankruptcy questionnaire, meet with your bankruptcy attorney, and attend the 341 meeting of creditors.
• If You Don’t Think That You Can Work Together:  Even if you cannot work together or if there is a major conflict of interest, it is still possible to file bankruptcy before you get divorced.  You will just need to file bankruptcy on your own.

If your marriage is ending and you have more debt than you can manage, it may make sense for you to file bankruptcy before you get divorced.  Waiting to do your divorce after the bankruptcy process is complete can greatly simplify the process, reduce the stress, and reduce the costs of a divorce.s

Every so often clients will ask me if they can sell, give away, deed, or transfer property after their bankruptcy is filed.  I’m glad that they ask, because the consequences for a prohibited post-petition property transfer are steep.

Let’s quickly review how property works in bankruptcy.  Once you file bankruptcy, all property becomes property of the bankruptcy estate.  Exemptions allow you to protect equity in property, so that you can get a fresh start after the bankruptcy is completed.  For example, if you have a house that is worth $200,000, and you have a $175,000 mortgage, then you have $25,000 in equity.  That equity is 100% protected by the Washington State homestead exemption; and the trustee cannot force you to sell your house.  However, you cannot sell the house or deed the house while you are in bankruptcy, unless you get written permission from either the court or the trustee.

You should get written permission to sell, give, transfer, deed, or transfer property as long as your case is open.  So how long is your case open?  It depends on the chapter you file.

If you are in a chapter 7 bankruptcy, your case is usually open for about 100 days.  It is important to distinguish between getting your discharge and having the case closed.  You get your discharge about 90 days after you file.  The discharge is what removes your legal obligation to pay pre-petition debts, but it does not close your case.  The case is closed when the trustee files a no asset report or a report that the administration of the case is completed, and the judge approves the report.  Until the judge approves the report and the case is closed, the bankruptcy estate remains in existence.

If you are in a chapter 13 bankruptcy, the case will remain open until all of your plan payments are complete.  Then the trustee will process a final report.  Until the judge approves the final report and the case is closed, the bankruptcy estate remains in existence.

Depending on what you are proposing to do, getting permission can be as simple as having your bankruptcy attorney send an email to the trustee and wait for the trustee’s written response.  In some cases, you will have to file a motion with the court.  The bottom line, however, is that as long as your bankruptcy case is open, you must have proof that you got written permission from either the trustee or the court to give, sell, deed, or transfer any property.

As little as 20 minutes.  It is called a barebones filing.  You file just enough documents to get a case number and put the automatic stay into effect.  Since an attorney can file a case electronically, you file the case and get a case any day, any time.  However, you should only do a barebones filing if it is a true emergency, and you need to stop a creditor’s collection action immediately.

The advantage of a barebones filing is pretty clear.  If it is Thursday afternoon and foreclosure is schedule for the next morning, then you don’t have a lot of time.  If you are being garnished, you don’t have a lot of time.  You need bankruptcy fast, and you can literally file bankruptcy in about 20 minutes with the help of a Seattle bankruptcy attorney.

There are also disadvantages to a barebones filing.  First and foremost, bankruptcy is a serious step.  You should not file bankruptcy if you do not intend to complete the bankruptcy process or if you do not intend to comply with the bankruptcy process.

Second, your options are limited by a barebones filing.  Your attorney will not have time to properly evaluate your case and determine whether all of your property is covered by an exemption.  You cannot voluntarily dismiss a chapter 7, and so most attorneys will strongly advise that you file a chapter 13.  This is because a chapter 13 case can be voluntarily dismissed.  Finally, you have to be able to pay your bankruptcy attorney their upfront fees and costs before they will file the case.

A fully developed bankruptcy filing requires about a week’s worth of preparation.  It is possible to do a bankruptcy on the fly, but I only suggest a barebones filing if it is a true emergency.  If you do a barebones filing, you have to be prepared to work with your bankruptcy attorney after the case is filed.  The court will set a deadline for you to turn your barebones filing into a complete filing.  If you miss that deadline the case can be automatically dismissed.

