Before I get to debt limits, income levels, and priority claims, I want to explore Chapter 5.  I want to know about what the client owns (§541), what he’s given away (§548), who he’s paid recently (§547), and what he may appear to own but doesn’t (§544).  Where has he lived (§522) and what has he charged (§523).

I’ve found that working down a checklist of such questions face to face often deadens the conversation, such that the client stops really thinking about what I’m asking.  To deal with that, I developed a little yes/no questionnaire that I ask the client to complete before we sit down.  The answers to those questions help me pick those things that we ought to discuss more fully and to avoid those areas where there is no issue.

When BAPCPA first became effective, I had a vision of doing the means test while the client sat at my conference table.  The more I know about the means test, the less likely I am to try to do that in public.  I may try to gather information about the portion of the B-22 that uses the client’s actual expenses, but I am now resigned to telling the above median income client that I’ll need to spend some time after our meeting working out the means test issues.

What is striking about clients is the differences between what I learn at the first meeting and what subsequently appears on the worksheets that they prepare for us.  Debts to family, tort claims, even operating businesses that were discussed in our meeting fail to find their way to the worksheets.  I chalk this up to some sort of narrow view of debts as being only contract claims where the creditor sends you a monthly bill, or such.

Anyway, the take-away from this phenomenon is that you need to engage in a real conversation with the client about their financial life and its issues so that you have the counterpoint to what they tell you when they prepare paper.  My worksheets reiterate that they must not exclude anything from the worksheets because they told us about the issues in some other forum, but they still do.

Your notes of the initial meeting have to highlight your findings.  But more importantly, you have to revisit those notes when you review the petition before filing.  To check the finished product against their worksheets is only half the job;  checking it against the overview acquired at the first meeting makes sure that you’ve used everything you’ve learned from the client.

Client as Onion

Listening Skills for the Lawyer

Playing Connect the Dots

Image courtesy of RalphBijker

My friend’s fact pattern was a bit more complex than the unresolved auto accident:  an exspouse was complaining that a title company mix-up left the property the ex got in the property division encumbered with the client’s  new loan, rather than the client’s property.  The young lawyer’s first reaction was that the ex wasn’t a creditor who could bring a non dischargeability suit.

The statutory definition of claim in 101(5) is very broad:

(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

So, in my friend’s case, the ex’s complaint about the equity in her home being wrongfully reduced by the errant lien certainly falls within this definition.  It’s an entirely different question whether this is a non dischargeable debt or whether the debtor is the one responsible.

Add to the teaching of Johnson v. Home State that a claim isn’t limited to debts for which there is personal liability, the proposition that a claim needn’t be contractual, liquidated , or  undisputed to be a claim within the meaning of the code.

Add to your intake procedures questions that flush out the sort of dispute or financial exposure that isn’t the subject of a monthly bill.

Image courtesy of  shuets udono

Clients who receive Social Security, disability, or other forms of income that is exempt by reason of its source can use this tip. Leading up to a bankruptcy filing, the debtor should use other non exempt sources of income, or even assets that can’t be claimed exempt, to fund current living expenses, the fees of their attorney, and any fix up/catch up payments appropriate prior to filing.  Leave the exempt funds untouched or make those funds the last used for necessary expenditures.

The debtor must segregate the exempt income so that it can be traced from exempt source to the account in question.

Depending on the marital property laws of your state, this principle may work in cases where a non filing spouse has property that doesn’t come into the bankruptcy estate.  Again consume the cash that would otherwise be property of the estate if existing at filing, and save the separate or excluded property.

Remember that the federal, non bankruptcy exemptions apply as well to a debtor who elects the state exemptions.  Become familiar with those exemptions and use them to your client’s advantage.

More on exemption planning :  dealing with excess, non exempt cash

A new bankruptcy lawyer was telling me about his client’s dealings with a loan modification lawyer he called a fraudster.  That relationship  resulted in a near foreclosure on the client’s home while the prior lawyer was saying “don’t worry”.  My friend filed a 13  that was necessary only because of the failings of prior counsel.

