Frequently Asked Questions

Federal law requires the United States Trustee to conduct audits of some Chapter 7 and Chapter 13 bankruptcy cases. If you are considering filing for bankruptcy, you should know what it means for the United States Trustee to audit a bankruptcy case, when they occur, and what happens if the U.S. Trustee audits your case.

Who Is the United States Trustee?

When you file a bankruptcy case, the bankruptcy court appoints a bankruptcy trustee to administer your case. The bankruptcy trustee is not the U.S. Trustee.

The United States Trustee Program is the agency in the U.S. Department of Justice charged with overseeing administration of bankruptcy cases and bankruptcy trustees. There are 21 United States Trustees appointed by the Attorney General, one for each of the 21 geographical regions covered by the Trustee Program.

The U.S. Trustee Program operates under authority granted under federal laws. One of those statutes, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, requires the U.S. Trustee to audit a certain number of bankruptcy cases filed in each judicial district every year.

How Does the U.S. Trustee Decide Which Cases to Audit?

The U.S. Trustee can select a bankruptcy case for audit in one of two different ways. First, the Trustee randomly selects a limited number cases for audit each year. Your chances of being selected for a random audit are relatively small. While the law requires the Trustee to audit at least one of every 250 cases in each federal judicial district every year, random audits are limited to one out of every 1,000 Chapter 7 or Chapter 13 cases filed.

The second reason that the U.S. Trustee selects a case for audit relates to information in the bankruptcy filing itself that raises “red flags.” The term for this type of audit is an “exception audit.” Red flags include situations in which the debtor’s income and expenses vary significantly from statistical averages in other cases filed in the district. An exception audit may also occur if there are irregularities in the filing itself.

There are two steps to take that help minimize your chances for an exception audit:

• Provide complete and accurate information regarding your financial transactions and assets
• Have an experienced bankruptcy attorney assist with your bankruptcy case

If you take those steps, it will not guarantee that you will not face an audit, but you will be in a much better position if one does occur. In addition, if an attorney represents you, the attorney may be able to find out whether your case involves a random or exception audit. That knowledge can be very beneficial.

What Happens If the Trustee Selects Your Case for Audit?

In most situations involving an audit, the U.S. Trustee sends notice of the audit within 10 days of the bankruptcy petition filing. If you filed your petition without the assistance of an attorney, and you receive an audit notice, you should talk with an experienced bankruptcy attorney immediately.

In random audits, the U.S. Trustee typically hires an outside audit firm to conduct the audit. In some exception audits, the U.S. Trustee’s office conducts the audit. The debtor does not pay for the cost of the audit in either case.

The audit notice includes a request for specific information, documents, and records. You are legally required to provide that information. You or your attorney must send that information to the audit firm within 21 days.

The audit firm uses the information you provide, as well as your bankruptcy petition and schedules, to verify your income, expenses, and assets. The auditor also conducts a public record search to determine whether you own any assets not disclosed in your filing.

The audit firm completes the audit within 21 days. The firm has 70 days from selection of the case for audit to file the audit report with the court.

The audit report does not contain legal conclusions about the audit firm’s findings. It only reports the factual findings about the debtor’s financial circumstances and details to the bankruptcy court.

The bankruptcy court and U.S. Trustee review the auditor’s findings to determine whether the debtor made any material misstatements on the bankruptcy petition. If the court does not find any material misstatements, the bankruptcy case proceeds normally. If the audit report identifies a material misstatement in the bankruptcy documents, the U.S. Trustee determines the next step in the process.

What Happens If the U.S. Trustee Audit Finds a Material Misstatement?

If the audit firm finds a material misstatement in your bankruptcy documents and financial records, you will have the opportunity to explain the discrepancy and amend your bankruptcy documents. If you are not able to explain the discrepancy satisfactorily, the U.S. Trustee’s office has several options.

For a Chapter 7 case in which the U.S. Trustee finds a material misstatement, the options include:

• Requiring an amendment to the bankruptcy schedules
• Filing an objection to discharge or complaint to revoke discharge
• Filing a motion to dismiss the bankruptcy case
• Filing a turnover action for return of bankruptcy estate property

For a material misstatement of fact in a Chapter 13 bankruptcy case, the U.S. Trustee’s options include:

• Requiring amendment of the schedules
• Requiring information to be sent to the bankruptcy trustee
• Filing a motion to dismiss the bankruptcy case
• Filing an objection to confirmation
• Requiring a modification of the plan
• Filing for revocation of a confirmed plan for fraud

Additionally in some cases, a material misstatement in a bankruptcy filing can lead to criminal prosecution by the United States Attorney’s Office.

How to Avoid — or Survive — a United States Trustee Audit of a Bankruptcy Case

The very best way to avoid a U.S. Trustee audit — or to survive an audit — is to be completely honest and make full disclosure about your financial situation and assets in your bankruptcy filing. Doing anything less makes you vulnerable to not just an audit, but to other types of adversary proceedings in your bankruptcy case.

A solid strategy for making sure that your bankruptcy case goes smoothly in all respects should include representation by an experienced bankruptcy attorney. Your attorney will ensure that your petition and schedules are properly and thoroughly prepared and that all the information is correct and complete. In the event your case undergoes a random audit, your attorney will be able to navigate through the audit with you to achieve the best possible result.

Talk With an Experienced Burr Ridge, Illinois Bankruptcy Attorney

Modestas Law Offices assists clients with Chapter 7 and Chapter 13 bankruptcy cases. In some situations, we also represent clients in bankruptcy adversary proceedings.

We serve Illinois clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends. Contact us to schedule your initial free consultation.

If you're considering bankruptcy, being able to keep your car might be one of your greatest concerns. When you read about how cars and car loans are treated in bankruptcy, you may come across the term "cramdown" in connection with auto loans. An auto loan cramdown is a tool that may be available in a Chapter 13 bankruptcy, if your circumstances meet certain requirements. If you qualify, a cramdown enables you to keep your car.

What Is an Auto Loan Cramdown?

Cramdown actually is not a term used in the Bankruptcy Code. It is an informal term used by bankruptcy judges, lawyers, and others, in connection with Chapter 13 bankruptcy. It applies to specific secured debts, including auto loans. A cramdown has benefits, including the fact that you can keep your car.

If an auto loan cramdown as approved as part of a Chapter 13 repayment plan, your loan amount is reduced to the fair market value of your car, often at a lower interest rate. That reduces the amount of your loan, the total amount you will have to pay, and your payments. If you fall behind in payments, you are protected from repossession.

Auto Loan Cramdown Eligibility Requirements

A cramdown for your auto loan is only available in Chapter 13 bankruptcy. It is also only available in certain circumstances. For your loan to qualify, both of the following must be true:

• Your car is worth less than the amount of your loan, and
• You purchased your car more than 910 days (2-1/2 years) before filing the bankruptcy petition.

The time limitation is imposed to prevent debtors from purchasing a car shortly before filing bankruptcy and taking advantage of a cramdown to avoid paying the full loan.

How Does an Auto Loan Cramdown Work?

