Bankruptcy Petition - The Start of Bankruptcy
Bankruptcy is started by filing the bankruptcy petition with the clerk of the bankruptcy court representing the district of the debtor's domicile, paying the required fee, and obtaining the order for relief, which commences the bankruptcy case. The petitioner, who is declaring bankruptcy, does have the option to pay the fee in 4 installments over a period of 60 days. The court may also waive the fee, if the debtor's income is less than 150% of the federal poverty level. The fee ranges from $200 - $300 for Chapters 7, 12, and 13. Chapter 9, for municipalities, and Chapter 11, used mostly by businesses and wealthy individuals, requires a fee of $1,000.
In a voluntary petition, the order for relief is granted automatically with the filing of the petition. In rare cases—less than 1% of all cases—creditors of a debtor may file an involuntary petition (Form B-5, Involuntary Petition), but only under Chapter 7 or Chapter 11 §303(a), which requires a court hearing. If the judge decides that the bankruptcy should go forward, then an order for relief is entered.
If the petition is filed jointly, then both spouses must sign the petition. If the petitioner is a partnership or a corporation, then the legal representative must file the petition. Who are spouses is determined by state law, while legal representatives are determined by state corporate or partnership laws. If the petitioner is a partnership, then all general partners must consent to the bankruptcy for a voluntary petition. If any partner objects, then the bankruptcy must be commenced as an involuntary petition.
The petition consists of the Official Bankruptcy Forms and required documents to support the information provided in the forms. The petitioner must sign the forms asserting their correctness under penalty of perjury. If the debtor is represented by an attorney, then the attorney must also sign the petition as an attorney of record. The attorney usually files the petition electronically.
The forms and documents that must be filed include detailed information on the petitioner's financial affairs: assets and liabilities, income and expenses, executory contracts and leases, and other information required by law or necessary to prosecute the case. Some documents are required by all debtors, while some depend on what chapter of bankruptcy the debtor is filing. Most of these documents must either be filed with the petition or within a short time of the filing—usually 15 days. It is generally wise to file all of the documents together, since the failure to file documents on time can result in a dismissal of the case.
To start the bankruptcy, the following documents (with links to the Official Bankruptcy Forms) must be filed:
- By all debtors:
- Form B-1, Voluntary Petition—filing this form commences the bankruptcy and initiates the automatic stay to prevent creditors from taking any further action unless it is through the bankruptcy court;
- the names and addresses of all creditors (aka creditors matrix);
- Creditor Matrix Format Requirements — this is an example of the local requirements of the Eastern District of Pennsylvania;
- Within 15 days of the petition:
- Schedule C, Property Claimed as Exempt
- Schedule G, Executory Contracts and Unexpired Leases;
- Form B-7, Statement of Financial Affairs;
- Schedule I, Current Income of Debtor(s);
- Schedule J, Current Expenditures of Individual Debtor(s);
- Form B-6 Summary, Summary of Schedules, which lists the aggregate totals and other information from Forms A-J.
- Form B-6, Declaration Concerning Debtor's Schedules—the debtor files this form to assert under penalty of perjury that the information provided in the schedules and forms is correct.
- For Chapter 11:
- A list of equity security holders.
- Required also for Chapter 9, is Form B4—List of Creditors Holding 20 Largest Unsecured Claims—the names, addresses, and amounts owed of the 20 creditors holding the largest unsecured claims (Form 4);
- Individual debtors must also file the following:
- Certificate from a credit counseling agency approved by the U.S. Trustee, along with a description of the services provided and any budget plan that was developed;
- Statement confirming the completion of a financial management course—Form B-23, Debtor's Certification of Completion of Instructional Course Concerning Financial Management—must be submitted no later than 45 days of the 1st creditors meeting in Chapter 7 and no later than the last payment in a Chapter 13 or Chapter 11 case;
- Copy of tax return for the year previous to the filing must be given to the trustee no later than 7 days before the 1st creditors meeting;
- Statement disclosing any changes in income or expenses that is expected to occur within 12 months of the filing date;
- Within 15 days of the petition (but almost always filed with the petition):
- Copies of all payment advices or other evidence of payment from an employer received in the 60 days previous to the filing;
- Statement of current monthly income (Form 22);
- For Chapter 7 filers, Form 22A, Statement of Currently Monthly Income and Means Test Calculation;
- For Chapter 13, Form B-22C, Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income;
- For Chapter 11, Form B-22B, Statement of Current Monthly Income;
- Schedule C, Property Claimed as Exempt;
- Record of debtor's interest in an educational individual retirement account or qualified state tuition program.