So the bottom line is that yes, you can file a bankruptcy very quickly.  However, you must be prepared to work with your bankruptcy attorney to make sure that everything goes smoothly after the filing.  In addition, you must be prepared to accept the risk of filing a bankruptcy before your attorney has had a chance to completely evaluate your financial situation.

When you file a chapter 7 bankruptcy, you will have the option of reaffirming your secured debts.  The most common reaffirmation is done on a car loan.  Many of my clients have questions about reaffirmation agreements; and whether it is in their best interests to sign a reaffirmation agreement.

What Is A Reaffirmation Agreement?

A reaffirmation agreement takes the debt out of the bankruptcy.  When you reaffirm a debt you are saying that even though the debt is discharged, you agree to treat the debt like it was never part of your bankruptcy.  This can have some serious consequences for you, but it also has some pretty good benefits.

You can only reaffirm secured debts.  This is because secured debts are treated differently in bankruptcy.  When a debt is secured, there are actually two parts to the claim that goes into the bankruptcy: 1) your personal liability on the contract, and 2) the creditor’s security interest in the collateral.  A security interest in collateral is the right to repossess or seize property in the event of default, i.e. repossession or foreclosure.

This means that if you want to keep property that is covered by a security interest, you have to keep paying the secured claim.  The secured creditor is only allowed to get the value of their interest, which is equivalent to the balance due on the contract.  So basically, when you have a secured debt in bankruptcy and you want to keep the property, you have to keep paying even though the actual “debt” was discharged in bankruptcy.

You don’t have to sign a reaffirmation agreement to keep secured property.  For example, you can keep your car if you don’t sign a reaffirmation agreement.  However, there are reasons you might want to sign a reaffirmation agreement.

If Your Reaffirm A Debt

If you reaffirm a debt and then default on that debt, the creditor can repossess the collateral, sell it at auction, and hold you liable for any deficiency.  A deficiency is the difference between the amount you owe and the amount they get at auction.  For example, if you owe $14,000 and the collateral sells at auction for $6,000, then you are personally liable for an $8,000 deficiency.

If you reaffirm a debt, then the creditor will usually start reporting your payment history to the credit bureaus.  If you are able to stay current on the payments, then this will help you rebuild your credit.  Of course, if you miss payments it will hurt your credit.

If you reaffirm a debt, the creditor may only repossess the collateral if you default on the loan.

If You Do Not Reaffirm A Debt

If you do not reaffirm a debt and the creditor repossesses the collateral, they cannot hold you liable for the deficiency.  This is because the debt was discharged in bankruptcy and was never reaffirmed.

If you do not sign a reaffirmation agreement, making on time payments will not help your credit score.  However, late payments will not hurt your credit score.  This is because the lenders will not report payment history on accounts, unless there is a signed reaffirmation agreement.

There is some risk if you decide not to file a reaffirmation agreement on a personal property loan, most commonly a car.  The Bankruptcy Code says that if the debtor does not sign a reaffirmation agreement on personal property, the secured creditor may repossess their collateral at any time, regardless of payment history.

So in theory, you could make all of your car payments on time and they could repossess your car right before it was paid off.  In practice, I have never actually heard of this happening.  If you do not sign a reaffirmation agreement and you remain current on your payments, it is unlikely that you will have to worry about your car being repossessed.  Even though the law allows it, it is unlikely.  This is because car lenders don’t want cars, they want car payments.

You do not have to sign a reaffirmation agreement on mortgages or home equity lines of credit.  This is because Washington State foreclosure law prevents a lender from foreclosing on a loan that is not in default.  Additionally, it is – in my opinion – a bad idea to reaffirm a mortgage because you are increasing the risk that you will be held personally liable for a very large debt.  As long as you do not default on your mortgage, you can keep your house.

