When filing for bankruptcy, a debtor must disclose all information regarding their personal assets, liabilities, accounts, and just about any information that may be pertinent to determining what amount, if anything, must be repaid to the creditors. But how does a debtor prove these pieces of information? And how can a creditor trust this information is accurate? This blog will discuss the various pieces of information a debtor is required to disclose, and how exactly they must disclose it.
Debtor’s Petition
The first step in filing for bankruptcy is to actually file the bankruptcy petition. This petition is a lengthy disclosure that details the assets owned by the debtor, the exemptions used by the debtor on those assets, any secured claims held by creditors, a list of the unsecured creditors, and information pertaining to the debtor’s income and monthly expenses. Essentially, the major reason for the petition is to disclose all of the assets, liabilities, income, and expenses that the debtor has. This is to show what, if anything, a debtor may be able to repay, or what may need to be liquidated in a chapter 7 case.
Role of the Trustee
First, it is important to understand the major parties in a bankruptcy. The debtor is the party who filed for bankruptcy. Creditors are the people or companies owed money by the debtor. The trustee is an attorney appointed by the court that plays as intermediary between the debtors and creditors.
Generally, a trustee will request certain documents in the beginning of the case evidencing ownership of certain assets. This usually includes bank statements, proof of income, and other financial information that discloses what the assets are worth. These specific documents are not usually shared with the creditors, but allow the trustee to confirm, for the sake of the creditors, that the information contained in the debtor’s petition is as accurate as possible.
The role of the trustee is to administer the case. In all bankruptcy cases, a trustee will review the documents, the petition, hold the 341 meeting of creditors, and distribute whatever proceeds may exist to the creditors. In a chapter 7 case, the trustee primarily determines if there is any non-exempt equity that would allow a sale of property for distribution. In a chapter 13 case, the trustee will review the proposed plan of repayment and often suggest revisions to ensure compliance with the bankruptcy code. In either case, the trustee is a vital part, and ensures fairness to both creditors and the debtor.
341 Meeting
One of the major routes for a creditor to collect information from the debtor is via 341 meeting of creditors. A 341 meeting of creditors is held by the trustee in every bankruptcy case. It’s called a 341 meeting because it is required by 11 U.S.C. §341(a). This 341 meeting will allow the trustee an opportunity to question the debtor on specific parts of their petition, including any possible issues with income, funding a chapter 13 plan, or assets that may have been sold or purchased just before filing for bankruptcy.
These 341 meetings are somewhat similar to depositions. The attorney for the debtor may not assist in answering questions, and the debtor is under oath. This gives the trustee, and the creditors, the opportunity to ask certain questions. Generally, a creditor will want information that may be detrimental to a debtor’s case, such as whether there were avoidable transfers made by the debtor prior to filing. Aside from the petition, this is likely the most common route for a creditor to discover more information from the debtor.
Rule 2004 Subpoena
While it does not happen in every case, sometimes after the 341 meeting of creditors a creditor may have more questions of the debtor, or would request certain documents from the debtor. To do so, they must send the debtor a subpoena pursuant to Federal Rules of Bankruptcy Procedure Rule 2004. Under a Rule 2004 subpoena, a creditor may order the deposition the debtor or demand documents relating to the bankruptcy case.
The rule is very specific in what may be requested, however. The creditor issuing the subpoena may not use the subpoena as a fishing expedition to discover information not pertinent to the bankruptcy case. The rule specifically requires any demand for documents and all matters covered at the deposition must relate only to the “acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate, or to the debtor's right to a discharge.” This means a creditor must limit the scope of their demands to only information that is related to the bankruptcy case. They cannot use this as a vehicle to discover outside information for another litigation, or an unrelated matter.
Adversary Proceedings
Should a creditor determine that information produced in the underlying bankruptcy case gives rise to an adversary proceeding, they must file a complaint against the debtor. Once the complaint is filed, the creditor and debtor may continue with discovery pursuant to the federal rules of bankruptcy procedure, which call for the exchange of initial disclosures, interrogatories, and depositions similar to that of any civil case. Discovery in an adversary proceeding may envelope more information, and may relate to information not necessarily inside the scope of a bankruptcy.
Conclusion
It is important for a creditor to know their rights, and understand the process once a party owing the creditor money files for bankruptcy. Call today for a free consultation.
