The Not-So-Dull Field of Bankruptcy Litigation
Some legal assistants do not consider Bankruptcy Law to be one of the more interesting areas of practice. They might even think it is dull. In fact, I was guilty of this same assumption when a firm where I was previously employed in the litigation section closed down practice in oil and gas and opened a bankruptcy section. I thought, "Not for me." Remember, things do come full circle, and I now find myself employed as a bankruptcy legal assistant in one of the leading debtor bankruptcy firms in our part of the state.
My duties revolve around the pre-petition phase of the process, after the client has retained our firm. I meet with the client to go over a questionnaire detailing his assets and liabilities. All debts, creditors, co-debtors, and parties to executory contracts must be listed with proper addresses. Many of our clients choose to file a Chapter 13 bankruptcy. This type of bankruptcy allows the debtor to renegotiate, reorganize, and reduce some of his debts and consolidate them all into one lump sum. The debtor then makes one payment a month which is disbursed by the bankruptcy trustee in pre-agreed amounts to each of the creditors. Chapter 13 bankruptcy allows the debtor to retain some measure of dignity in that he is able to pay off his honest debts, even if it is at a slower rate, and sometimes at a lesser amount, than the creditors originally demanded.
If the client is filing Chapter 13, debt reconsolidation, I compare the earnings of the client with necessary living expenses and formulate the reorganization plan based upon a percentage of the unsecured debt which the client can afford to pay and which best protects the assets of the client. Property must be inventoried and properly categorized, and exemptions must be contemplated. Follow up appointments are scheduled, if necessary, to collect all data necessary for the preparation of the petition with attached schedules and the statement of financial affairs. At the final appointment with which I am involved, the client signs the petition and other documents required by the trustee. It is all quite streamlined and efficient, but easy and stress-free, it is not. Emotions run high, particularly for the debtor who has been diligent and creditworthy throughout his life; but, because of tragedy, loss of employment, or illness, is unable to keep up any more. This is especially true with the high interest and penalties tagged onto credit card debt that almost all clients have.
Chapter 7 bankruptcy, debt liquidation, is the form of bankruptcy in which all the listed debts of the debtor are discharged, and the creditors may no longer make any attempts to collect the debt. This chapter is usually necessary for debtors who have a large amount of debt, $250,000 or over, which would have been impossible to consolidate and handle under the requirements of Chapter 13. The Chapter 7 debtor must surrender all his property which is listed as collateral against the debt or, with permission of the trustee, must reaffirm his liability of the debt and waive any right to protection from the creditor in the event he defaults on the debt in the future. This form of bankruptcy can be very injurious to individuals or companies who are creditors and often prompts adversarial actions by a creditor in an attempt to have discharge of the debt owed to him set aside or disallowed. If that occurs, then discovery requests and depositions take place the same as in other types of litigation. On the other hand, this form of bankruptcy is even more devastating to the debtor. While the debtor may come out of the proceeding with no more debts, he also comes out of the proceeding with no creditworthiness for as long as ten years. Even though some people say that bankruptcy no longer carries the "stigma" it once did, it is still looked upon with disdain when it shows up in employment investigations, applications for auto or life insurance or credit cards, and renewals of licensure or certification. Even though bankruptcy is a provision of our law allowing an individual the chance to start over, it is very often considered a shameful failure by the debtor and others and, often times, leaves an emotionally-painful scar on the debtor.
Another area which is especially stressful to a debtor client concerns matters considered already closed: a former spouse and debts from that previous marriage. My years of experience in Family Law have really helped in this area. Family Law impacts a great deal on bankruptcy, and vice-versa. But most clients do not realize this. Questions concerning previous marriage, including support and property settlement obligations, is the area on the questionnaire which clients breeze over or ignore. I have to ask each one, "Do you have a divorce in your background?" Some clients express opposition to the advice the attorney gives concerning noticing out the ex-spouse. The issue here is determining if the hold harmless agreement to pay marital debts is a part of the property division or is considered support, and if so, is the obligation dischargeable in bankruptcy? The new alimony laws of Texas definitely impact the issue of dischargeability of debts of a prior marriage. Further, while formerly protected by state homestead exemptions, generous in the state of Texas, the Fifth Circuit recently found that a homestead may be attached for payment of court-ordered spousal support. Sandra Davis v. Thomas C. Davis (In the Matter of Thomas C. and Karen J. Davis), No. 95-11112 (February 5, 1997).
