Petitions, Schedules, and Forms: Understanding the Many Documents of a Bankruptcy Case
Petition and Schedules
The Petition and Schedules can range in length between 12 and 65 pages. Shorter Petitions with empty Schedules are commonly called “skeleton” petitions. They’re bare bones. Skeleton Petitions are usually filed when a debtor is in a rush to file because of an immediate deadline, or in rare cases of abuse where the debtor does not intend to follow through with the bankruptcy, but merely interfere with creditors. These must be amended and completed within a certain deadline set by the bankruptcy court or the case will be dismissed.
We’ll look at a Petition and Schedules used by a small family business. The business was a “sole proprietorship,” not a corporation. In this case, the family owned real estate that they rented out for income. We’ll go page-by-page to dissect the documents so you understand what you’re looking at when you receive a Notice of Bankruptcy, and when you get a hold of the underlying documents, you’ll be able to spot errors relating to your status as a creditor, and you’ll be better able to discuss the case with your attorney.
• Here the debtor (or debtors) gives their personal information and the names of any related businesses. Check the list of names against your information for the debtor to see if they left out any business names.
• The debtor also states the chapter of bankruptcy, and whether they’re filing as an individual or a corporate entity.
• Whether the debtor believes funds will be available to distribute to unsecured creditors is also stated on this page. This is a flag for unsecured creditors to take notice of a case.
• On this page, the debtor lists all of his prior bankruptcy cases. This is important because of the automatic stay. If a debtor has filed more than one case within 180 days (e.g., if the first one was dismissed), then the stay may only last for 30 days. More cases within 365 days or two years bring about a presumption of abuse. Carefully discuss this section with your attorney. This will be implications for how the case will proceed.
• While this is simply a signature page, it is very important. The debtor is affirming under penalty of perjury that everything contained in the Petition and Schedules is correct. The debtor risks massive fines and years in jail for lying on these forms. It is not uncommon for creditors’ attorneys to wave this page in front of debtors of questionable character.
• The Bankruptcy Code requires all debtors to undergo two financial management seminars. One must be taken before the bankruptcy case is filed and one must be taken within a number of days after filing. The debtor must certify that he completed, or will complete, these courses and file the certificates of completion.
• The financial management and counseling course is fairly standardized and can be taken online from a number of providers. It is inexpensive, ranging from $25 to $50 per course. I personally recommend that everyone take a financial management or counseling seminar to better manage their personal finances.
• Here begins the Statement of Financial Affairs. The debtor must disclose all income for the three years preceding bankruptcy.
• Section 1 requires disclosure of all income from employment. A negative number in this section is odd (since either you make more or you don’t from employment, but you can’t lose money). In this case, the debtors were examined by the trustee in detail about their income.
• Section 2 requires disclosure of all income from business operations and the source.
• Section 3 asks for information about payments made to creditors within the 90 days preceding filing. The section is divided between consumer and nonconsumer debts. This is important because of the concept of fraudulent transfer. The trustee has to make sure that the debt payments were made within the ordinary course of business. Otherwise other creditors can claim that they were disadvantaged, arguing that the debtor knew he was going to file bankruptcy and intentionally shut them out.
• Section 4 requires the debtor to list all pending lawsuits.
• Section 5 asks the debtor to disclose any property that was recently seized or repossessed by creditors.
• Section 6 deals with receivership and assignment of property. The trustee is looking to see if the debtor has any property or money being held by third parties. This property, as well, is part of the bankruptcy estate.
• Section 7 asks about gifts. Again, this relates to fraudulent transfer. If ordinary, small, gifts are given for common purposes ($25 for a grandchild’s birthday) it is of no concern. But if $10,000 is given for no good reason, that will cause the trustee to take action and demand the money back.
• Sections 8 through 11, continuing the theme of pre-bankruptcy distribution of funds, ask the debtor to disclose all other transfers of property or money, and also for information about closed bank accounts.
• Section 13 asks for setoffs, meaning claims that the debtor has against a creditor, which may reduce the debtor’s liability to that creditor.
• The other sections ask for information about safe deposit boxes, prior addresses, and former spouses. This is only relevant in community property states.
• Section 18 here is key, as it will contain more detailed information about the debtor’s businesses.
• These sections are devoted mostly to disclosure of business managers, executives, and partners.
• For certain creditors, Section 20 is important because it lists inventory. If you are trying to recover items held on consignment, or if you claim a lien on inventory, pay careful attention to this section.