If a cramdown is included in your Chapter 13 plan, your auto loan amount is reduced to the fair value of your car, which is the secured value of the loan. The balance of the loan, the unsecured amount, is rolled into your total unsecured debts for purposes of your payment plan.

Usually, the interest on your auto loan will be reduced as part of the cramdown. With the amount of the loan and interest both reduced, your monthly loan payments usually are considerably less than before your bankruptcy.

Here's an example: You purchased your car three years ago, taking out a car loan for $15,000. Today, the car's fair market value is $8,000. You can cram down your loan to $8,000, probably at a lower interest rate (and lower monthly payments). The $7,000 balance of the loan becomes part of your unsecured debt that is paid off with your Chapter 13 plan payments.

Other Debts that Can Be Crammed Down in Chapter 13

Cramdowns are not limited to auto loans. If you file Chapter 13 bankruptcy, you may be able to cramdown secured loans on investment property mortgages and on personal property like furnishings and other household goods. Your home mortgage cannot be crammed down in Chapter 13.

Alternatives to an Auto Loan Cramdown

Cramdowns are only available in Chapter 13 bankruptcy. If your circumstances aren't suitable for filing Chapter 13, you may end up filing for Chapter 7 bankruptcy. Auto loans are treated differently in Chapter 7.

In Chapter 7 bankruptcy, you may be able to keep your vehicle by either reaffirming your car loan or redeeming it. In a reaffirmation, you agree to continuing to pay the full amount of your car loan. The debt is excluded from the discharge, and your lender retains all of its rights under the loan agreement.

If you reaffirm a car loan and are unable to make the payments, your car can be repossessed. The lender can also proceed against you for any deficiency left after your car is sold, if it isn't sold for enough to pay off the whole debt. In most Chapter 7 situations, reaffirmation is the only option for keeping your car.

Redemption is also an option in Chapter 7. However, to redeem your auto loan, you need to be able to pay the lender the full current fair market value of your car (assuming that value is less than the amount of the loan). The difficulty for the debtor usually is getting the money to redeem the loan. Sometimes, debtors are able to borrow the necessary funds from friends or relatives. There are commercial sources that offer special loans for this purpose, but applicants must meet certain qualifications.

Should You Try to Get an Auto Loan Cramdown?

If you need to keep your car for employment or for other reasons, the Chapter 13 cramdown process often presents the best option, if you qualify for it. However, there are many other considerations that go into determining whether Chapter 13 bankruptcy is the best option for you.

Your income and your assets are both significant factors in determining which type of bankruptcy is best for your circumstances. Your home mortgage and equity in your home — and whether you want to try to keep your home — should also factor into your decision.

The best way to determine whether bankruptcy is right for you and what type of bankruptcy is most suitable for your circumstances is to discuss your whole situation with an experienced bankruptcy attorney. A knowledgeable attorney will talk with you in detail about your circumstances, explain the available options for filing for bankruptcy, and also ensure that you understand all the consequences of filing the different types of bankruptcy.

If you are considering bankruptcy, additional information is available on our general page about bankruptcy, as well as on our pages for Chapter 7 and Chapter 13 bankruptcy. We provide a free initial consultation for bankruptcy clients.

Talk With an Experienced Illinois Bankruptcy Attorney

Modestas Law Offices assists clients with Chapter 7 or Chapter 13 bankruptcy cases. We serve Illinois clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends. Contact us to schedule your initial free consultation. We look forward to assisting you.

At Modestas Law Offices, our clients often ask whether student loans are included in a bankruptcy discharge. While there is a process under the Bankruptcy Code to request discharge of a student loan in a Chapter 7 or Chapter 13 bankruptcy case, getting a student loan discharged is far from a sure thing.

Whether the bankruptcy judge will grant the discharge depends entirely on your individual circumstances.

Bankruptcy Code Provisions Relating to Student Loans

Under the United States Bankruptcy Code, student loans are a type of unsecured debt that is usually not covered by a bankruptcy discharge. However, the Code provides an exception relating for student loans. If you can prove that failure to discharge the debt will impose an “undue hardship,” the bankruptcy court can grant discharge of the student loan.

While the Code includes the undue hardship exception for student loans, the law does not explain what qualifies as undue hardship. Therefore, interpretation of the exception is left to the courts.

Since the United States Supreme Court has not decided what constitutes undue hardship in student loan cases, interpretation of the requirement is based on decisions of the United States Courts of Appeals.

Bankruptcy cases are reviewed by 12 different individual circuits of the Court of Appeals across the country. Each circuit sets its own standards for applying the undue hardship test. Illinois is covered by the United States Court of Appeals for the Seventh Circuit, which also includes Indiana and Wisconsin.

Undue Hardship Test for Student Loan Bankruptcy Discharge in Illinois

The Seventh Circuit Court of Appeals embraces a test known as the “Brunner Test,” named after the decision of the Second Circuit which originally set forth the test. The Brunner Test applies to all Seventh Circuit cases, so it applies to bankruptcy cases filed in Illinois, Indiana, and Wisconsin.

The Brunner Test requires you to meet three different criteria to qualify for discharge of a student loan:

• You made good faith efforts to repay the loans;
• If you are forced to repay the loan, you will not be able to maintain a minimal standard of living for yourself and your dependents, based on your current income and expenses; and
• Your current financial situation is likely to continue for a significant part of the repayment period.

To meet the three-part test, the facts in your case must support each individual element of the Brunner Test.

When the bankruptcy court applies the test, the judge is likely to consider eligibility for repayment plans, if you have federal student loans. However, in a case several years ago, the Seventh Circuit upheld a bankruptcy court ruling that a debtor had made a good faith effort to repay her loans even though she had not applied for a federal repayment plan. The case is important because it means that applying for a federal loan repayment plan is not an absolute requirement for meeting the “good faith” element of the undue hardship test for cases tried in the Seventh Circuit.

Requesting a Student Loan Undue Hardship Discharge in a Bankruptcy Case

Getting discharge of student loans in a bankruptcy case is not an easy task. The undue hardship determination can only be made by the bankruptcy judge (not the trustee). The request must be filed as an adversary proceeding in the bankruptcy case.

Adversary proceedings are a separate civil matter within a bankruptcy case. These proceedings are sometimes referred to as bankruptcy litigation. Requesting discharge on the basis of undue hardship in an adversary proceeding involves a formal court hearing before the bankruptcy judge, at which you are represented by legal counsel. Ultimately, the bankruptcy judge issues a decision, which then becomes part of your bankruptcy case.

Since an adversary proceeding must be filed to request discharge of a student loan, the process complicates your bankruptcy case considerably. In addition, your request can be opposed by your student loan lender.

If an adversary proceeding is filed to request discharge of a student loan, you may receive some relief, even if it is not a full discharge. Depending on the circumstances, a bankruptcy judge may grant a partial discharge or suggest bankruptcy mediation between the debtor and lender. In addition, your attorney can negotiate with the lender for a lower interest rate, reduction of principal, or other forms of relief.

Should You Pursue Bankruptcy Discharge of a Student Loan?