The Bankruptcy Reform Act of 1994, under ¤532(a)(15), created a new exception to discharge, permitting a nondebtor to challenge the dischargeability of property settlement debts. The section has no impact on nondischargeable debts in the nature of alimony, maintenance, or support under 523(a)(5). The determination of dischargeability is placed within the exclusive jurisdiction of the bankruptcy court. BR 7001 requires any proceeding seeking a determination of dischargeability be brought as an adversary proceeding, initiated by complaint, pursuant to 523(c), within 60 days from the date of the first meeting of creditors. Counsel for a nondebtor obligee must bring such an action seeking a finding that the debt is nondischargeable under 523(a)(15). And, while the debtor client is not happy about having to notice a former spouse, under 523(a)(3) if a creditor is not given notice, the debt will probably not be dischargeable.
Of utmost concern to Texans should be the ruling by the Fifth Circuit that exempt property can be seized by a bankruptcy court to pay for nondischargeable matrimonial debts. Davis supra. Debtors Thomas Davis and wife, Karen, filed for Chapter 11 protection and scheduled their $750,000 home, purchased by Thomas's inheritance from his father, as being unencumbered and fully exempt under Texas laws. Thomas asked the bankruptcy court to rule on the dischargeability of the debt to his former wife, Sandra, in the principal sum of $250,000 plus $50,000 attorney's fees; the obligation was found to be nondischargeable under Section 523(a). Appellant Sandra asked that debtor Thomas be ordered to execute a warranty deed conveying his homestead to her, because judgment against him was unenforceable outside of the bankruptcy. The bankruptcy court refused, and the district court affirmed under the broad protection afforded by state exemptions, finding that the debtor's homestead ceased to be property of the bankruptcy estate when the claim of exemption became effective. The Fifth Circuit disagreed and found that exempt property was not removed from the bankruptcy estate but remained liable for claims that are nondischargeable under Section 532(a)(1) or (a)(5). Clearly, state homestead exemption law is superseded by the Bankruptcy Code; state law cannot alter the obligations of a bankruptcy debtor and his creditors. Thus, bankruptcy may not only not discharge support obligations, but may also strip the protection from exempt property protected outside of bankruptcy.
Caveat: If the property settlement portion of a divorce decree is worded in such a way that it could be interpreted as alimony, then the debtor's obligation outlined in the property settlement portion of the divorce decree is automatically nondischargeable in bankruptcy. If the payment of certain debts by debtor in bankruptcy was written into the decree as property settlement, the debts are dischargeable. To avoid that happening, the former spouse would have to object within a 60 day period, and a determination would be made by the court about whether the benefit of the discharge to the debtor outweighs hardship to the spouse, former spouse, or child of the debtor.
Legal assistants in both bankruptcy law and family law should be aware of these provisions. Many people with family problems also suffer from financial problems. This is often referred to as two heads of the same monster. A bankruptcy legal assistant should remember it is best to make sure that spouses, who are not petitioners in the bankruptcy filing, and former spouses are noticed. The legal assistant to a family law attorney who is representing a client who may also need bankruptcy relief in the future should avoid "hold-harmless" language and take note of the different treatments given alimony and property settlement by the bankruptcy system. A legal assistant to a family law attorney representing a client anticipating a bankruptcy filing by a soon-to-be ex-spouse should also be aware of the implications of bankruptcy on support obligations and property settlements.
Legal assistants in the bankruptcy field must have a working knowledge of many other areas of law, including real estate, contract, family law, and business law. Current demographics point to a galloping rise in the number of bankruptcies filed each year. Opportunities abound in the field, and as long as there are cases which require the volume of paperwork generated by federal bankruptcy filings, there will be a need for persons to assist the attorneys - notorious for their dismay at "handling paper." Bankruptcy law: stressful it is, but dull it isn't.
TEXAS PARALEGAL JOURNAL
Summer 1997
©1997 Legal Assistants Division, State Bar of Texas