Basics of bankruptcy—Part 1

Basics of bankruptcy—Part 1

By Barbara Wells, Staff Writer

Bankruptcy is generally a forced-to-know law. Unless and until people find themselves in desperate financial straits, they don’t think about bankruptcy law.

With Enron, WorldCom, United Airlines and other corporations going into bankruptcy, the news causes us to think about that area of the law a bit more because it affects more than just employees and creditors of the company.

On the individual level, bankruptcy is a gruesome subject for some people who have filed for bankruptcy and own property or had pending lawsuits for personal injury, alimony, and etc. Then again, more and more people are just falling victim to our poor economy and out-of-control credit card debt.

Forced-to-know law becomes a common condition for the public in other areas as well. For example, for many years, professional confidence artists got away with their crimes because victims blamed themselves for being vulnerable.

For instance, how many people putting a roof on their house, or replacing their furnace, considered they would need an attorney to make sure the contract and terms of payment were legitimate? “Well,” they say, “the man said if I gave him $500 down that day, he would start work the next day.” A month later, no workers have shown up, and telephone calls are not returned. In their shame, victims seldom tell others about their plight. Explaining the details of the crime often places victims in position to explain how they voluntarily submitted their money or property to professional confidence artists. The same is true for victims voluntarily submitting themselves to the jurisdiction of the bankruptcy court, that discover their trust in lawyers, the law, and the judicial system is similarly betrayed.

The average person should know that Chapter 7 bankruptcy is liquidation, and liquidation means having dischargable debts written off. In other words, the debt no longer exists. Written off, in bankruptcy legalese, is called “discharge of debts.” The person or people filing for bankruptcy are called “the bankrupt.” In bankruptcy legalese, however, they are called the “debtor.” If you owe debts, you are a debtor. Those you owe are called “creditors.”

Most people consult with an attorney to discuss bankruptcy, and pay the attorney to prepare the documents, most commonly called “schedules.” A Chapter 7 bankruptcy begins with the filing of a petition and schedules. The Schedules typically ask you to describe all your assets, debts, income, expenditures, as well as other personal background, and financial information. When completing the schedules, all property owned is listed along with how much is owed and the value of the property if it were sold.

Filing the petition results in an “automatic stay” against creditors. It stops the collection letters and telephone calls, wage garnishments, and the judicial process in other courts if creditors are suing the debtor. Once the petition is filed, the person is now under the jurisdiction of bankruptcy court. They cannot change their mind. Even if they want to withdraw their bankruptcy petition, they will need to file documents explaining why they want to withdraw. There are no guarantees that the court will grant the withdrawal or “dismissal.”

The next step to the bankruptcy process is attending a “meeting of creditors.” In general, the meeting of creditors is a short hearing. Debtors are sworn on oath. It is not an informal hearing as some people are led to believe. What is testified at the meeting of creditors is taped for the record. The transcript of the Meeting of Creditors can always be used later to provide evidence of what debtors testified. Attendance at this meeting is mandatory. Creditors can attend the hearing, as well as those opposed to the debtor filing for bankruptcy. Ex-spouses are known to appear at the Meeting of Creditors and allege that their ex-husband or ex-wife has property or money that disqualifies them for bankruptcy.

The person who determines what people are entitled to keep and do is someone titled “trustee.” The trustee presides at the meeting of creditors. The title “trustee” is misleading. The titles “Chapter 7 trustee,” and “panel trustees” are interchangeable. The average individual assumes that trustees represent the debtors’ interests.

Nothing could be further from the truth. Chapter 7 trustees mainly represent the interests of unsecured creditors. Secured creditors can be thought of as those creditors who can repossess property if it is not paid off. Unsecured creditors depend on trustees to determine if there is value in secured property or other assets. For example, utilities, gas cards and some credit cards are unsecured creditors.

Chapter 7 trustees are private attorneys who are paid by incentive commission and hourly compensation for the time spent pursuing assets. That means they have a personal interest in acquiring assets. When people file Chapter 7 bankruptcy, they pay a filing fee of $200. Upon last report, the panel trustee presiding at the meeting of creditors receives $60.00 from the filing fee. Unless the trustee recovers assets, they do not make any additional money.

A better description for the panel trustee position is used-property brokers. They take property, hire someone else to turn it into money, pay commission to the seller, and take a commission themselves. If the assets are in the form of cash, the trustee can cut-out the middle man, leaving more assets available for his or her hourly compensation. After deducting their incentive commission and compensation, remaining money, if any, is then divided among creditors.

Incentive commission paid to Chapter 7 trustees is on a sliding scale. Bankruptcy law provides for Chapter 7 trustees to receive 25 percent of the first $5,000 of assets, 10 percent up to $50,000, and 5 percent on amounts more than $50,000. The average hourly rate of compensation charged by trustees is $280. The commission and hourly compensation are paid out of gross assets recovered. Therefore, trustees have a personal financial interest in administering Chapter 7 asset cases, and not allowing them to withdraw or be dismissed.

The title “trustee” is also confusing because many people in the bankruptcy system have that or a similar title. The chain of command in the bankruptcy system can be best described as the U.S. Attorney General, Executive Office for U.S. Trustee, then regional trustees. Regional trustees appoint Chapter 7 panel trustees. Panel trustees are hired to represent the Regional U.S. Trustee, just as a person would hire an attorney to represent them in court. However, when they are assigned to cases, they have the official title of “trustee” that gives them authority to act in an offical capacity.

Although the U.S. Code, (which is the law of the United States), refers to Chapter 7 trustees as “officers,” Lawrence Friedman, Director for the Executive Office for U.S. Trustees, says that Chapter 7 trustees are not government employees. If you can now detect the difference in the terms “officers” and “not government employees,” then you have an idea of the deception used when trying to determine who is responsible and accountable for the actions of panel trustees in each district or division.

States are broken down into regions. The states of Illinois and Wisconsin are in Region 11. Each state is then broken down into districts, and large districts are then broken down into divisions. The United States Bankruptcy Court in Rockford is the court for the Western Division of the Northern District of Illinois. It covers 10 counties including, Winnebago, Boone, Carroll, DeKalb, Jo Daviess, Lee, McHenry, Ogle, Stephenson, and Whiteside.

To administer Chapter 7 cases filed by residents of the 10 counties, there are seven panel trustees. Although the division covers 10 counties, six of the seven panel trustees are in Rockford. The Chapter 7 trustees for the Northern District of Illinois, Western Division, are Stephen G. Balsley, James E. Stevens, Thomas J. Lester, Daniel M. Donahue, Joseph D. Olsen, and Bernard J. Natale. Gregory F. Schott was also a Chapter 7 trustee, but was replaced this year by Megan Heeg.

From Jan. 1 through Nov. 15, 2002, the trustees have earned more in incentive commission from Chapter 7 asset cases than some people earn all year. The figures provided here do not reflect the additional hourly commission. We should also keep in mind that panel trustees are private parties who practice law independently. In other words, their jobs and income are not limited to administering bankruptcy cases. These figures are not conclusive, as there are reports of case administration that we have not yet examined. In other words, these incentive commission amounts may be less than the total incentive commission awarded.

l Stephen G. Balsley—$21,602.55 from 14 cases

l James E. Stevens—$35,261.00 from 11 cases

l Thomas J. Lester—$19,320.35 from six cases

l Daniel M. Donahue—$17,248.81 from 12 cases

l Joseph D. Olsen—$42,934.19 from 10 cases

l Bernard J. Natale—$18,770.03 from 12 cases

l Gregory F. Schott—$9,812.88 from nine cases.

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