• Note Section 23 on this page, which lists distributions to partners, officers, and shareholders. While here it is blank, it’s a good place to catch questionable distributions of business funds.
• Again, this is just a signature page. But it is evidence of the debtor affirming everything in the Petition under penalty of perjury.
• We begin the Schedules with the Summary of Schedules.
• This summarizes the assets and liabilities of the debtor. In a bankruptcy case, it should be inevitable that liabilities exceed assets.
• On this page, you can immediately spot red flags for missing assets, excessive or reduced claims of debt, or missing information.
• This Statistical Summary page factors income and unsecured debt into the bankruptcy calculation.
• Schedule A is a disclosure of all real property (real estate) in which the debtor has an interest. This includes all forms of ownership, but not leases.
• The debtor has to disclose the location of the property (address or legal description sufficient to identify the property), the nature of the property (house, raw land, commercial, industrial), the type of interest that he has (sole ownership, joint, fee simple, life estate), the value of the property, and the amount of claim that secured creditors have for debt owed encumbering the property.
• The value of the property has to be some form of market value.
• Schedule B requires the debtor to list all of his personal property. This is everything that’s not real estate.
• The form lists all of the different types of property. The debtor has to provide specific information about the property, his ownership interest, and the market value. Since used personal property usually has less value than new, these numbers will inevitably be low.
• One key point is that personal property has a lot of exemptions under state law, meaning that a debtor gets to keep the personal property they need to re-start their life after bankruptcy. But the exemption has limits. You will find that the values for the personal property conveniently coincide with the state exemption limits. There’s nothing nefarious about this, as it is usually reasonably accurate. But it is something to take notice of if you know the debtor has some special property that they do not list.
• For business purposes, it’s important to take note of Section 16 here and review accounts receivable. These accounts are an asset that can be assigned. Also, litigation can be instituted by the trustee on behalf of the estate.
• For businesses, look at equipment, machinery, and inventory. These may be assets, but they also may be encumbered by liens. If they’re your liens, double check on the details and the value of these assets.
• On the bottom of this page, you will see the total value of the personal property.
• Schedule C lists the personal and real property exemptions. By state law, the debtor is allowed to claim a certain value of each type of property as exempt from liquidation.
• Review this list carefully to see if there is any excess value, meaning property that is worth more than the allowed exemption.
• On the bottom of this page, you will find the amount of exempt property versus the total value of the property. If the latter is higher, there will be assets available for distribution to creditors.
• Schedule D is a list of creditors holding secured claims on real and personal property.
• This schedule lists the name and address of the creditor, the property subject to the lien, the value of the property, and the amount of the lien claim.
• At the bottom will be the totals for lien claims versus value.
• If you believe you are a secured creditor but are not listed on Schedule D, it is important to bring that to the attention of your attorney immediately. Your attorney will inform the debtor’s attorney and the trustee. Also make sure the numbers for your collateral are correct.
• Schedule E relates to unsecured priority claims. These are claims for child support, alimony, and taxes. Priority claims can also be salary and benefits owed to employees.
• Schedule F lists unsecured, nonpriority claims. In other words, everyone else. Most unsecured creditors will be listed here.
• The schedule lists the name and address of the creditor, the date the debt was incurred (although it’s rarely listed), and the amount of the claim.
• At the bottom you will find the total of the unsecured claims.
• Schedule F is usually multiple pages long. We show only the first page as an example.
• Schedule G will list leases that are currently operative, along with other contracts that are ongoing at the time of bankruptcy.
• Schedule H lists co-debtors. A co-debtor is a person or corporation obligated on a debt along with the debtor, but is not a party to the bankruptcy.
• Schedule I is a disclosure of the debtor’s monthly living expenses. The purpose is to show that the debtor has enough income to meet his regular monthly living expenses, including debt payments, plus the Chapter 13 Plan payment on arrearages. In Chapter 7, this will show that the debtor does not have the ability to make his monthly payments and therefore should be granted a discharge.
• This schedule is pretty well scrutinized by the trustee. Often debtors will drastically overestimate or underestimate living expenses depending on their goal.
• This disclosure is provided to the debtor pursuant to the bankruptcy code. It is a “plain English” summary of the bankruptcy laws so the debtor will understand their obligations and what they’re getting themselves into. I present it here so you understand bankruptcy from the debtor’s perspective. The debtor certifies that they’ve read this form before filing for bankruptcy protection.
• This is the second page of the required disclosure.