Conclusion

If you have a car loan, or other personal property loan, that needs to be reaffirmed, then you should carefully weigh the pros and cons of signing the reaffirmation agreement.  You can keep your car if you do not sign a reaffirmation agreement.  You can also decide to sign a reaffirmation agreement.  There is risk both ways.  I can help you evaluate that risk and help you decide whether a reaffirmation agreement is right for you.

Let’s start with a few basics.  In any bankruptcy, when you file the case the bankruptcy estate is created.  The bankruptcy estate consists of all of your non-exempt property and interests in property that existed when the petition was filed.  For most people, the bankruptcy estate is not a big deal because all of their property is exempt and the chapter 7 trustee will file a report of no distribution at the end of their case.  Additionally, in a chapter 13 bankruptcy, the debtor remains in control of property of the estate.  This means that there are only really three times when you might need to file a motion to abandon:

1. The chapter 7 trustee has filed an asset report that you either disagree with or that is interfering with your exempt property.
2. The chapter 7 trustee is trying to conduct a short sale on a piece of real property; and you want to stop the short sale.
3. You omitted a piece of property from your original bankruptcy schedules.

Chapter 7 Trustee Files An Asset Report

The vast majority of cases are no- asset cases, meaning that the chapter 7 trustee will not do anything with your property.  Your bankruptcy attorney is usually able to determine whether your case will be an asset case or a no-asset case before the case is filed.  It is not possible to guarantee whether a case will be an asset or a no-asset case, but your attorney can usually make a strong educated guess.

When the trustee is administering assets in your bankruptcy, it can prevent you from selling, transferring, or disposing of your property.  Most of the time, this isn’t a problem.  You know which assets are being administered and you were prepared for it before you filed.  If you need to do something with an asset that isn’t being administered, it’s as simple as informing the trustee in writing and making sure that you don’t need a court order to sell, transfer, or dispose of a piece of property.

If for some reason the trustee is administering property that you think should not be property of the estate, then you can file a motion to abandon that property.  In order for the court to grant the motion to abandon, you must show that the property is of little or no value to the bankruptcy estate.  Oftentimes, this type of motion arises over a disagreement over asset valuation.  Your bankruptcy attorney can advise you as to when it makes sense to litigate against the trustee’s administration of assets and what kind of outcome to expect.

Stopping A Short Sale

A chapter 7 trustee can list real property – including your residence – for short sale.  Generally, this is not a problem because the chapter 7 trustee can only do it if you are already in default and intend to surrender the property.  In fact, many times it is beneficial to you because it prevents a foreclosure from going on your credit report and it may actually increase the time that you have before you have to move.  However, this practice is controversial.  There is no direct authority in the Bankruptcy Code for the chapter 7 trustee to short sell real property.

The bankruptcy judges in Seattle and Tacoma seem to agree that trustees can conduct short sales if certain requirements are met: 1) there is no equity in the house, 2) the debtor is in default, and 3) the debtor is unable to cure the default or obtain a modification.  It has been my experience that if these three requirements are met, then the court will allow a short sale to go forward.  I do not recommend that debtors fight the short sale process, because the short sale is usually beneficial and because the local judges are overruling objections.  If you are adamant that the trustee cannot or should not be permitted to conduct a short sale and the three requirements are met, then you need to be prepared to litigate the issue in the bankruptcy court and be prepared to file an appeal.

Property Omitted From Your Original Schedules

Property omitted from the original bankruptcy schedules is the most common reason a chapter 7 debtor would need to file a motion to abandon.  If property is omitted from a bankruptcy schedule it becomes trapped in the bankruptcy.

This is because all property becomes property of the estate once the bankruptcy is filed.  When the trustee files either a no-asset report or a final report at the end of the case, only releases property was disclosed on the schedules.  This means that if a piece of property is omitted from your bankruptcy schedules, it is still property of the estate even after your case is done.

