Most cases are no asset
cases. You can help the trustee quickly
make that determination by supplying helpful information that may not be
required by the statements and schedules or current rules.
Small Asset Cases
Through research the OUST has
determined that a greater return is made to creditors in small asset cases
($1,000 to $10,000) than in larger cases.
As a result, trustees are being mandated to handle cases under the
traditional $2,000 to $5,000 range.
Trustees are also being strongly encouraged to be more exacting in those
cases where there appear to be assets.
Please let your clients know that in any case where there is a tax
return, car, or other asset that will bring money to the estate, they will also
be asked to turn over “all” cash on hand on the date of filing (even if it is a
nominal amount), and may be asked to turn over “all” non-exempt personal assets
(even if they could not be sold for much).
The idea is that even a small amount of funds will increase the
percentage return to unsecured creditors.
An explanation of the process
of analyzing an estate may be helpful to debtor’s counsel.
First the trustee will gather
information. In addition to the review
of debtors pleadings and the questions asked at the
first meeting of creditors; trustees have additional sources of information
about the estate. Debtors would be
amazed at the amount of information supplied by third parties. In addition, most trustee’s have access to
asset searching software that provides information on real estate, businesses,
motor vehicles, boats, trailers, taxes, and more. Some trustees even make house calls with
digital cameras to look for assets. In a
pilot study trustees were requested to visit the homes of approximately 50% of
the debtors on each rotation. These
visits disclosed that 70% of the homes visited had “materially” under reported
assets. In this study 35% of the cases
on each calendar became asset cases. Key items the trustee looks at (in
addition to schedules A, B, C, D & E) include the statement of financial
affairs. The following is part of my
Statement of Affairs
[ ] Q3 Preferential
[ ] Q5 Repossession by Relative
[ ] Q7 Preferential Transfers
] Q8 Insurance Payments (over exemption)
[ ] Q10 Preferential Transfers
] Q11 Disposition of Large Balances
] Q13 Preferential Transfers
[ ] Q14 Verify Ownership
[ ] Q16 Verify Divorce Transfers
] Q18 Verify Status of Business and Assets
] Q19 Financial Applications Check
] Q20 Verify Inventory Reductions
[ ] Q23 Excessive?
[ ] Available Equity?
[ ] Verify Title
[ ] Available Equity?
[ ] Schedule D
[ ] Available Equity?
[ ] Verify Ownership
[ ] Schedule E
[ ] Likely Refund?
[ ] Tax Liability?
[ ] Schedule F
[ ] Business Debt but no Q18
[ ] Schedule G
] Rent Paid/Excess income on Sch J
[ ] Schedule J
[ ] Excess Retirement Income
Research has indicated that
at least 10% of all cases are asset cases.
The OUST believes that if debtors schedules were accurate this number
would be as high as 45%.
Next, asset data is entered
into the trustee’s bankruptcy software.
It is usually entered by type of property. As a result, it is helpful to the trustee if
all of a similar type of asset is entered as a group with a total in the right
hand column. Each asset should of course
have its value entered as well. For
example: “stove (350), table (150) ...” All of the information the trustee is
aware of is entered into the computer.
The trustee is then asked to make an independent assessment of each
class of properties value. This may be
the value assigned by an agent of the trustee such as a real estate agent or
auctioneer. Or, if the debtor’s values
look accurate, it may be those values reduced by 7% (in the case of real
estate) or 15% (in the case of vehicles or personal property). Finally, exemptions as claimed on schedule C
and valid liens are entered. This data
is used by the computer to create a “Form 1". This is the form the OUST, the Court, and the
auditors look at to see if the trustee is doing his job. They expect the trustee to recover, if
possible, the amount at the bottom of column three. Unfortunately, the Form 1 as printed does not
show the trustees valuation. As a result,
the number you get from reviewing your clients
pleadings will often be higher than the trustee’s. Do not expect the trustee to claim exemptions
for you. It is your job to properly
complete the pleadings. If you don’t
timely claim an exemption your client may loose property.
The Form 1 is reviewed to
determine if the estate is worth administering. Trustees are being asked to
administer smaller cases. Most trustees set the case
threshold at $1,000.00. However, you
should not depend on this amount. If a
trustee determines that the estate has sufficient assets he will issue a
directive or demand letter.