In 2012, the American Bankruptcy Law Journal published a report on a study of student loan discharge requests and the undue hardship exception. The study of actual discharge requests found that about 40% of those requests were granted.

The report also concluded that debtors who were successful in meeting the test had common characteristics:

• Unemployment: If a debtor has ongoing problems finding employment, despite efforts to do so, that fact can help establish a future inability to pay.
• Disability: Involuntary medical hardship or disability seems to be the most predominant characteristic in getting discharge of a student loan. However, a disability that is the result of a lifestyle issue (like alcoholism) may not satisfy the test.
• Low Income: If the debtor's past income has been persistently low, that fact can help demonstrate that the circumstances are likely to continue in the future.

The study was conducted six years ago, and results in the student loan discharge requests may have changed since then. In addition, the presence of any of these characteristics does not ensure success in any future case. The study may, however, be useful as a reference in evaluating whether pursuing the undue hardship exception is a good option in your case.

How you would fare in an adversary proceeding will depend entirely on the facts of your case. Your bankruptcy attorney can discuss your circumstances and advise you whether pursuing a discharge is advisable. Sometimes, pursuing other avenues for relief of student loan debt is preferable to filing bankruptcy or an adversary proceeding within your bankruptcy case.

Talk With a Burr Ridge, Illinois Bankruptcy Attorney

Modestas Law Offices assists clients with Chapter 7 or Chapter 13 bankruptcy. A request for discharge of a student loan can be filed in either type of bankruptcy case. If you’re considering bankruptcy for your student loans or other reasons, we welcome you to contact us.

We serve Illinois clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends. Contact us to schedule your initial free consultation.

If you file for bankruptcy, you must be honest and transparent about all your financial activity before, during, and after the petition is filed. For Chapter 7 and Chapter 11 bankruptcies, the ramifications of any kind of dishonesty can be especially severe. If Section 727 adversary proceedings are filed, the entire discharge can be denied or revoked if certain fraudulent activities can be proven by a creditor or the bankruptcy trustee.

Consequences of Denial or Revocation of a Discharge Under 727

In our previous blog post about Section 523 adversary proceedings, we explained how a creditor can object to discharge of a specific debt. Proceedings under Section 727 of the Bankruptcy Code have even more serious consequences.

If a creditor or the bankruptcy trustee files under Section 727, the entire discharge can be denied or revoked. The effect is even worse than if the bankruptcy was never filed. Denial or revocation under Section 727 is sometimes referred to as “bankruptcy hell” — for good reason. Consequences include the following:

• The debtor is still legally responsible for all debts.
• The trustee still administers the debtor’s assets.
• The debtor loses all non-exempt property, which is used to pay creditor claims.
• After non-exempt assets are liquidated and creditors are paid, the debtor is still legally responsible for paying remaining unpaid debts.
• Creditors can pursue state law claims to collect the remaining debts.
• The trustee controls all assets — the debtor cannot use them to pay legal fees or settle claims.

Section 727 was designed to protect the integrity of the bankruptcy process. It penalizes debtors severely for specific conduct that is fraudulent or disrupts the process.

Reasons a Creditor or the Trustee Can File a Section 727 Petition

Actions filed under Section 727 are adversary proceedings within a bankruptcy case. A creditor or the bankruptcy trustee files the action, which is a separate proceeding within the bankruptcy case. Section 727 proceedings are a type of bankruptcy litigation.

There are numerous reasons set out in Section 727 for filing a request for denial of a discharge. Most of the provisions include some type of fraudulent conduct, including these subsections:

Section 727(a)(2)

A request for denial of the discharge can be filed if, with the intention of hindering or defrauding a creditor or the trustee, the debtor took the following actions (or caused them to be taken) with regard to his or her property (within one year before the date of filing) or property of the bankruptcy estate (after filing of the petition):

• Transfer
• Removal
• Destruction
• Mutilation
• Concealment

Section 727(a)(3)

A petition can be filed if the debtor took action to destroy, conceal, falsify, or mutilate financial or business records or failed to keep or preserve those records, unless the conduct or failure to act was justified under all the circumstances of the case. The records include papers, documents, books, and other records that can be used to substantiate the debtor’s financial condition or business transaction.

Section 727(a)(4)

If, in connection with a bankruptcy case, a debtor knowingly and fraudulently does any of the following, a creditor or the trustee can file an action under Section 727:

• Makes a false oath or account;
• Presents or uses a false claim;
• Gives, offers, receives, or attempts to obtain money, property, or an advantage, or a promise of an advantage, property, or money, for acting or refraining from acting; or
• Withholds from the trustee any documents relating to the debtor’s assets or financial affairs.

Section 727(a)(5)

An action can be filed under Section 727 if the debtor fails to offer a satisfactory explanation for any loss or deficiency of assets.

Section 727(a)(6)

A request for denial of discharge can be made if the debtor refuses to:

• Obey an order of the bankruptcy court, other than an order to testify or respond to a material question approved by the court;
• Testify or answer a material question approved by the court, on a ground other than the privilege against self-incrimination; or
• Respond to a material question or testify, if granted immunity on the matter after revoking the privilege against self-incrimination.

Objections to Discharge Under Section 727

During pendency of the bankruptcy case, the trustee, a creditor, or the United States trustee can object to the granting of a discharge under Section 727, for any of the reasons set forth in the section. In addition, a creditor can ask the court to have the trustee examine the debtor’s conduct to determine whether a basis exists for denial of the discharge.

If a request for denial of the discharge is filed, the court will hold a hearing to determine the facts and circumstances relevant to the request. The party filing the objection has the burden of demonstrating the required elements to justify denial of the discharge under Section 727.

Request for Revocation of a Discharge Under Section 727

After a discharge has been granted, the trustee, a creditor, or the United States trustee can ask the bankruptcy court to revoke a discharge previously granted, on the grounds set forth in Section 727(a), if:

• The discharge was obtained through the debtor’s fraud, and the requesting party was unaware of the fraud until after the discharge was granted;
• The debtor acquired or became entitled to acquire property belonging to the bankruptcy estate and knowingly and fraudulently failed to deliver the property to the trustee or report the acquisition or entitlement to the trustee;
• The debtor committed a violation of Section 727(a)(6); or
• The debtor failed to explain a material misstatement in an audit or failed to make records requested for an audit available for inspection.

A request for revocation of a discharge can be filed within one year after the discharge was granted. For a revocation request filed on the basis of the last reason above (material misstatement or failure to provide records), the request can be filed either one year after the discharge was granted or one year after the date case was closed, whichever is later.

Importance of Understanding Section 727

While most bankruptcy cases do not include any adversary proceedings at all — and rarely involve a Section 727 request to deny the discharge — it is essential for anyone contemplating bankruptcy to understand the message of Section 727: Debtor honesty and transparency are critical to a successful bankruptcy case.

To avoid running afoul of any of the integrity provisions in the Bankruptcy Code, you must be very careful to:

• Be honest and truthful with your bankruptcy attorney every step of the way.
• Maintain all documents and records that may relate to your bankruptcy — and keep them before, during, and after the petition is filed.
• Be candid and truthful with everyone involved in your bankruptcy case, including the trustee and the bankruptcy judge.

