How Does Bankruptcy “Work” - Part 4

Posted by William Kain on February 7, 2018 at 6:36 PM
William Kain

bankruptcy_questions.jpgFor the last three weeks, I’ve written about the function of bankruptcy to serve the twin purposes Congress set out in passing bills that codified bankruptcy law into the Bankruptcy Code: treating creditors fairly and allowing debtors to live with dignity.  I’ve written about why the bankruptcy debtor has to list assets and liabilities accurately in her schedules, about the specific features of chapter 13, the benefits of the automatic stay in bankruptcy and the requirement that the bankruptcy debtor list all of her creditors in her bankruptcy paperwork.  This week, I’ll continue to look at how bankruptcy law and procedure seeks to meet the policy goals of Congress.

The Order for Relief

Last week, I wrote about what a powerful tool the Bankruptcy Court’s automatic stay is to help debtors live with dignity.  The way that creditors learn of the automatic stay in a specific case is through receiving the Bankruptcy Court’s Order for Relief.  

The Order for Relief is written notice of the automatic stay against collection that the Bankruptcy Court issues upon a debtor filing a bankruptcy case.  The order is a two-page written document that is sent to all of the creditors listed on the bankruptcy case, the United States Trustee’s office, the local, or panel trustee that will be assigned responsibility to administer the bankruptcy estate in the case at hand, the debtor and the debtor’s attorney.

The Order contains a lot of information.  The debtor’s name and address is listed, including any other legal names used by the debtor in the preceding eight years.  If the debtor operates a business or has done so in the past, any business names used by the debtor is listed. The debtor’s attorney’s name, address and telephone number are listed.  The name, address and telephone number of the trustee appointed to the case is listed.  The bankruptcy clerk of court’s office that is handling the clerical aspects of the case - the clerk’s office in either Minneapolis, St. Paul or Duluth - is listed.   

All of this is done so that creditors know who has filed bankruptcy, and so that creditors can know who to contact in the event the creditor has a question about the administration of the case, and/or if the creditor needs to communicate with the debtor (the creditor must communicate through the debtor’s attorney or risk violating the bankruptcy law).

But the Order for Relief contains more information than that.  Importantly, the Order for Relief operates as the notice of the automatic stay being entered in the debtor’s case.  Creditors are told, in writing, to discontinue any and all collection efforts against the bankruptcy debtor. In chapter 7 bankruptcy cases, the Order for Relief will advise creditors as to whether the debtor’s income creates a presumption of abuse and will also let creditors know that the creditors either should or should not file claims with the bankruptcy court for payment of a dividend out of the debtor’s non-exempt assets.  Creditors are given direction as to how to access the debtor’s bankruptcy filing, including a way to review the assets the debtor owns in which the debtor claims an exemption.

And the Order for Relief lets creditors know the date, time and location of the debtor’s 341 meeting - the meeting the debtor has with the panel trustee in which the debtor will answer questions while under oath from the trustee and, if the creditor so chooses, from any creditors.

Almost all creditors who are in the business of extending credit to customers receive the Order for Relief electronically - and the notice is received on the same day that the bankruptcy case is filed.  The technical ability of the Bankruptcy Court to electronically notify creditors of a bankruptcy case being filed is something that advances the goal of treating creditors fairly and allowing debtors to live with dignity.  Almost all creditors know that when they receive a notice that a bankruptcy case is filed, all activity involving the debtor ceases.  That means that all creditors “start” the bankruptcy from the same place with respect to collection of debt.  The electronic transmission of the bankruptcy notice also assists debtors.  Creditors stop collecting when the creditor knows that a bankruptcy case has been filed; the sooner the creditor knows, the sooner phone calls and letters from creditors demanding payment stop.

The 341 Meeting

As mentioned, above, the Order for Relief sets out the date, time and location of the meeting the debtor must attend with the bankruptcy trustee.  The debtor receives this notice to insure that the debtor is there, and on time, for the meeting.  Creditors receive this notice so that the creditor can also attend this meeting and ask questions of the debtor while the debtor is under oath.   While in the vast majority of cases creditors opt to not attend the 341 meeting, the opportunity for attendance is present for all creditors.  Again, the notice requirement advances the policy goal of treating creditors fairly.

The 341 meeting is the only formal event in a typical consumer bankruptcy case - and it is an extremely important part of bankruptcy procedure.  The panel trustee has the ability to obtain sworn testimony from the debtor, so any intentional misstatement by a debtor in response to a trustee’s question creates the potential for the debtor to be either prosecuted for perjury, or to have the debtor’s discharge denied because of false statements while under oath.  So accurate, honest testimony is absolutely necessary in order to the debtor to receive a discharge.  

If a creditor attends the meeting, that creditor has the ability to ask the debtor about the debtor’s assets and liabilities.  Again, the testimony the debtor gives in response to a creditor’s questions is under oath, and the same risk of perjury and/or denial of discharge is present in the same way as it is with the trustee’s questions.  The debtor’s attorney is also at this meeting, and one of the duties of the attorney is to protect her client from unnecessary questions that deviate from an inquiry into the debtor’s income and expenses, and assets.

Next week I will write about how the bankruptcy trustee plays an important role in treating creditors fairly while also assisting the debtor.

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