If a refund has been received
as follows: 2,000 or more in the 3 weeks
before filing, 3,000 or more in the 6 weeks before filing, or 4,000 or more in
the 9 weeks before filing; have your client prepare a summary by date, name,
and purpose of the disposition of the refund to present at the 341
hearing. Also have them bring copies of
their bank statements for the period just before receipt of the refund to the
filing date and receipts as appropriate to prove the expenditures.
If you have a married debtor
filing singly, be sure to include all the W2's for both parties so a proper
allocation of the refund can be made. It
is not simply a 50/50 split.
If your client has spent a
refund received post filing, come to the hearing with a proposal for repayment
(over 6 months or less).
Extensions filed with the IRS
are not binding on the Trustee and your client must file returns within 10 days
of the 341 hearing. It is best if they
are prepared prior to that date so the hearing need not be continued.
Be sure to correlate recently
received tax refunds with question 3 of the Statement of Financial Affairs.
If your client receives a
refund post-filing or determines that they are entitled to a refund
post-filing, be sure to amend schedule b to disclose the refund (even if a no asset report has been
filed) and provide the trustee with a copy of the amendment.
The OUST has taken the
position, after a number of successful cases, that debtors do not have the
right to change their deductions after the date of filing in an attempt to
reduce the size of their eventual refund.
As a result, be aware that the trustees will compare year to date
withholdings on pay stubs with total withholdings on the tax return. If there is a discrepancy the case is to be
turned over to the local UST Office for post filing theft of estate assets.
Some debtors have filed
returns failing to list all of their available deductions so they can present
to the Trustee a return with nominal refunds in hopes that the case will not be
administered. These individuals then
file an amended returns once the case has been
closed. Please counsel your clients not
to do this. If they are caught, they may
be prosecuted for theft of estate assets and their discharge revoked.
If your client files
bankruptcy in the last quarter of the year, a portion of their tax refund is
considered property of the estate. You
can calculate this amount as follows:
Refunds x (the number of days of the year to date of filing/total days in the
year) = Estate Share
If your client has non-exempt
personal property the trustee will ask for the value of those items up to the
Total Refund. This is so that your
client is not out of pocket to retain personal property of the estate. However, if there is substantial non-exempt
property the trustee may still be required to liquidate it.
In the event that you are
required to forward to the trustee all of a tax refund, the check should not be
signed. It should simply be forwarded to
the trustee. If your client is required
to forward only part of the refund, they should make a copy of the check, deposit
it to their account, and then write the trustee a check for the appropriate
amount. Send the check and a copy of the
original check to the trustee. If the
tax refund has been direct deposited, include a copy of the bank statement
showing the entire deposit. The cost of
a cashiers check or money order can be deducted from to total. Do not send cash to the trustee. Personal checks are okay, but cashiers checks
are preferred. If the check bounces your
client may have to pay additional fees.
The cost of preparing the return may also be deducted if you ask ahead
of time and provide proof of payment.
Valuation of Property
Occasionally it is necessary
for the trustee to verify or determine the value of property. If real estate is involved the trustee will
look at the purchase price, any appraisals within the last two years, and the
property tax notice. If there is still a
question as to value the trustee will have Paula Draper, do an examination of
the property and make a market appraisal.
She will call your client to arrange a time to look at the
property. If the property is a motor
vehicle or some other asset, the appraisal will usually be done by Erkelens and Olsen.
Your client will be given a directive requiring them to call Erkelens and make appropriate arrangements. Sometimes Erkelens
will come down and appraise the property so your client don’t
have to take it to Salt Lake. If personal
property is being valued, Erkelens will be given
instructions as to the value that must be obtained at auction before the
property can be sold. If Erkelens believes the value of the item or items to be
higher than this, they will take possession.
The trustee will then seek court approval for a sale.
It should be noted that
debtors can always make an offer to the trustee for the purchase of an
item. Payment should be over six months
or less. However, once Erkelens takes possession, the property will be sold at
auction. Your clients can bid at the
auction just like anyone else, but there can be no private deals.
Delivery of Assets
As indicated above, if your
client has items that are to be sold; they will be provided a directive to
contact Erkelens and cooperate in the delivery of the
item. If the property is in the form of
Stock Certificates or other Commercial Paper, they should be hand delivered to
the trustee. If the property is from a
tax return or bank account, it should be mailed to the trustee in the form of
Certified Funds. If you have concerns
regarding a specific item of property please feel free to contact the trustee.