The two most commonly omitted pieces of property are 1) personal injury cases, and 2) real property.  You may not realize that you have omitted a piece of property until you try to bring the personal injury case or try to either sell or refinance the real property.  It is very important that you correct any omission before you bring a personal injury case or try to either sell or refinance real property.  If you do not deal with the omission beforehand, your personal injury case could be dismissed with prejudice.  With real property, closing or refinancing could be delayed by weeks or months while you sort out the omission.

You can deal with the omission by bringing a motion to reopen your bankruptcy, amending the schedules, and then filing a motion to abandon the omitted property.  The purpose of this three step process is to alert the court, the trustee, and your creditors to the omission and then resolve the omission by disclosing the property and affirmatively removing it from the bankruptcy estate.

1. The debtor is in default on the mortgage;
2. The debtor intends to surrender the real property; and,
3. The debtor does not have any equity in the house.

This is confusing and concerning for some people, because they feel that they filed bankruptcy to protect themselves from a foreclosure.  However, a chapter 7 bankruptcy can only delay a foreclosure.  If you are behind on your mortgage and you want to save your house from foreclosure, you have to either file a chapter 13 bankruptcy or get a mortgage modification.

This is because a mortgage – like any other secured debt in bankruptcy – has two parts: 1) the debt, and 2) the lien.  The debt is discharged in a chapter 7, meaning that you cannot be held personally liable for it.  The lien – which is the creditor’s right to foreclose – cannot be discharged in a chapter 7 bankruptcy.  This means that your mortgage company has the right to foreclose after they either 1) get relief from the automatic stay, or 2) the bankruptcy is completed.

Chapter 7 is very useful for delaying foreclosure, because the moment you file it the automatic stay prevents a foreclosure from going forward.  However, the foreclosure process will eventually restart.  A chapter 7 bankruptcy can give you anywhere from an additional 45 day to 180 days in your house, depending on where you are in the foreclosure process and how fast the bank moves.  This is where the chapter 7 trustee comes in with a short sale.

If the trustee conducts a short sale, you will typically get as much, or more, time in your house as you would if you just let it go into foreclosure.  In addition, you will not have a foreclosure on your credit report.  In some cases, banks are very slow to foreclose and you are stuck with HOA or COA dues; and so, a trustee’s short sale can actually help you save money.  The purpose of the short sale is for the bank to give the trustee a carve out – essentially a fee – for conducting the short sale.  That carve out is used to provide some payment to your unsecured creditors.

There are some cases where a chapter 7 trustee’s short sale is a problem for a debtor.  The court will not stop a short sale just because you want more time in the house or because you want to be control of te short sale process.  This is a controversial area of bankruptcy law, where it is difficult to give a precise answer as to how the court will rule.  In my opinion, chapter 7 trustees do not actually have the authority to conduct short sales without the debtor’s consent; however, for most people, the short sale is actually beneficial and it is not worth the effort to try to stop the short sale process.

Two areas where it is possible to get the court to stop a short sale: unreasonable delay or interference with the ability to modify.  For example, the trustee may be taking too long to short sell the house and delaying the administration of your case.  Alternatively, you may want to modify the mortgage on your house.  If the trustee’s short sale is taking too long, then you can file a motion to abandon the house.  If the court believes that the process is taking an unreasonably long amount of time, then the court can force the trustee to abandon the sale.

If you are in the process of modifying the mortgage, the trustee will generally hold off on listing the house once you have shown him the modification paperwork.  Once the modification is completed and the court approves the modification, the trustee will abandon the house.  If the trustee’s short sale efforts are interfering with your modification, then your attorney can file a motion to abandon the property and try to get the bankruptcy court to order the trustee house.

If you are considering bankruptcy and concerned about a short sale by the trustee, then discuss it with your bankruptcy attorney.  Your bankruptcy attorney can explain the short sale process, the chances that the trustee will actually attempt a short sale, and whether you have grounds to object to a short sale.

