Proper Disclosure of
Prepetition and Post-Petition Assets in
Michigan Bankruptcy Petitions
Walter A. Metzen
Consumer Bankruptcy Attorney, Law Offices of Walter A. Metzen, Bankruptcy Attorney Detroit , Michigan
Abstract: Fundamental to the concept of bankruptcy is the duty incumbent upon debtors to properly disclose assets in exchange for the discharge of their debts. Intentionally concealing an asset from the bankruptcy estate can be grounds for criminal prosecution under the bankruptcy code. Rule 9011 and BAPCPA require additional inquiry and certification by debtor’s counsel. This paper will explore some common sense strategies to help accomplish this goal to.
I. Introduction-Practical Tips to Ensure Compliance with the Bankruptcy Code’s Requirement to Properly Disclose Assets
At its core, bankruptcy law involves an exchange. Debtors agree to give up non-exempt assets (or the value thereof in a Chapter 13) in exchange for a discharge of their debts. However, this exchange cannot function when debtor attorneys get too relaxed or complacent while preparing a client’s petition. Similar to a commercial airline pilot, failure to perform those routine and mundane pre-flight checks, potentially ends in disaster.
The majority of debtors that seek out an attorney are filing bankruptcy for the first time and have very limited knowledge of the procedures involved. They depend on an experienced lawyer to pilot them through the daunting skies of the bankruptcy court, avoiding turbulence along the way. What follows is a series of practical tips to help ensure compliance with the bankruptcy code’s requirement to properly disclose assets and a reminder of the consequences for debtor’s counsel for failure to do so.
II. Preparing the Bankruptcy Petition, Schedules and Statement of Financial Affairs
A. Face to Face Consultation with Your Client
The best way to avoid many non-disclosure issues is simply to have a face-to-face consultation directly with your client. This seems fundamental, but in years past many practitioners relied on legal assistants to complete the petition and schedules. Worse, some simply relied on a client’s own written disclosures on a worksheet and merely handed that to a legal assistant to prepare. Shortcuts can be problematic. Bankruptcy attorneys want clients to feel reassured that the bankruptcy process will help them. Those same attorneys must at the same time impress upon the debtor the serious requirement to disclose all assets, while also exercising some degree of caution so as not to scare the client out of the office because they felt interrogated. A bankruptcy attorney who is attending a .341 hearing with just one client will typically watch 5 to 10 other hearings before her case is called. Multiply this over a year, and 100 clients, and that same attorney has witnessed a thousand .341 examinations by Bankruptcy Trustees in Michigan. A typical legal assistant or paralegal is back in the office and does not have the benefit of that invaluable practical knowledge. A good bankruptcy attorney will think like a trustee when preparing her client’s petition. Should debtors feel too at ease or adopt a carefree, lackadaisical attitude during the preparation of the petition and supporting documents, there is greater likelihood that an asset may be concealed.
Bankruptcy Rule 9011, the bankruptcy equivalent to Federal Rule of Civil Procedure 11, places “an affirmative duty on attorneys and litigants to make a reasonable investigation (under the circumstances) of the facts and the law before signing and submitting any petition, pleading, motion or other paper.” Debtor’s counsel basically needs to perform his or own inquiry when representing an assisted person and is required to assist the debtor in their requirement to disclose assets. As the court stated in In re Robinson:
The duty of reasonable inquiry imposed upon an attorney requires the attorney (1) to explain the requirement of full, complete, accurate, and honest disclosure of all information required of a debtor; (2) to ask probing and pertinent questions designed to elicit full, complete, accurate, and honest disclosure of all information required of a debtor; (3) to check the debtor’s responses in the petition and Schedules to assure they are internally and externally consistent; (4) to demand of the debtor full, complete, accurate, and honest disclosure of all information required before the attorney signs and files the petition; and (5) to seek relief from the court in the event that the attorney learns that he or she may have been misled by a debtor.
198 B. R., 1017 (1996) (internal citations omitted.) In Robinson, the court found that debtor’s attorney facilitated his client’s abuse of the bankruptcy system and found such conduct to be sanctionable under Bankruptcy Rule 9011.
The vast majority of debtors are honest people and have no intention of concealing assets, but there are a few bad apples in every bushel. A personal, face to face consultation will allow an experienced attorney to detect if a debtor is being evasive in responding to questions. An alert attorney should immediately recognize this and seize the opportunity to counsel the client so that potentially disastrous results for both the debtor and the attorney can be avoided. Take it from personal experience, it can be extremely embarrassing if a trustee discovers a debtor’s undisclosed cottage up north while questioning a debtor, but we have debtor’s 14 year old cat listed on Sch. B Question 31 “Animals”.