Talk With an Experienced Burr Ridge, Illinois Bankruptcy Attorney

Modestas Law Offices assists clients with Chapter 7 and Chapter 13 bankruptcy cases. In some situations, we also represent clients, including creditors, in bankruptcy adversary proceedings.

We serve Illinois clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends. Contact us to schedule your initial free consultation.

In a bankruptcy case, many debts are discharged. There are certain debts that will be discharged unless a creditor files an action called an objection to the discharge. These creditor actions are referred to as Section 523 adversary proceedings, because they are filed under Section 523 of the U.S. Bankruptcy Code and constitute a separate proceeding within the bankruptcy case. While most bankruptcies do not involve this type of claim, there are some specific situations in which they can arise.

Section 523 objections to discharge fall into several different categories. If you are considering filing for bankruptcy, it's important to understand the basis for creditor objections to discharge and know what you should do if a creditor files one in your bankruptcy case.

What Can a Creditor Claim in a Section 523 Objection to Discharge?

Under Section 523(a) of the Bankruptcy Code, a creditor can file an action asking the bankruptcy court to declare that a certain debt will not be discharged in the bankruptcy case. The debt can be in the form of money, property, or services, or an extension, renewal, or refinancing credit.

Individual subsections of the Bankruptcy Code specify the different types of situations in which an objection can be filed by a creditor. The most common objections are filed under Section 523(a)(2)(A) or (B), but Sections 523(a)(4) and 523(a)(6) also allow a creditor to object to discharge under certain circumstances detailed in those subsections.

Section 523(a)(2)(A) Claims

Section 523(a)(2)(A) permits a creditor to object to discharge of a debt that was obtained by “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”

The Code does not define the terms false pretenses, false representation, or actual fraud. In a case filed under this section, the bankruptcy court will apply rules and guidelines developed in previous court decisions about what kind of statements or conduct meets those requirements.

Generally, if a creditor requests an exception to discharge under this subsection, the creditor must prove that the debtor’s actions or statements were intentionally deceitful or misleading and that the creditor relied on the debtor’s representations in advancing money, property, or credit. The fraud can occur by a debtor making a misrepresentation through statements or conduct. The U.S. Supreme Court has held that “actual fraud” includes claims based on intentional fraudulent transfers, regardless of whether the debtor made a false misrepresentation to the creditor.

Under this subsection, there are two types of transactions that are presumed to nondischargeable, so the debtor has the burden of proving that no fraud or misrepresentation was intended if the creditor files an objection to discharge:

• A consumer debt for more than $675 for luxury goods or services incurred within 90 days before the bankruptcy petition was filed; or
• Cash advances totaling more than $950 obtained within 70 days before the bankruptcy petition was filed.

If a creditor files an objection to discharge under this subsection, the creditor has the burden of proving the allegations, unless the claim is one of the two situations where nondischargeability is presumed. Even if there is a presumption of nondischargeability, the creditor must investigate the facts to make sure there is a basis for filing the objection and present evidence in court. In either case, your attorney in the adversary proceeding will present evidence on your behalf, as well as cross examine the creditor’s evidence, in defending against the claim.

Section 523(a)(2)(B) Claims

Section 523(a)(2)(B) gives a creditor the ability to object to discharge if the debtor provided a materially false written statement about the debtor’s or an insider’s financial condition. Under the Code provisions, the creditor must prove that:

• The statement was materially false;
• The misrepresentation related to the debtor’s or an insider’s financial condition;
• The creditor reasonably relied on the misrepresentation in providing the money, services or property; and
• The debtor made the statement with the intention of deceiving the creditor.

Whether a debt meets the four statutory requirements is a determination made by the court based on evidence introduced at a hearing on the creditor’s petition.

Section 523(a)(4) Claims

This subsection permits a creditor to file an objection to discharge if a debtor was acting in a fiduciary capacity and committed fraud or misappropriated funds while acting in that capacity. It also includes circumstances involving embezzlement or larceny.

A fiduciary is a person who has special legal responsibilities on account of a specific relationship of trust to another person. Fiduciaries include individuals who serve as the trustee of trust, a guardian or conservator, or a person acting as agent under a power of attorney.

As in the case of other objections to discharge, the creditor has the burden of proving to the court all the elements of the claim, including the fact that the debtor was acting in a fiduciary capacity.

Section 523(a)(6) Claims

A claim brought under Section 523(a)(6) is based on a debtor causing willful or malicious injury to another entity or person. The injury can be either to a person or to property.

Generally, a creditor has to prove that the debtor intentionally targeted the creditor and inflicted actual harm. The burden of proof in this type of claim is on the creditor.

What Should You Do If a Section 523 Objection Is Filed by a Creditor in Your Bankruptcy Case?

A Section 523 objection is an adversary proceeding within your bankruptcy case. Adversary proceedings are also referred to as bankruptcy litigation. Each action is a separate, formal court proceeding that is heard before the bankruptcy court, rather than the bankruptcy trustee.

If you have a bankruptcy case pending, and a creditor files a Section 523 objection to discharge, the worst thing you can do is ignore it. Defending against an objection to discharge is critical.

If you have a lawyer handling your bankruptcy case, your lawyer will either represent you in the Section 523 proceeding or recommend a lawyer who specifically handles bankruptcy litigation. If you do not have an attorney handling your bankruptcy case, you should find one as soon as possible to represent you in the Section 523 action. You have a limited amount of time to respond to the creditor's petition. Failing to do so could result in having the court rule that a debt is nondischargeable.

When a creditor files an objection to discharge, both sides will be able to gather evidence about the creditor’s claim. Your attorney will file a response to the creditor’s petition. Then, the bankruptcy court will hold a hearing on the creditor’s petition. At the hearing, the creditor (who is usually represented by an attorney) and your attorney will present evidence. Both sides can cross examine witnesses. The proceeding and the hearing are conducted according to the Federal Rules of Civil Procedure.

Having a lawyer represent you and defend against the claim could result in a court ruling that the debt is discharged, contrary to the creditor's request. In addition, while the proceeding is pending, your lawyer likely will negotiate on your behalf with the creditor’s attorney to try to find a solution satisfactory to both sides, so that the bankruptcy court does not have to decide the issue.

A creditor who files certain claims under Section 523 can be liable for attorney’s fees if the claim is not justified. Section 523(d) is a specific provision in the Bankruptcy Code designed to discourage creditors from filing unwarranted objections to discharge based on fraud or false pretenses or statements. That section gives the bankruptcy court the authority to award reasonable attorney’s fees to the debtor in cases where a creditor files an action under Section 523(a)(2) if the court finds that the action not substantially justified.

Talk With a Burr Ridge, Illinois Bankruptcy Attorney

Modestas Law Offices assists clients with Chapter 7 or Chapter 13 bankruptcy cases. In some situations, we also represent clients, including creditors, in bankruptcy adversary proceedings.