The purpose of the US Trustee audit program was to identify “material misstatements of fact” in consumer bankruptcy petitions.  The US Trustee’s Office never defined the term “material misstatement.”  In a typical audit, the debtor would receive a letter requesting a routine set of financial documents such as pay advices from the 180 days prior to filing, bank statements from the 90 days prior to filing, and the most recent tax return.  The documents would be sent to an auditor who would review them and cross check them against the petition.  In some cases, there would be a more in depth review.

I’m glad the program is gone – at least for now – because it didn’t produce any results and it only made life harder for people who were already going through a stressful experience.  Besides, the bankruptcy system already has a system in place for catching fraud: the panel trustees.  A chapter 7 trustee who handles hundreds of cases a year and who takes testimony from every single debtor is in a much better position to spot fraud than a random auditor.

For the moment, debtors can rest easy knowing that they won’t be subject to a random audit.  It doesn’t mean that debtors and their attorneys should be any less careful – because the trustees are still there – but at least they don’t have to worry about be subject to an extra layer of random stress.

1. Everything can be monetized.
2. If it can be monetized, the chapter 7 trustee will liquidate it.

In case you’ve been living under a rock for the last couple of years, the Casey Anthony bankruptcy case is as follows.  Casey Anthony was accused of murdering her toddler daughter.  Her behavior after her daughter’s disappearance could be described as lacking in good taste and sound judgment.  She was tried for capital murder in Florida and acquitted.  Her acquittal provoked outrage, since many in the media and on the internet believed that she was guilty.  She went into hiding for about a year and emerged to file a chapter 7 bankruptcy.  Her bankruptcy case has some important lessons for anyone who is considering bankruptcy.

The purpose of the bankruptcy system is to determine whether a debtor has any assets or income that is available to make a partial or full payment to their creditors.  If there are available assets or available income, then the debtor must turn it over to a trustee.  The trustee then distributes it to creditors based on their priority in bankruptcy on a pro rata basis.  If, after this distribution, there is any remaining indebtedness it is usually discharged.  There are some exceptions to the discharge, but most debt is dischargeable in bankruptcy.

Most debtors do not have enough assets or income available to make any kind of meaningful distribution to creditors; and so, their case is simply discharged as a no asset chapter 7.  Their debts are discharged in full, and they go on with their lives.  However, the lesson in the Casey Anthony bankruptcy is that “asset” is very broadly defined; and, the trustee has very broad powers to seize those assets.

Assets In Bankruptcy – A Brief Background

So here’s how it works.  When you file bankruptcy, everything that you own that is not either fully secured or subject to an exemption becomes property of the bankruptcy estate.  Now you don’t just own the stuff in your house.  You have property rights and property interests that become property of the bankruptcy estate.  Those property rights and property interests include the ability to turn something – even something intangible – into a valuable asset in the future.

For example, a real estate agent who files bankruptcy may have future commissions based on sales contracts that were signed before the bankruptcy but will not close until after the bankruptcy.  That real estate agent can’t turn their future commissions into cash on the day they file bankruptcy.  In fact, if the sale falls through, the real estate agent will never get that commission.  But the right to the future commission is still property of the estate.  If the sale fails to close, then nothing happens; because the property right was worthless.  However, if the sale closes, then the real estate agent is entitled to the commission, and the property right had value.  Even though the closing happened post-petition – after the bankruptcy was filed – the fact that the sales contract was signed before the bankruptcy means that there is a property right; and, that property right is property of the bankruptcy estate that the chapter 7 trustee can use for the benefit of unsecured creditors.

What This Means For Casey Anthony

Case Anthony apparently has no income and lives on the charity of friends and family members.  However, she does have an asset.  She has the rights to her story.  You can sell the right to tell your life story.  Most of us have very boring life stories.  For instance, nobody wants to hear about that time I got out of a speeding ticket.   However, Casey Anthony’s life story is valuable, because of the sensation surrounding her trial.

Evidently, she has not tried to sell the rights to her story yet; but that doesn’t matter.  What matters is that on the day she filed bankruptcy, she had the right to sell her story.  The chapter 7 trustee can take that right and sell it to the highest bidder, who can then publish the “exclusive authorized Casey Anthony life story,” turn it into a TV movie, etc.