But the newbie lawyer had not recognized that the claims of the client against prior counsel were assets of the estate and needed to be disclosed on Schedule B.

The fact pattern is common as clients often either don’t know that the abuse they have suffered triggers a legal remedy or don’t understand that even unfiled claims are claims and therefore assets.

Cases are full of stories of debtors who later identify and elect to pursue a cause of action that predates the petition  and encounter disaster:  “Judicial estoppel” squeals the  defendant.

The concept is that the debtor has taken inconsistent positions, saying in effect on the bankruptcy schedules that no such claim exists, while prosecuting that claim in another forum.

Bankruptcy counsel needs to be alert to evidence of causes of action lurking in the debtor’s history and see that those claims known as of filing are listed.  If properly disclosed, the closing of the bankruptcy case without administration of the asset results in its abandonment to the debtor.

I would never have considered that a debtor would use two different Social Security numbers without a thought.  Yet they apparently do.  With this  experience,  I have added the need to check the Social Security number against the tax return to my list of pre filing checks.

What happened here?   Two things:  debtor’s lawyer accepted the  categories on the official form as the only allowable expenses.  Then the debtor, either out of inattention or a desire to be seen as living frugally, put minimalist numbers for expenses.  Lawyer doesn’t see the bombshell in having a self declared excess and files the schedule.

How to avoid such disasters?  First, the official form is not an exclusive list of expenses.  Note that there are no categories for vacations, kids school activities, repair and replacement of household goods, pet care, grooming, yard care, etc.  If you look at the elements that make up the IRS standards, you find allowances for housekeeping supplies (cleaners, toilet paper, etc.).  Add those to the Schedule J expenses.   Look at the expense categories on the B-22.  Several of them don’t appear on J.

Local culture and the world view of trustees will color what is seen as acceptable expenses where you practice. But remember that trustees, panel and UST, are only advocates for their position.  They are not the ultimate decision makers;  the judge makes the final call.  Don’t be afraid to present a realistic budget for your client and be prepared to advocate it to the judge.

The second problem is the client who thinks that he gains credibility by proposing a budget that is unrealistically spare.  Consider that the budget here is the yardstick for whether the debtor spends 3-5 years in a Chapter 13.  While a debtor might get by with $75 in health care expenses for a while, chances are that over 5 years, there will be some event that will blow that number as an average monthly expense.  Same scenario for car repairs, clothing, etc.

An effective bankruptcy lawyer is not bound to accept without question the debtor’s figures on these issues.  You can’t replace the client’s input with your own, but the value you add to the process is your critical review of the client’s submission.  Probe and question numbers that seem unrealistic.

I start from the proposition that if my client’s budget leaves a fat figure at the bottom of I and J, I have just challenged the various trustees to contest my client’s right to a Chapter 7 discharge.  A good result for the client is much more likely to result if I put real-world budget numbers on J, and prepare to defend them if necessary.

Babel fish from Hitchhiker's Guide to the Galaxy

Bankruptcy debtors hear something different when their lawyer asks, “What do you owe on your mortgage”. It’s as though they speak a different language,  Client, while we speak Bankruptcy.  As  bankruptcy lawyers, we need to be bilingual.

It shouldn’t be a trick question, but all too often the answer a bankruptcy lawyer gets back is the principal balance.  Gone, somehow, are the arrears and corporate advances much less all the junk fees the homeowner knows nothing about.

It is the payoff balance that you want for the bankruptcy schedules:  principal, interest, and everything else owed to the lender to obtain release of the lien.  Knowing the arrears is important for the means test and for the plan, in Chapter 13.

But it’s also vital when you are considering a lien strip in Chapter 13.  You may need every dollar owed to the senior lender to push the junior lien over the edge of the equity.

So, once again, don’t take the client’s input at face value.  Probe to find out if the number you’re given for the mortgage debt includes any arrearages.  Develop your linguistic skills in Client-speak.

Image courtesy of Wikipedia and Stuart Halliday.