• The Petition and Schedules concludes with a mailing list of all the creditors. Review the list and see who else the debtor has business with. This could provide insight into how they got into bankruptcy and how assets may be distributed.
Chapter 13 Debtor’s Plan of Reorganization
The Chapter 13 Plan is the debtor’s proposal to pay off pre-petition accrued debt to secured creditors (the arrearage), while maintaining payments on other debts secured by property that the debtor intends to keep, and also keeping up with their living expenses. The following is an example of a Chapter 13 Plan. We’ll go through it in detail so you can identify where your business might fit into the plan, and where you should be concerned. Discussing the plan in detail with your attorney is the best way to understand the impact of a Chapter 13 Plan on your business. Unlike the Petition, which is a standard form across the country, the form of the Plan may differ by district. But the essential points are the same. The plan shown here is from the Northern District of Georgia, which tends to be lengthy.
• The key parts of the Plan are anything that involves filling in the blanks, or adding text. Note Section 2, which sets out the monthly Chapter 13 Plan payment, how the payment will be made (whether directly to creditors or to the trustee), and Section 4, which is the debtor’s attorney’s fee.
• If the monthly Plan payment, plus monthly expenses, exceeds monthly income then the Plan is not feasible and has to be revised.
• The attorney’s fee is subject to the trustee’s review for being excessive. Most attorneys stay within the bounds of local custom on this matter.
• On this page, note the priority claims of taxes. Taxes can include unpaid income or payroll taxes due to the federal government or the state. Taxes can also include unpaid property taxes.
• The Plan requires that pre-confirmation payments be made, known as “adequate protection.” This page notes whether special pre-confirmation payments will be made or whether payments will be made through the trustee under the regular terms of the Plan.
• A creditor can claim that the payments are “inadequate” if they do not lead to the arrearage being paid off by the end of the term of the Plan, among other reasons.
• This page will contain Plan information for personal property. The debtor will list the personal property that is collateral for loans, and his intent for retaining or abandoning the property.
• If the debtor is going to keep the property, he has to set out the repayment plan for the arrearage. It must totally pay off the arrearage, but the interest rate must be high enough to be “adequate” but low enough that the debtor can afford the payment.
• This debtor made an error listing real property here.
• This page relates to real property. The debtor has to list all of his encumbered real property and declare what he intends to retain and let go.
• If he is going to retain the real property, he has to state how he will pay off the arrearage. Just as previously, the arrearage payment must be feasible given his income and expenses.
• This page also lists unsecured claims and whether unsecured creditors will realize any payment from the Plan. In most cases, the answer is “no.”
• Pay careful attention to the “Other Provisions” on this page. While it is blank here, often this is where debtors sneak in provisions that are not to the liking of secured creditors. They may say that payments will be one amount initially and another amount later. It’s also common to list intentions to strip an inferior lien or mortgage at this point.
• If that is the case, speak to your attorney about rvemedies to preserve your lien rights and chance at receiving payment.
Creditor’s Proof of Claim
A creditor files a Proof of Claim to let the trustee, the debtor, and other creditors know the amount and nature of their claim. The Proof of Claim is used to establish security status and priority when payments are being made. In most cases, a Proof of Claim is only filed in a Chapter 13 case. But sometimes, if a Chapter 7 case has assets to be distributed, the trustee will direct creditors to file a Proof of Claim. The following is an example of a Proof of Claim. If the claim is secured, most districts require a copy of the security agreement to be included with the filing, such as a mortgage, deed of trust, security deed, or UCC-1 statement. Some districts allow businesses and corporate entities to file their own Proofs of Claim. Others require an attorney to file on behalf of a corporation. Either way, let’s review the required information so you can fill it out on your own behalf, or assist your attorney more effectively.
• The top of the page requires basic information about the case name, name and address of the creditor, and other contact information.
• Section 3 requires the creditor to state the basis of the claim. This is usually “money loaned” or “auto loan” or “real estate mortgage.” Something along those lines.
• Section 4 requires the creditor to state whether the claim is secured, and if so, to describe the collateral, provide the loan amount, the balance due (the secured claim), the interest rate, and any arrearage owed. If there is no security, just the amounts are necessary.
• If the claim is secured, the creditor is required to attach a copy of the security agreement, or other document that shows that the claim is secured. This is usually the mortgage or security deed, car lien, or UCC-1 statement. If you do not have a copy of the document, you have to explain on this page why there is no security document.