We serve Illinois clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends. Contact us to schedule your initial free consultation.

Most bankruptcy cases go smoothly and are finalized fairly quickly without objections from creditors or the trustee. However, sometimes problems or questions arise. Those issues can result in adversary proceedings being filed during the bankruptcy.

Adversary proceedings are sometimes also referred to as bankruptcy litigation. If you're considering filing for bankruptcy, you should understand what an adversary proceeding is and what will happen if one is filed in your bankruptcy case.

Who Can File An Adversary Proceeding?

Only specific people can file an adversary proceeding. The petitioner can be the bankruptcy trustee or a creditor. You as the debtor also can file an adversary claim if a creditor violates your rights.

The trustee can file an adversary proceeding to force a creditor or another person to turn over property that person is holding for the debtor, recover money paid to a creditor shortly before the bankruptcy was filed, or recover property that was fraudulently transferred.

A creditor can file an adversary case to ask the court to declare a debt to be non-dischargeable, as well as for other reasons. A creditor might file an adversary proceeding to claim that a debt is within one of the exceptions to discharge or that you provided false information to the creditor or incurred the debt in anticipation of filing the bankruptcy.

In addition, you as the debtor can file an adversary proceeding against a creditor for violating the automatic stay or the discharge injunction. If creditors are harassing you during or after your bankruptcy case, you can file an adversary case to protect your rights. In some cases, you may also recover damages for a creditor’s misconduct.

How Do Adversary Proceedings Work?

An adversary proceeding is not part of the bankruptcy case itself. It is basically a civil lawsuit arising from your bankruptcy that involves a separate court proceeding. Unlike your bankruptcy case, where you represent yourself in the meeting of creditors, you should be represented by legal counsel if an adversary case is filed against you or if you need to file an adversary proceeding against a creditor.

When the bankruptcy trustee or a creditor files the adversary proceeding, the opposing party starts by filing a complaint or petition in the bankruptcy court. The other party is usually represented by an attorney, who files the petition and represents the petitioner throughout the process.

The complaint sets forth the claims that constitute the objections to the bankruptcy or issue that needs to be resolved. You are given the opportunity to file a response to the claim. If no response is filed, the court can enter a default judgment against you.

If you respond and challenge the complaint, both sides will have an opportunity to collect evidence. At this point, your attorney and the opposing attorney may attempt to resolve the disagreement through negotiations.

If the matter is not resolved between the parties, the court will hold a hearing. At the hearing, the petitioner’s lawyer presents evidence, which can include documents and witness testimony. Through your attorney, you will have the opportunity to present your own evidence and respond to the claims.

After the hearing is completed, the court will make a determination whether the objection is valid. Depending on the outcome, the court’s decision in the adversary proceeding can affect the result of your bankruptcy case.

In some cases, such as if a creditor is not abiding by the terms of the bankruptcy stay or discharge, you as the debtor will be the one initiating the adversary proceeding. In that case, the process is the same, except that you are the party filing the complaint.

What Are Specific Examples of Adversary Proceedings?

There are many reasons that an adversary proceeding can be filed. The U.S. Bankruptcy Code and rules require certain types of claims to be filed as adversary proceedings. To some extent, the reasons for an adversary proceeding depend on whether your bankruptcy is filed under Chapter 7, Chapter 11, or Chapter 13.

Examples of the types of disputes that must or may be brought as adversary proceedings include:

• Recovery of money or property from another person, including payments made before the bankruptcy was filed;
• Determination of the validity, priority, or extent of a lien or other interest in property;
• Revocation of an order of confirmation of a Chapter 11, Chapter 12, or Chapter 13 plan;
• Determination of dischargeability of a debt, including fraudulent payments and transfers;
• Obtaining an injunction or other equitable relief, unless the bankruptcy plan provides the relief;
• Subordination of an allowed claim or interest, unless the bankruptcy plan provides for subordination;
• Determination of removing a claim or cause of action to another court with jurisdiction;
• Obtaining approval for sale of an interest of the bankruptcy estate and a co-owner of the property;
• Objection to or revocation of a bankruptcy discharge;
• Request by the trustee to convert a Chapter 7 case to a Chapter 13 case;
• Action by the debtor against creditor for violating the automatic stay or discharge injunction.

Generally, if you are completely honest with your lawyer before your bankruptcy case is filed and disclose everything in your filing, you have no reason to fear that you will face an adversary proceeding. Most disputes that lead to an adversary proceeding involve some type of dishonesty or fraud committed in an effort to conceal assets that occurred before the bankruptcy was filed.

What Should I Do If an Adversary Proceeding Is Filed in My Bankruptcy Case?

If you have filed for bankruptcy and the trustee or a creditor files an adversary proceeding, you should have an attorney represent you in the adversary proceeding. If you have a lawyer handling the bankruptcy case, he or she can represent you in the adversary case. However, some attorneys who represent clients in bankruptcy filings do not also handle adversary proceedings. In that situation, your attorney will recommend a bankruptcy litigation attorney to handle the adversary proceeding. At Modestas Law Offices, we represent our clients in any adversary proceedings that arise in the course of a bankruptcy case.

If you are not using an attorney to handle your bankruptcy filing, you should contact a lawyer as soon as the adversary proceeding is filed. If you do not respond to the complaint within the required time, the bankruptcy court could enter a default judgment against you.

Having a lawyer represent you in an adversary proceeding is important for several reasons. First, the proceeding is a separate case within the bankruptcy case. It is a type of civil lawsuit and involves formal court proceedings, including a hearing.

Filing the proper documents and presenting the case in court should be handled only by an experienced bankruptcy litigation attorney. If you try to represent yourself, you risk losing the case and having judgment entered against you.

In addition, defending against an adversary proceeding involves much more than just filing documents and appearing in court. To present a defense, the facts and circumstances surrounding the situation need to be investigated and analyzed. That means collecting evidence, which must be done in accordance with court rules.

Analyzing the evidence under the legal criteria is a complex task that only a lawyer is qualified to complete. Presenting that evidence to the court also requires an attorney who knows not only the law but also courtroom process, rules, and procedures.

Finally, sometimes the dispute that led to the adversary proceeding can be resolved between the parties without having the court decide the case. Negotiations with the other party should be handled by a qualified legal representative. If you attempt to negotiate yourself, you could make statements or mistakes that will end up with you losing the adversary proceeding and harming your underlying bankruptcy case.

Talk With a Burr Ridge, Illinois Bankruptcy Attorney

Modestas Law Offices assists clients with Chapter 7 or Chapter 13 bankruptcy cases. In some situations, we also represent clients, including creditors, in bankruptcy adversary proceedings.

We serve Illinois clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends. Contact us to schedule your initial free consultation.

A bankruptcy discharge is issued at the end of a Chapter 7 or Chapter 13 bankruptcy case. The discharge in a bankruptcy case is a court order that relieves you of your obligation to pay debts that are covered by the discharge.

Our bankruptcy clients at Modestas Law Offices often ask basic questions about the discharge. If you are considering filing for bankruptcy or have already filed, our answers to those questions will be helpful to you.