B. Go Through Schedule B and the Statement of Financial Affairs Line by Line With your Client
Most bankruptcy attorneys are using some type of bankruptcy preparation software, which makes it easy to view many pages worth of information at once. A good practice is to make use of this broad viewpoint and go through the Schedule B Questions (all 35 of them) line by line and ask your client about each one. If there is any doubt that all assets need to be disclosed in a bankruptcy petition, just look at the last catch-all question that asks for other personal property of any kind not already listed. It seems very basic, tedious and mundane, but it really is a good pre-flight check and helps insure that all bases are covered. A debtor attorney’s usual focus is on the debtor’s duty to disclose real property or personal property assets that normally would be listed on schedules A and B. It should also be impressed upon a debtor the duty to property fill out the statement of financial affairs as this can often be a source of assets for the bankruptcy estate. SOFA question 3 a. and b. for example, will advise the trustee as to the existence of preferential transfers to ordinary creditors or insiders, question 5. could possibly alert the trustee to a foreclosed property that may still be in the redemption period that the trustee may be able to sell or negotiate a carve out with the mortgage company. Question 4 a. and b. might contain information on wages or tax refunds that were garnished within the statutory preference period and for which the debtor has no remaining exemption which could result in a recovery by the trustee for the benefit of creditors.
It’s still a good idea to have a client fill out a hand written worksheet. It can help protect you later should something go wrong, but it should only be used as a guide when interviewing your client in preparation of the schedules.
C. Perform Your Own Search
A commonly overlooked potential asset is possible interest in real estate that the debtor may not even consider their own or that the client may not even know about. A quick search for possible interest in real estate can often be done online with the county Registrar of Deeds office and might turn something up. Debtors often struggle to understand how to properly disclose interests in real property, how mortgages and other liens might impact their property and the effect of prepetition transfers that may have occurred. On any given day in the .341 hearing room one can overhear a trustee asking a debtor if they own any real estate and eliciting a response like “Nope, just my house,” or, “I don’t own my house, the bank does”. Obviously, clients need help when it comes to understanding the true legal nature of ownership. Further inquiry should be made as to whether they have ever owned any other real estate, and if so, what was the disposition. Keep in mind that the trustee is looking for possible fraudulent conveyances and can go back up to six years under Michigan’s fraudulent conveyances statute. You should also ask your potential clients if, to their knowledge, anyone (such as a parent) placed their name on real estate for estate planning purposes or some other reason. If overlooked, this can be a huge find for a trustee and devastating for a debtor, as elderly parents oftentimes own real estate free and clear of mortgages. Collier on Bankruptcy describes an attorney’s role while preparing the bankruptcy schedules:
In the preparation of the schedules nothing should be taken for granted. The attorney should carefully investigate the affairs of the debtor and make certain that the attorney has all the information needed to prepare full and complete schedules, for it is the duty of the debtor to present intelligible and true schedules. 4 COLLIER ON BANKRUPTCY ¶ 521.03 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2013).
Many trustees subscribe to various public records search technologies such as SmartLinx by LexisNexis to aid them in finding possible undisclosed assets. Bankruptcy attorneys should consider subscribing to such a service as well.
III. Additional Debtor Attorney’s Duties after BAPCPA
In the Eastern District of Michigan we are presently experiencing large numbers of pro se bankruptcy filings. Many of these cases are not true pro se cases, but instead are prepared by unscrupulous individuals who do not follow the rules governing bankruptcy petition preparers. Many have been prohibited from assisting potential debtors in filing cases in the Eastern District thanks to the efforts of our U.S. Trustee’s Office. To help further combat this problem, bankruptcy attorneys must strive to set ourselves apart from these riskier but less expensive alternatives and avoid simply filing petitions without offering more of a service to our clients. Bankruptcy courts are holding debtor’s attorneys to higher standards, as illustrated in In re Cuomo – No. BK-S-10-14813-BAM, Adversary No. 12-01124-BAM, United States Bankruptcy Court, D. Nevada. July 17, 2013, in which debtor’s attorney was sanctioned for failing to review two prior bankruptcy petitions that were previously filed by his client with another law office:[Debtor’s attorney] did not take the necessary steps to fully comprehend [debtor’s] financial and legal situation before filing her petition. He placed the burden on her to provide accurate information such that he served more like a bankruptcy petition preparer. This practice represents one of the downfalls of operating a consumer bankruptcy “mill” where clients are treated more like commodities than individuals, where one-size-fits-all is the prevailing attitude in a drive for efficiency and profit. *** The bankruptcy attorney is the expert and to properly serve his client, he must not merely react to what the client presents him. Rather, he must proactively perform independent research into the relevant facts and relevant law.