If the chapter 7 trustee sells the rights to her story, it does not prevent her from telling her story.  It just prevents her from profiting from it.  For example, people like Casey Anthony are often paid to give interviews, particularly their first interview.  If someone buys the rights to her story, then anything she receives for giving an interview is actually payable to the person who buys her story.  She can give the interview, but she doesn’t get the interview fee.

Of course, the buyer can’t force her to write a book or give an interview.  This means that the rights to her story are worth very little, unless she reaches an agreement with the buyer.  For example, the buyer could offer her 25% of the net proceeds from an interview as an inducement to her granting an interview with a news outlet.

The buyer cannot, however, obtain some kind of blanket gag order that prevents her from ever telling her story in any form.  That would violate her First Amendment right.  She can pretty clearly tell her story to whomever she chooses, whenever she chooses.  Purchasing the rights only means that any profit she derives from her story is payable to the owner of rights.

What This Means For A Potential Bankruptcy Filer

Very few of us have anything as sensational as the rights to the Casey Antony story.  However, her case illustrates an interesting point.  When you file bankruptcy, you expose all of your property, your property interests, and your property rights no matter how small or remote to liquidation by the chapter 7 trustee.  This relates back to the two rules of bankruptcy I proposed earlier.

Everything Can Be Monetized

When you file bankruptcy, the case is about money.  Specifically, the case is about whether there is money for your creditors.  In effect, the trustee and the court will look at all of your assets and determine whether there is non-exempt value that is available to repay unsecured creditors.

Basically, everything has value.  It’s just a question of how much.  In order to monetize something, it has to have enough value that there is 1) a market for it, and 2) the market is willing to pay enough to make the sale profitable.  That’s why you don’t see chapter 7 trustees selling people’s pet goldfish.  The value of the pet goldfish cannot be monetized.  Despite the market for pet goldfish, gold fish is not worth enough to actually produce value; and so, it cannot be monetized.

If It Can Be Monetized The Chapter 7 Trustee Will Sell It

Chapter 7 trustees are paid $60, plus a percentage of what they recover.  The vast majority of debtors do not have any non-exempt property; and so, the chapter 7 trustee gets paid $60 per case, in most cases.  This is a powerful incentive to find and liquidate non-exempt property.  Filing bankruptcy and hoping that the trustee will not notice how much something is worth is a fool’s game.  A chapter 7 trustee would not last very long if they couldn’t ferret out value to monetize.

A good chapter 7 attorney can spot potential assets before the case is filed and counsel the client about the risks that the trustee will liquidate property.  One hopes – for the sake of her attorney’s malpractice premium – that Casey Anthony was adequately counseled on the risk that the rights to her story could be sold to the highest bidder.  Actually, in a case like Anthony’s – I’m not sure why she didn’t file a chapter 11, sell the rights herself, and negotiate a plan with her creditors.

The casual reader may think that this wouldn’t have been an issue in a chapter 13 or a chapter 11.  That, however, is not the case and one of several pitfalls for the unwary in bankruptcy practice.  The reorganization chapters – that is chapter 13 and chapter 11 – both require that unsecured creditors either agree to their treatment under a plan or receive as much as they would in a hypothetical chapter 7.  The principle of chapter 7 liquidation is applicable even when the debtor files another chapter.

You may, therefore, wonder why someone would file a chapter 13 or chapter 11, when they have to pay just as much as they would in a chapter 7.  The answer is control.  In a chapter 13 or a chapter 11, the debtor is generally able to control the liquidation of the asset.  In a chapter 7, the trustee sells the asset without any input from the debtor.  When you have a unique and valuable asset – such as the rights to your life story – you may be able to get a better deal for yourself by retaining control over the sale through a chapter 13 or chapter 11 reorganization than you would by letting the trustee sell the asset in a chapter 7.