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By Markian R. Slobodian, Esq.
Chapter 7 Bankruptcy


As a Chapter 7 Bankruptcy Trustee, I am required by law to take certain actions with regard to debtors who file Chapter 7 and their bankruptcy estates.  First, I review debtors’ bankruptcy petitions and schedules to determine whether there are any assets that can be administered for the benefit creditors.  Usually this means checking to see whether debtors have correctly utilized the “property exemptions” afforded to them under the bankruptcy law.  If I believe that an exemption is incorrectly claimed or that the value of a debtor’s assets exceeds the amount of exemptions to which the debtor is entitled, I may file with the Bankruptcy Court an objection to the exemptions.

I may also find assets that were not properly disclosed on a debtor’s bankruptcy schedules.  If I do that, I will try to recover the assets and sell them for the benefit of the creditors.  Such assets could include property which the debtor improperly transferred prior to filing, often defined as “fraudulent transfers” under the Bankruptcy Code or payments that a debtor made to creditors, usually within 90 days of the bankruptcy filing, which allowed those creditors to receive more money than they would have otherwise received if they had waited for payment from the Chapter 7 Trustee.  These payments are usually referred to as “preferential transfers”.

On the other hand, I also examine proofs of claim filed by creditors to make sure they are correct and justified.  When creditors claim a certain priority status for their claims, such as tax claims, certain wage claims, and domestic support obligation, I will review those claims to make sure that the priority status is correct.

A Top Priority for Domestic Support Obligations 
Under the new bankruptcy law which became effective in October of 2005, claims for domestic support obligations owed to a spouse, former spouse, or child of a debtor now have a priority claim which, in cases where the Trustee recovers assets, would be paid ahead of the claims of most other creditors.  The new law also requires debtors to provide to the Chapter 7 Trustee an affidavit disclosing the name and address of the claim holder and, if the support obligation is being paid pursuant to a court order, the name and address of the court and the case number.  The Chapter 7 Trustee must, in turn, send a notice to the domestic support claim holders advising them of their priority status and their right to file a proof of claim.  The Trustee will also advise the domestic support claim holders of their right to use a state Child Support Enforcement Agency and will provide the name, address, and telephone number of an Agency that may be able to assist them.

Limits on Right to Convert Case to Chapter 13 
In the past, debtors had the automatic right to convert their cases from Chapter 7 to Chapter 13 at any time and for any reason.  In the Chapter 13 case they would be required to file individual reorganization plans with proposed payments to their creditors.  In a case decided last year, Marrama v. Citizens Bank of Massachusetts, 127 S. Ct. 1105 (2007), the United States Supreme Court held that a Chapter 7 debtor could not automatically convert a case to Chapter 13 if he or she had engaged in bad-faith conduct such as hiding assets from the Chapter 7 Trustee.  As a result of Marrama case, the Bankruptcy Court in the Middle District of Pennsylvania now affords the Chapter 7 Trustee and other creditors an opportunity to object to the proposed conversion.  It is now likely that a Chapter 7 Trustee will object to the conversion when the Trustee has discovered assets that a debtor has attempted to hide from his or her creditors. 

Exemptions for New Residents 
Debtors who file Chapter 7 within two years of moving to a new state may find that they are required to use the exemptions allowed by the old state.  If the debtor has moved into a state within 2 years of filing bankruptcy, the Trustee will have to check where the debtor resided 2 ½ years before filing bankruptcy.  This issue becomes important when the exemptions of one state are substantially more generous than in another.  It may also affect the timing of a debtor’s bankruptcy filing.  Debtors may decide to expedite or delay their bankruptcy filing in order to qualify for the most generous exemptions.

Other Changes 
The 2005 Bankruptcy Legislation brought numerous other changes which affect debtors, creditors, and Chapter 7 Trustees.  This article addresses only some of those changes.  Hopefully, being aware of the changes I have discussed will make the bankruptcy process smoother and easier for debtors and creditors and help them understand the duties and expectations of the Chapter 7 Bankruptcy Trustee.