If you are approached by a client about a possible bankruptcy filing, it is important to consider the debtor's state of mind and what the debtor knows about their financial situation and options.
You are likely to find that the debtor is anxious about bankruptcy, and that they may know a lot less about their finances than you might expect.
When a client comes into your office for a bankruptcy case, the client may have little understanding of courts or legal proceedings beyond what they have seen on television, and even that exposure may be primarily about criminal cases.
Some bankruptcy clients may even need to be reassured that the bankruptcy process is very different than that followed in criminal cases, and that creditors will not be able to try to put them in jail. A client may be embarrassed to ask you about what will happen in a bankruptcy case, so don't assume that the client does not need this reassurance.
Try to reassure your prospective client about what happens when you go to court, how hearings work in bankruptcy cases, and why most debtors do not need to worry about what will happen at the hearings.
You should make the intake interview as calming and friendly as possible. The more relaxed that you can make your prospective client, the more likely it is that they will understand what you are telling them, that they will be comfortable enough to ask questions, and that they will be honest with you. Be friendly and empathetic, but maintain your professionalism.
Many people who are considering bankruptcy owe student loans or secured debt. Many may have financial obligations under a divorce judgment or owe child support.
Clients will need to understand why some debts survive bankruptcy, what assets they may keep or surrender to creditors, and how the choice of Chapter 7 or Chapter 13 bankruptcy will affect their debts and repayment obligations.
Clients are often worried about car repossession or home foreclosure. Let clients know about their options for keeping a home or car, including reaffirmation and how the reaffirmation process works, and whether a creditor might accept payments and refrain from repossession or foreclosure even if they don't (or can't) formally reaffirm a debt.
Debtors who are considering Chapter 7 bankruptcy will also need an explanation of the means test and credit counseling requirement, both to help you determine if they will qualify for Chapter 7 bankruptcy and so that they understand their obligations going forward.
A person who is considering bankruptcy is not likely to understand what a bankruptcy stay is, let alone how stays work. It is helpful to explain bankruptcy stays in simple terms, as a shield that protects them from creditors for debts incurred before the filing, and how it protects them and their property from creditors and debt collectors.
Make sure that your client understands the difference between debts incurred before filing, and those debts or obligations they may incur after they file. If the client is a tenant, make sure that they understand their obligation to pay rent after filing the bankruptcy case. If the client is involved in eviction or foreclosure proceedings, or owns property that may be the subject of repossession, explain how bankruptcy will affect those creditor actions.
Even if you have explained that there is little reason to be concerned about routine bankruptcy hearings, your client is likely to have a lot of anxiety about their first experience in court, and what creditors may do or say at the hearing.
Let the client know that the hearing occurs with the trustee, but that no judge will be present. Let them know that creditors often make only perfunctory appearances, and that in many cases they don't even appear for the hearing. Go through the questions they can expect to be asked at the hearing.
Many people who file bankruptcy believe that the bankruptcy court can take everything that they own. Given that debtors are often afraid of losing their assets, there is a risk that debtors will not be completely honest with their lawyer or with the bankruptcy court.
As you know but they may not fully understand, it is important to present an accurate picture of the debtor's finances to the bankruptcy court. Among assets that debtors may not understand that they need to disclose:
- Expected tax refunds.
- Jewelry, even their wedding rings, with value over the applicable exemption.
- Retirement savings.
- Whole life insurance policies.
Debtors may believe that they only have to tell you about debts and creditors that appear on the debtor's credit report. Make sure the debtor understands that credit reports are not complete, and that the balances shown as due on credit reports are often incorrect.
Help debtors understand that if an overlooked or omitted asset is not disclosed, you may be surprised when you learn about the omission for the first time at the 341 hearing, that it may require that you perform a lot of additional work on their case, and that in some cases it can result in serious legal consequences for the debtor
Make sure that clients also understand the consequences of giving away their assets. They may believe that the best way to save property, such as a car, an heirloom or a parcel of land, is to transfer it to a relative before filing bankruptcy, whether as a gift or with the intention of later having the asset transferred back.
Help your client understand that they should also disclose less formal loans and obligations. For example, a client may have borrowed money from a relative in order to pay some bills. A client may owe money on a traffic ticket or court case. Clients needs to understand that they need to share that type of information with you.
Many debtors are tempted to try to understate or hide assets when declaring bankruptcy, and some will try to conceal their true financial picture from their lawyer. Clients may be gently educated about the consequences of concealment, as well as how they can use bankruptcy exemptions to protect certain property from their creditors.
Clients need to be informed about what will happen if their financial situation changes during bankruptcy.
- What will happen if they lose their job, or get a raise?
- If their car breaks down, will they be able to buy another car?
- Will changes in their financial situation require that they start a whole new bankruptcy case?
Clients may also be worried that they don't know the proper name or address of a creditor, or that despite their best effort they will forget to tell you about a debt or asset.
Reassure the client that the court understands that mistakes and omissions can happen even when debtors are making a good faith effort at full disclosure, but that they must promptly inform you if they learn about or remember an asset or debt that they did not previously disclose.
Clients can be reassured that most changes in their financial circumstances can be addressed through filing amendments with the bankruptcy court, with no need to restart the process.