Bankruptcy attorneys cannot simply blame everything on the debtor when something goes wrong. “Clearly, the debtor is ultimately responsible for the veracity of the information contained in her bankruptcy schedules. . . . A debtor’s attorney also bears a significant degree of responsibility in assuring to the best of his or her ability that the schedules are complete and accurate before they are filed.” In re McKain, 325 B.R. 842, 849 (Bankr. D. Neb. 2005) (citing 4 COLLIER ON BANKRUPTCY ¶ 521.03 (15th ed. rev. 2005))
The goal when filing a bankruptcy petition should be to inform and educate the trustee by providing detailed information in the petition, schedules and statement of financial affairs rather than intentionally omitting information based on a belief that the trustee will not be interested in it because it may have limited or inconsequential value to the estate. See In re Bellows-Fairchild, 322 B.R. 675 (Bankr. D. Or. 2005), in which the court wrote:
“Neither a debtor nor his attorney is entitled to omit information or provide partial information simply because, in their view, the information provided is sufficient to allow the trustee to determine the value of a debtor’s estate.”
BAPCPA provides that bankruptcy attorneys can be sanctioned for failure to fulfill the statutory duty of a reasonable investigation. See 11 U.S.C. § 707(b)(4)***
(C) The signature of an attorney on a petition, pleading, or written
motion shall constitute a certification that the attorney has —
(i) performed a reasonable investigation into the circumstances
that gave rise to the petition, pleading, or written motion; and
(ii) determined that the petition, pleading, or written motion —
(I) is well grounded in fact; and
(II) is warranted by existing law or a good faith argument for
the extension, modification, or reversal of existing law and
does not constitute an abuse under paragraph (1).
(D) The signature of an attorney on the petition shall constitute a
certification that the attorney has no knowledge after an inquiry
that the information in the schedules filed with such petition is
Code section 707(b)(4)(D) is the first time in the history of the bankruptcy code that debtor attorneys can be held responsible, through threat of sanctions, for the accuracy of their client’s schedules. Only through a detailed interview and discussion with a debtor can this potential pitfall be avoided.
IV. Post-Petition Assets in Bankruptcy
A debtor’s attorney will on occasion receive a phone call from a worried debtor, months or years after their bankruptcy case has been discharged and closed, who has discovered that they inadvertently omitted an asset from their schedules. Typically it may be a vehicle that the debtor thought was in an adult child’s name but turned out to still be titled to them or an interest in a relative’s real estate that they did not know they owned at the time. What can debtor’s counsel do to protect the debtor in this circumstance? One option is to file a motion to reopen the bankruptcy case to amend the schedules to disclose the asset and to use any remaining exemption the debtor may have. Another route is to immediately contact the trustee in the case advising them of the asset with as much detail as possible, fully explaining the reasons for the debtor’s failure to list. Often times, if the asset is not very valuable or can be exempted, the trustee will not be interested in reopening the case to administer it. If, however, the asset has value or non-exempt equity, the trustee will likely seek to reopen the bankruptcy case and set aside the trustee’s report of no distribution. The debtor will still be able to take exemptions, but the trustee may seek to liquidate any remaining equity.
Although seldom seen in day to day consumer practice, the bankruptcy code requires debtors to inform the trustee of certain post-petition assets. Section 541(a)(5) brings into the bankruptcy estate, a debtor’s rights to inheritances, life insurance proceeds and property settlements stemming from a divorce that the debtor acquires within 180 days after the filing date. “Acquires” does not mean when the debtor actually receives the funds, but instead the triggering event is when the debtor becomes entitled to them. A good example is upon death of a parent where debtor will receive an inheritance or is the beneficiary of a life insurance policy. Many Chapter 7 Bankruptcy trustees in the Eastern District of Michigan have questionnaires which the debtor must fill out and sign at the .341 hearing. Most questionnaires contain a question that asks “Do you understand that you are to report to the Court and Trustee, by formal written amendment filed with the Court, any right to an inheritance, property settlement agreement, lawsuit settlement, or life insurance proceeds that occurs within 180 days of the date your case was filed?” or similar language. It is important that the debtor is reminded of this duty after the .341 hearing is concluded.