What Debts Are Covered By a Bankruptcy Discharge?

Which debts are covered by the discharge depends on whether you filed for a Chapter 7 or Chapter 13 bankruptcy. In both cases, there are some types of debt that are not covered by the discharge.

In a Chapter 7 case, debts likely to be covered by the discharge include credit card debt, medical bills, personal loans, and other unsecured debts and loans. The U.S. Bankruptcy Code identifies a number of specific debts that are not discharged by a Chapter 7 bankruptcy, including:

• Domestic support obligations, such as alimony, child support, and payments under a divorce or separation agreement or decree;
• Certain restitution, fines, and penalties for criminal offenses;
• Payments for death or personal injury caused by unlawful operation of a motor vehicle, vessel, or aircraft due to alcohol, drug, or substance intoxication;
• Certain customs duties and taxes, including fraudulent income tax, business tax, and property tax;
• Court costs;
• Retirement plan loans;
• Condominium or homeowners’ association fees assessed after you filed for bankruptcy;
• Debts not discharged in a previous bankruptcy;
• Educational loans, in most circumstances;
• Certain other debts like luxury purchases, fraudulent purchases, and debts arising from willful and malicious acts.

In a Chapter 13 case, a slightly broader discharge of debts is available. Debts that are not discharged in Chapter 13 include:

• Child support and alimony;
• Certain taxes, including fraudulent income taxes, property taxes, and business taxes;
• Certain fines, penalties, and restitution from criminal offenses;
• Debts from willful or malicious activity;
• Payments for death or personal injury caused by unlawful operation of a motor vehicle, vessel, or aircraft due to alcohol, drug, or substance intoxication;
• Debts from recent luxury purchases;
• Student loans, in most circumstances;
• Debts not listed on your bankruptcy documents.

The lists above are general and not all-inclusive. Depending on your circumstances, you may have other debts that will not be covered by a bankruptcy discharge. Those debts will still have to be repaid following the discharge. You should rely on your attorney to advise you on your individual circumstances.

When Is the Bankruptcy Discharge Issued?

The timing of the bankruptcy discharge is different in Chapter 7 and Chapter 13 cases.

In a Chapter 7 case, the court usually issues the discharge as soon as the 60-day period expires after the Section 341 Meeting of Creditors occurs. Generally, that means the discharge will be issued about three to four months after the petition is filed.

In a Chapter 13 case, the discharge is issued after the debtor completes all payments under the plan, which usually takes three to five years.

What Is the Effect of the Discharge in a Bankruptcy Case?

After the court issues the discharge, creditors can no longer attempt to collect on the debts that were discharged by the court’s order. Debts not covered by the discharge still can be subject to collection efforts by creditors.

The discharge operates as a prohibition against creditors taking any action on the debt. Creditors can be sanctioned by the court if they violate the discharge. The sanction usually is civil contempt, which is punishable by a fine.

Can Anyone Object to the Discharge?

In Chapter 7 cases, there is no absolute right to receive a discharge. Creditors, the trustee, and the U.S. Trustee can file objections to the discharge. If objections are filed, a separate proceeding in bankruptcy court begins. These proceedings are called bankruptcy litigation or bankruptcy adversary proceedings. The court will separately hear and determine any objections to the discharge.

The Bankruptcy Code sets out the specific reasons that objections to a discharge can be filed. They include:

• Failure to provide tax documents;
• Failure to complete a financial management course;
• Transferring or concealing property;
• Fraudulent acts, including perjury;
• Failure to account for loss of assets;
• Violation of a court order;
• Discharge in an earlier case within a specific amount of time prior to the current petition.

In a Chapter 13 case, creditors can object to confirmation of the repayment plan, but they cannot object to discharge if the plan payments have been made. However, the court can deny a Chapter 13 discharge if the debtor does not complete the required financial management course or if there was a discharge in a previous case within a certain amount of time before the current petition was filed.

If no objections to a discharge are filed, the court will grant the discharge if all other requirements have been met.

Can a Bankruptcy Discharge Be Revoked?

The Bankruptcy Code provides that the trustee, a creditor, or the U.S. Trustee can ask the court to revoke the discharge under specific circumstances. For a Chapter 7 case, revocation can be requested if the debtor:

• Committed fraud in obtaining the discharge;
• Fails to disclose or turn over property that belongs to the bankruptcy estate;
• Does not comply with the court’s order;
• Fails to explain misstatements or provide documents in an audit case.

In a Chapter 7 case, a petition to revoke a discharge generally must be filed within a year after the discharge is granted or after the date the case is closed, whichever is later.

In a Chapter 13 case, revocation can be requested if the debtor committed fraud in obtaining the discharge. The revocation petition must be filed within a year after the discharge is granted.

If a discharge is revoked, all debts are reinstated as if the bankruptcy has never occurred. The debtor may also be subject to additional sanctions, including paying fines and penalties, forfeiting some assets, or facing criminal prosecution.

Revocation of a bankruptcy discharge generally occurs in situations where there is fraud or dishonesty during the bankruptcy process. For that reason, it is always very important to be completely honest and forthcoming about all your property and debts during the bankruptcy process.

Talk With a Burr Ridge, Illinois Bankruptcy Attorney

Modestas Law Offices assists clients with Chapter 7 or Chapter 13 bankruptcy cases. We serve Illinois clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends.

Contact us to schedule your initial free consultation.

At Modestas Law Offices, our bankruptcy clients frequently ask what to expect at the meeting of creditors that takes place after the bankruptcy filing. Often, clients are nervous or worried about the process, but in most cases the meeting goes smoothly and quickly. Understanding what the meeting is and knowing what to expect will alleviate a lot of the concern you feel ahead of time.

What Exactly Is the Meeting of Creditors?

Within a fairly short time after a petition for Chapter 7 or Chapter 13 bankruptcy is filed, the bankruptcy court sends notice to the petitioner and all parties, including creditors, of the time and place for the meeting of creditors. The meeting is sometimes referred to as the “341 meeting,” because it is required by Section 341 of the U.S. Bankruptcy Code.

While the process is called the “meeting of creditors,” the meeting is primarily a discussion about your case between you and the bankruptcy trustee, with your attorney present. Often, creditors do not even attend.

Do I Have to Attend the Meeting?

Attendance at the meeting of creditors is mandatory for the person(s) filing for bankruptcy. If you and your spouse filed jointly, both of you must attend. In Chapter 7 cases, it often is the only required appearance you will have to make. The hearing notice is sent with several weeks’ advance notice, so you will have time to plan ahead.

Is the Meeting a Formal Courtroom Proceeding?

No. The meeting is held in a hearing room, rather than a formal courtroom. The meeting is not a court hearing, but you will be placed under oath to answer questions from the trustee. If any creditors attend, they will be able to ask questions as well.

What Do I Need to Bring to the Meeting?

You need to bring identification, including your driver’s license or state identification card and Social Security card or another document showing your Social Security number, like a pay stub. Occasionally, you may be asked to bring recent bank statements, pay stubs, or other information.

