Accuracy of Pleadings
A study by the OUST in which
cases were randomly audited disclosed that about 85% of the cases filed
contained “material” errors. And a pilot
study in which trustees were requested to visit the homes of approximately 50%
of the debtors on each rotation 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. As a result,
trustees have been asked to “raise the bar” on proper preparation of pleadings. You should also communicate with your clients
that agents of the trustee may be making visits to their homes prior to the 341
hearing with digital recording equipment.
If you would like to be present at these visits, please contact my
office. Otherwise, we will assume
blanket permission to contact your clients directly to arrange these visits.
Finally, if you are not
already aware the OUST has adopted a prosecutorial attitude toward
debtors. As a result, the oath and
statements they make at 341 hearings are very important. If their pleadings contain errors and they
answer the oath in the affirmative, a prima facie case of a bankruptcy crime
has occurred. This makes a prosecutors
job very easy. Don’t let one of your
clients become a statistic on a OUST press release. Remember also that a "Material Error" can result in dismissal without the ability to refile.
The Quality of Debtor
Review the pleadings with
your clients prior to signing. Make sure
all questions have been answered. Key
problem areas include:
Income is under reported.
Tax withholdings are too high.
No dates or purposes on debts.
Incorrect entries regarding payments made in the last
90 days. Especially if the debtor
received a tax refund pre-filing.
Not disclosing if there is business debt on the petition
We understand that clients
often do not supply the information.
However, you have an obligation to ask.
The presumption of the UST Office is that you have not spoken to your
client if any portion of the schedules or statements are left blank.
The Attorney must meet with
the client pre-filing and advise them regarding the appropriate chapter to file
and the consequences of filing. In
connection with this, the attorney must ensure in a joint filing that both
spouses are actually aware of the filing.
Don’t send the pleadings home to sign unless you have previously met
with the absent spouse.
The fees charged must be
reasonable and the pleadings must reflect sufficient attention to detail to
show that the fee has been earned. $800 to $900 is considered a reasonable fee
in the typical case. Under the new
law $950 to $1,400 may be considered reasonable. The information regarding fees on the
statement of financial affairs should match the information on the disclosure
of compensation. If you sue your client
for fees and they complain to the UST Office, you will likely be the subject of
a sanctions motion for violating the discharge stay provisions. The local UST Office has determined to step
back from mandatory implementation of Bethea. However, Judge Thurman has determined that
it is applicable in any case that comes before him.
Another area of concern is
sloppy or improperly prepared pleadings.
This includes, but is not limited to (a) pleadings that fail to clearly
distinguish business debt,1 (b) failure to disclose prior
filings, (c) missing dates or descriptions of schedule D, E, & F; and (d)
pleadings that are not internally consistent.
The following are common inconsistency errors:
A business alias or equipment, but no entry on question 18 of
the statement of affairs.
Question 1 of the statement of affairs not matching Schedule I.
Question 2 of the statement of affairs not matching questions
4, 10, 16, schedule B, or schedule I.
Question 4a of the statements of affairs not matching
Question 7 of the statement of affairs not matching
Question 9 of the statement of affairs not matching the 'Fee Disclosure statement'.
Question 12 of the statement of affairs not matching
Business equipment, but no entry on question 18 of the
statement of affairs.
Schedule C values or property not matching schedule A or B.
Schedule D values or property not matching schedule A or B.
The summary page not matching the schedule totals.
Schedule D debts appearing on schedule F.
Business debt on D, E, or F and no entry on question 18
of the statement of affairs.
Schedule G doesn’t match schedule I or J.
Schedule H debt not listed on D or F.
Statement of Intent doesn’t match schedule D.
Surrendered debt on schedule J.
A few other items to be aware
of: (1) do not sign pleadings for your client, (2) do not electronically file pleadings
that have not been previously signed by the client, (3) have the client date
the pleadings at the time of signing, (4) do not have clients sign blank forms,
(5) do not forge client signatures, (6) don’t file cases where there is no
intent to complete the filing, and (7) do not take fees in installment cases
until the court filing fee has been paid in full.
The following items appeared
on a list of General Civil Enforcement Areas under the heading of Attorney
Misconduct: (1) Excessive fees, (2) Unbundled services, (3) Use of appearance
counsel/substitute counsel, (4) Poor lawyering, (5)
Abandonment of clients, (6) False statements, (7) Poorly prepared documents, (8)
Forgery/unsigned documents, and (9) Bad legal advice.
707b Violations (Substantial
If your client has the
following characteristics they will be carefully scrutinized to see if they
should be dismissed or converted to a chapter 13:
Single individual with income of 50,000 or more.
Married with joint income of 75,000 or more.
75,000 or more of unsecured debt.
More than 50% of the debt is consumer debt.
$200.00 or more of excess income.
It is the position of the UST
Office in Denver that a legal right exists to require disclosure of
the income of the spouse (or any other adult in the household) as well as their
expenses to insure that it is not abuse for a client to file chapter 7. Partner income is applied against half the
joint overhead. Excess partner income
beyond this is ignored. If after paying
half of the joint overhead a client has excess income sufficient to return more
than 20% to unsecured creditors over a three year period it will be considered
abuse for them to file a Chapter 7.
If you have a case like this,
plan on bringing to the first meeting of creditors the following documentation:
2 years of tax returns.
2 years of W2 and 1099 information.
3 months of pay stubs
6 months of bank statements
6 months of credit card statements
Last quarter retirement statement
When determining budget
expenses do not include in the budget expenses for property being surrendered
or that would be discharged in a 7 (such a credit card debt). Remember also that 401k deductions or loan
repayments will be factored out as well, although this may change under the
The Trustees Office in Denver is concerned with under reporting of income. Based upon prior research a high
percentage of cases include substantial unreported income. As a result, all debtors are being asked to
bring the following documents to the 341 hearing:
Statements for each bank account, investment account,
mutual fund, or brokerage account that include the filing date balance.
The most recent pay stub.
The most recently filed complete federal and state tax
The following items appeared
on a list of General Civil Enforcement Areas under the heading of Debtor
Misconduct: (1) Substantial abuse, (2) No statements and/or schedules,
nonpayment of fees, (3) Failure to appear at the 341 meeting, (4) Incomplete
and/or inaccurate schedules and/or statements, (5) Concealment of assets, (6)
Undisclosed transfer of assets, (7) Asset undervaluation, (8) False statements,
(9) Lack of books and records, (10) Inability to explain loss of assets, (11)
Credit card bust outs, (12) Serial/multiple filings, and (13) Identity issues,
including identity theft.
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.
And lest you think that a large amount of debt will persuade trustees
not to liquidate property, be aware that most creditors do not file claims and
that the OUST calculations are based upon percentage return to creditors who
file claims, not total creditors.
Trustees are being encouraged to obtain storage units to hold debtor
personal property and to hold their own sales on a periodic basis.
The US Trustees office is
concerned Creditor and Petition Preparer Misconduct. If you become aware of the following to
report them to the UST Office:
Petition Preparer Misconduct
Non compliance with 110 disclosures
Unfair and deceptive practices, including the
unauthorized practice of law
Use of attorneys as fronts
Automatic stay abuse
Violation of injunction or other equitable
False or inaccurate claims
Misuse of the reaffirmation or redemption
Unauthorized use of official court language/fake
pleadings in written solicitations