Administration of the Estate.
Last week I wrote about the creation of a bankruptcy estate at the time a bankruptcy case is filed. The bankruptcy estate is composed of all the property the debtor owns, or to which the debtor is entitled at the time the bankruptcy case is filed. And I wrote that the United States Trustee’s Office, which is a division of the Department of Justice, appoints a “local” or “case” trustee to administer the bankruptcy estate.
As I wrote last week, bankruptcy debtors have the right to protect, or “exempt” property of the bankruptcy estate from administration. And I wrote that in most chapter 7 cases all of the property of a bankruptcy debtor is exempt. I should add that this general statement is true in Minnesota, but not in every state. Why?Minnesota is an “opt in” state. When Congress passed major legislation in 1978, it put in place a uniform exemption statute in the Bankruptcy Code. Congress did this to try to promote uniformity in bankruptcy practice and to establish a “baseline” of exempt property. This wasn’t a uniformly popular idea, particularly with states that had more generous exemptions than those proposed in the 1978 law. So Congress gave states a choice: the states could “opt in” to allow residents of the state to use either the Bankruptcy Code exemptions or to use non-bankruptcy law; in most cases non-bankruptcy law that exempts property is found in state statutes. Minnesota is one of 15 states in the United States that chose to “opt in,” thus allowing Minnesota debtors to choose state or federal law to protect property. Since chapter 7 debtors have a choice, it usually works out that all of the property owned by a debtor is exempt from case administration.
When there is no non-exempt property in a case, the case is referred to as a “no asset” case. Case trustees are appointed to administer no asset cases, but that administration typically involves reviewing the case and conducting a meeting with the bankruptcy debtor. At that meeting, often called a “341 Meeting” (after the statute that requires the meeting) or a “first meeting of creditors” the case trustee asks the bankruptcy debtor a series of questions while the debtor is under oath. This meeting takes place four to six weeks after a case is filed. The questions are routine; the questions are designed to have the debtor testify that the schedules filed in the case are true and correct. Assuming that the debtor testifies that the information in the bankruptcy papers is indeed true and correct, the case trustee will file something called a “no asset report” with the court. The debtor then receive his discharge 60 days after the meeting with the bankruptcy trustee.
“No Asset” Cases
Occasionally, a chapter 7 debtor will file a case in which there are non-exempt assets. When the case is filed, the debtor notes in the bankruptcy petition that the debtor believes there are assets available for administration by the trustee. When this happens, the debtor, who has been holding all of the property she owns in trust for creditors, must cooperate with the trustee to either turn over the asset or to purchase the asset back from the trustee. Typically, cases have non-exempt assets when bankruptcy debtors have significant equity in their home. When that is the case, there are a number of commonly-held properties that are typically non-exempt, including cash on hand or in the bank, “extra” vehicles, recreational vehicles and equipment and non-homestead real estate holdings.
Failure to either purchase non-exempt assets back from the bankruptcy estate, or turn them over to the case trustee can result in the trustee asking the bankruptcy court to order a turnover of the asset(s), and failure to comply with that order can trigger a lawsuit from the trustee asking the court to deny a discharge to the debtor, or, if the debtor has already been entered, to revoke that discharge. Since the reason to file a bankruptcy case is to get debts discharged, it is clear that cooperating with the trustee in an asset case is critical.
The 341 Meeting
Chapter 7 debtors must attend a meeting with the case trustee - this is called “the first meeting of creditors” or “the trustee meeting” or “the 341 meeting” (after section 341 of the bankruptcy code, which mandates that this meeting take place. The notice - the order for relief -that is sent to all listed creditors, the debtor and the debtor’s attorney at the time the case is filed will contain the name and address of the case trustee appointed on the case and the date, time and location of the meeting. Typically the meeting will be scheduled more than 21 days after the case is filed but not more than 42 days after the case is filed. By law, the bankruptcy judge who has jurisdiction over the case cannot attend this meeting.
In most consumer bankruptcy cases, creditor do not attend the 341 meeting, although they have a right to do so. Creditors will sometimes appear at the meeting if the creditor has a security interest in property owned by the debtor and the creditor is concerned that the value of the property has been unduly depreciated, or in cases where creditors believe that the debtor has not been honest in dealing with the creditor in the debt transaction. The attraction for creditors in such cases is that the debtor is required to testify under oath at the meeting; so in cases where the creditor suspects the debtor has not been honest, the creditor has the ability to depose the debtor at a relatively low cost. Creditors in these situations are limited to questioning the debtor about assets and liabilities - questions such as “why did you do this?’ or “do you know how much money you cost me?” are outside of that scope and, thus, objectionable.
But typically creditors do not attend the meeting - and that means that the trustee is the only person questioning the debtor. The questions the trustee asks in almost every case are routine and designed to make sure the debtor is familiar with the information contained in the bankruptcy petition and schedules filed with the court, that the information is true and correct, and whether there are non-exempt assets of the bankruptcy estate, and/or whether there has been financial transactions, such as preferential payments to 3rd party creditors or related parties, or transfers of money or property to close friends or relatives, that can result in the trustee liquidating assets or voiding transactions.
The meeting will usually take about five to ten minutes to complete. After the meeting is concluded, the next legal step is for the debtor to receive a bankruptcy discharge. I’ll write about that next week.