Will Other People in the Courthouse Hear What Happens in My Meeting?

There will be several other meetings of creditors scheduled at the same time as your meeting. Cases will be called one-by-one according to a schedule.

Whether others are present during your meeting depends on the location of your meeting. At some locations, no one else is present. At other locations, other people will be present. But most likely, they will not be paying much attention. They just want things to go quickly, so their case can be called and they can leave.

Do I Have to Dress Up for the Meeting?

No, since it is not a formal proceeding, you do not need to dress up. We advise clients to dress comfortably, but plainly.

Who Attends the Meeting?

The meeting is run by the bankruptcy trustee, who is appointed by the bankruptcy court to oversee your case, conduct the meetings of creditors, and administer any assets.

You and your attorney attend the meeting together.

Will My Creditors Be There?

Your creditors receive notice of the hearing at the same time you do. In a typical consumer case, no creditors will be present. In a business bankruptcy or in a personal bankruptcy with a lot of business-related debt, it is common for creditors or their attorneys to be present. Usually, your attorney will be able to advise you if any creditors are likely to attend your meeting.

Is the Bankruptcy Judge at the Meeting?

The bankruptcy judge is not present at the meeting of creditors.

What Happens During the Meeting?

When your case is called, your identification will be checked. You will raise your hand and take an oath to tell the truth. You will sit at a table with your attorney and the trustee.

What Will the Trustee Ask Me?

The trustee will review your petition, schedules, and other documents prior to the meeting. After you are sworn in, the trustee will ask you a variety of questions, such as verifying your signature on the bankruptcy documents and confirming that no changes are needed. Then the trustee will go through the petition and schedules to verify the information about your assets and liabilities, income and expenses, and related topics.

The trustee may ask whether you expect to get any money in the future, including from a lawsuit, inheritance, or tax refund. The trustee may also ask what happened to any assets you used to have but sold or transferred within the last couple years.

When the trustee has finished asking questions, any creditors who are present will be allowed to ask questions about your finances and property.

When the questioning is finished, the trustee will conclude the meeting. In rare cases when investigation or more documents are necessary, the trustee can continue the meeting to another date. In most cases, the meeting will be concluded with finality.

I Will Be Nervous. Can My Attorney Answer For Me?

No. Your attorney is not permitted to answer for you. He or she will go over everything ahead of time to prepare you for the meeting and the trustee’s questions. Your attorney likely will be able to predict the areas of the trustee’s inquiries in advance.

How Long Does the Meeting Take?

You may have to wait for your meeting to be called. Once it is called, the meeting usually will last about 10 minutes. Sometimes, it even takes less time than that.

What Happens Afterwards?

In a Chapter 7 bankruptcy case, assuming there is no reason for a continuance and the trustee concludes the meeting, you will wait about 60 days for the discharge order to be entered and the case to close. In a Chapter 13 case, there will be a court hearing about a month after the meeting, where the bankruptcy judge will decide whether your repayment plan will be approved and confirmed by the bankruptcy court.

Talk With a Burr Ridge, Illinois Bankruptcy Attorney

Modestas Law Offices assists clients with Chapter 7 or Chapter 13 bankruptcy cases. We serve Illinois clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends.

Contact us to schedule your initial free consultation.

Most individuals file for bankruptcy under Chapter 7 of the United States Bankruptcy Code.  In some circumstances, converting a Chapter 7 bankruptcy to a Chapter 13 bankruptcy provides benefits for the debtor.  Switching from one type to the other raises two essential questions:  Do you have a right to switch from Chapter 7 to Chapter 13?  When should you consider switching from Chapter 7 to Chapter 13?

Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

Chapter 7 of the Bankruptcy Code provides debtors with a “fresh start” by discharging most debts.  The debtor gives up non-exempt assets for liquidation. Specific eligibility criteria apply to filing for Chapter 7 bankruptcy.

In contrast, Chapter 13 bankruptcy enables debtors to set up a three- to five-year payment plan for paying off debts.  Referred to as a “wage earner’s plan,” Chapter 13 provides a way for the debtor to keep his or her property and assets.  This type of bankruptcy is available to debtors with regular income.

A major difference between Chapter 7 and Chapter 13 is the length of time it takes to complete.  Most Chapter 7 cases conclude within three to four months, although some cases do take longer.  In contrast, the payment period under Chapter 13 lasts for up to five years.

Reasons for Conversion from Chapter 7 to Chapter 13 Bankruptcy

Several different situations can arise that make a switch from Chapter 7 to Chapter 13 advisable for the debtor.  In specific circumstances, the bankruptcy court may order a debtor to convert.

Debtors sometimes realize after filing a Chapter 7 case that Chapter 13 offers a better choice in their circumstances.  In these cases, the debtor may benefit from voluntarily converting the bankruptcy.  Examples of situations when this occurs include a debtor who:

• Inadvertently failed to disclose an important asset in the Chapter 7 filing;
• Did not understand accurately what debts the Chapter 7 bankruptcy discharge covers; or
• Underestimated the value of assets and discovers that the exemption does not cover all of the property that debtor wants to keep; or
• Experiences a sudden change in the debtor’s financial circumstances — such as receiving an unexpected inheritance or getting a job — triggers eligibility for Chapter 13.

In any of these circumstances, converting to Chapter 13 may be a better option than proceeding with your Chapter 7 case.

Chapter 13 offers debtors more ways to preserve assets than Chapter 7.  If your circumstances provide the opportunity to switch from Chapter 7 to Chapter 13, discussing your case with an experienced bankruptcy attorney is in your best interest.

Since Chapter 7 cases move quickly, your opportunity to convert exists only for a short time.  If any of these situations arise in your Chapter 7 bankruptcy case, you should talk with an attorney as soon as possible.

Finally, if a debtor makes a mistake in the Chapter 7 petition — usually in calculating eligibility under the means test — the bankruptcy court has the authority to order conversion to Chapter 13.  Such errors rarely occur if a bankruptcy attorney represents the debtor, but they can occur if a debtor files a petition without consulting with an attorney.  The bankruptcy court also may order a debtor to switch from Chapter 7 to Chapter 13 if the court determines that the debtor’s income is sufficient to repay creditors.

Does a Debtor Have an Absolute Right to Switch a Chapter 7 Bankruptcy to a Chapter 13 Bankruptcy?

The provisions of Section 706(a) of the Bankruptcy Code permit debtors to convert a Chapter 7 case into a Chapter 13 case.  However, the debtor cannot convert if the Chapter 7 case previously was converted from a case filed under a different chapter on request of a creditor, the trustee, or the bankruptcy court. In that case, the law prevents the debtor from converting to Chapter 13.  

To convert a Chapter 7 case to Chapter 13, the debtor must meet the eligibility requirements for filing a Chapter 13 case.  That includes having enough income to repay creditors under a payment plan.

An additional requirement applies to converting a bankruptcy case.   A decision of the United States Supreme Court imposes a good faith requirement on a conversion request.  If a debtor seeks conversion in bad faith, the bankruptcy court can deny a request to convert.  This issue arises in unusual circumstances, such as a debtor who attempts to hide major assets during a Chapter 7 case.

Generally, a debtor can convert a bankruptcy case one time with court approval.  Subsequent conversions require approval of the bankruptcy court.  Most bankruptcy courts do not permit switching back and forth multiple times, so the decision to convert a bankruptcy case is not one to make without careful consideration.

Process for Converting Chapter 7 to Chapter 13

The process for converting a Chapter 7 bankruptcy to a Chapter 13 bankruptcy is straightforward.  Generally, it begins with filing a motion with the bankruptcy court.

The debtor sends a copy of the motion to creditors, the trustee, the U.S. Trustee, and any other interested parties.  Then, the bankruptcy court holds a brief hearing before ruling on the motion. 

Even though the process for switching is relatively simple, converting does require preparation and planning.  That is especially true because the debtor needs to file a Chapter 13 payment plan, and payments begin soon after the court approves the conversion.

If you filed for Chapter 7 bankruptcy without the assistance of an attorney and want to consider converting to Chapter 13, consulting with an experienced bankruptcy attorney is critical.  Attempting to navigate a bankruptcy conversion on your own creates a situation with many potential pitfalls.

Talk With an Experienced Burr Ridge, Illinois Bankruptcy Attorney

At Modestas Law Offices, we assist clients with Chapter 7 and Chapter 13 bankruptcy, as well as Chapter 7 to Chapter 13 conversions.  We serve clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends.

Contact us to schedule your initial free consultation.

Under Section 548 of the United States Bankruptcy Code, the bankruptcy trustee can avoid fraudulent transfers made within two years preceding filing of a bankruptcy petition. If a creditor asserts a claim of fraudulent transfer in a bankruptcy case, the claim creates a separate adversary proceeding within the case.

Complex laws and rules apply to fraudulent transfer determinations. If you are contemplating bankruptcy, it is important to be aware of the rules. You should discuss any recent property transfers with a bankruptcy lawyer before filing a bankruptcy petition.

Provisions of Section 548 of the Bankruptcy Code

The provisions of Section 548 allow the bankruptcy trustee to avoid any obligation or transfer of the debtor’s interest in property made within two years before filing the bankruptcy petition, if the debtor voluntarily or involuntarily:

1. Made the transfer or incurred the obligation with actual intent to hinder, delay, or defraud any entity to which the debtor owed a debt; or
2. Transferred the property without receiving a reasonably equivalent value, under certain circumstances.

The section also authorizes the trustee to avoid transfers of property made within ten years before filing of the petition if:

• The debtor made the transfer to a self-titled trust or similar device;
• The debtor is a beneficiary of the trust; and
• The debtor made the transfer with the actual intent to defraud creditors.

In circumstances detailed in the Bankruptcy Code, Section 548 does not apply to certain transfers to charitable organizations.

Court decisions on transfers under this section acknowledge the purposes of the fraudulent transfer provisions as:

• Preserving assets of the bankruptcy estate to pay creditors; and
• Protecting creditors from last-minute reductions in the debtor's pool of assets available to pay creditors.

Fraudulent transfers under Section 548 fall into two different categories: Transfers involving actual fraud, and transfers involving constructive fraud. The facts surrounding a transfer determine whether a transfer qualifies involves actual or constructive fraud.

If fraud is established and the trustee voids a transfer, the trustee can recover the transferred property or its value from the transferee, subject to exceptions. Section 550 of the Bankruptcy Code addresses liability of the transferee of an avoided transfer.

Actual Fraud in a Debtor's Property Transfer

Actual fraud in a transfer occurs if the transfer meets the criteria in Item 1 above, if the debtor made the transfer with actual intent to defraud creditors. Insolvency and malice are not required to establish the intent to defraud.

Since proving the debtor’s state of mind is difficult, courts look to specific “badges of fraud” to demonstrate the required intent. Those badges include evidence that:

• The debtor absconded with the proceeds immediately following receipt;
• The transfer involved lack of consideration (value), when both the debtor and transferee know that creditors will not be paid as a result;
• There is a significant disparity between the value of the property transferred and the payment made for the property;
• The transferee is an officer, or agent or creditor of an officer, of a corporate debtor;
• The debtor was insolvent; or
• A special relationship existed between the debtor and the transferee.

In evaluating the debtor’s intent relating to a transfer in a Section 548 challenge by a creditor or trustee, the bankruptcy court will weigh all these factors. A finding of intent does not require all of them to be present.

Constructive Fraud in a Debtor’s Transfer of Property

In transfers involving constructive fraud (Item 2 above) do not involve the debtor’s intent or state of mind. Under the Bankruptcy Code, a transfer is constructively fraudulent if the debtor received less than reasonably equivalent value and the debtor:

• Was insolvent on the date of the transfer or became insolvent because the transfer;
• Engaged in or was about engage in a business transaction for which the debtor’s remaining property constituted unreasonably small capital;
• Intended to incur or believed that he or she would incur debts beyond the his or her ability to pay as the debt matured; or
• Made the transfer or incurred the obligation to or for the benefit of an insider under an employment contract and not in the ordinary course of business.

In determining whether constructive fraud exists in a transfer, courts consider certain factors, including:

• Value of the transferred property, including whether it is equal to the value received by the debtor;
• Actual market value of the property transferred and received;
• Nature of the transaction, including whether it was an arm’s-length transaction; and
• Presence (or absence) of good faith of the transferee of the property.

As with situations involving claims of actual fraud, the bankruptcy court reviews a claim of constructive fraud based on the specific facts relating to the transaction.

Impact of Section 544 of the Bankruptcy Code and Illinois State Law on Fraudulent Transfers

Section 544 of the Bankruptcy Code often comes into play in fraudulent transfer cases. Under that section, the trustee can rely of state law relating to fraudulent transfer claims if there is a creditor who could challenge the transfer under applicable state law.

The Illinois Uniform Fraudulent Transfer Act enables creditors to void a fraudulent transfer made for four years prior to filing of the bankruptcy petition. If a state law claim exists, it effectively extends the two-year time limitation in Section 548 of the Bankruptcy Code to four years.

Effect of Section 548 of the Bankruptcy Code on Your Bankruptcy

Section 548 insures the orderly financial distribution process established by the Bankruptcy Code. By authorizing the trustee to avoid fraudulent transfers, it maximizes the assets of the bankruptcy estate.

An attempt by a debtor to transfer assets out of the reach of the bankruptcy process prior to filing a bankruptcy petition can result in a Section 548 challenge from a creditor or the bankruptcy trustee. If you are contemplating bankruptcy, you should discuss your situation with an experienced bankruptcy attorney before making any asset transfers that may fall under Section 548.

Talk With a Burr Ridge, Illinois Bankruptcy Attorney

Modestas Law Offices assists clients with Chapter 7 or Chapter 13 bankruptcy cases. In some situations, we also represent clients, including creditors, in bankruptcy adversary proceedings.

We serve Illinois clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends. Contact us to schedule your initial free consultation.