These Official Bankruptcy Forms and Instructions are fillable and updated when necessary.
There may be additional requirements, such as providing copies of tax returns filed or amended during the course of the bankruptcy, that are required by law or are requested by the court, the trustee, or by creditors.
Legal Effects of Bankruptcy Filing
The bankruptcy filing has an immediate legal effect upon the debtor's property and upon his creditors. One effect is the creation of the bankruptcy estate, where the debtor's property—all his legal and equitable interests—is transferred to the exclusive jurisdiction of the bankruptcy court. Under most chapters, the bankruptcy estate is controlled by the trustee, who works for the benefit of creditors and carries out many of the duties required in bankruptcy. While the debtor keeps possession of the property, the trustee, using the bankruptcy process, will determine what the debtor gets to keep and what can be sold for the benefit of the debtor's creditors.
Because the bankruptcy estate is now under the control of the trustee and bankruptcy court, creditors cannot take action against the estate or the debtor unless it is through the bankruptcy court. Hence, the court can effect one of the main goals of bankruptcy—the equal treatment of unsecured creditors—by coordinating their actions through the centralized supervision of the court. Creditors are prevented from pursuing their own legal actions by the automatic stay. The automatic stay is invoked immediately by the bankruptcy filing, both in voluntary and involuntary cases.
Because the automatic stay prevents any further action by creditors as long as the automatic stay is in effect, the statute of limitations that would have otherwise expired during the case is extended so that creditors are not deprived of their rights. Their right to sue the debtor if the case is dismissed is extended by 30 days after the dismissal. However, if the statute of limitations only expires after the bankruptcy case is closed, then there is no extension of time. If the debtor receives a discharge of his debt, however, then the creditors are forever barred from trying to collect the debt by an injunction that supersedes the automatic stay.
Because it takes time for the trustee to learn about the estate and the rights of the debtor, any time limitations on action that the debtor could have taken that would benefit the estate, which is now assumed by the trustee, will be extended. The trustee has 2 years from the filing to sue for the benefit of the estate and 60 days to take any other action.
Another immediate benefit of filing is the prevention of any termination of utility services until at least 20 days after the filing. Utility services cannot be terminated because of a prepetition debt, but the debtor must provide an assurance of payment, usually in the form of a security deposit, to keep utility service.
Duties of the Petitioner
Since most of the information required in a bankruptcy is held by the petitioner and because the petitioner must do certain things to receive a discharge, the failure to provide such information or to do what is required or to cooperate with either the trustee or the court will result in either the dismissal of the case or a denial of a discharge. Filing the required forms and supporting documents is the 1st step. The failure to file such documents at least within 45 days of the filing can result in the automatic dismissal of the case.
In addition, the debtor must provide copies of any current tax returns that were filed during the case, and give the trustee the most recent tax return for the previous year at least 7 days before the 1st creditors meeting. (Usually there is only 1 creditors meeting, but sometimes it is continued at a later date.)
The creditors meeting (aka 341 meeting), which usually occurs about 30 days after the filing of the petition, allows the trustee and any creditors that show up to interview the petitioner under oath. The petitioner will be required to furnish a photo ID as proof of identity and any other documents required by the trustee. The petitioner must attend this meeting; otherwise, his case will be dismissed unless he can show good cause for the failure to attend.
In addition, there will be other duties, depending on the bankruptcy chapter and the property held by the debtor. For instance, if the debtor is filing Chapter 7 and has secured property, then the debtor must file a Statement of Intention—Form B-8, Chapter 7 Individual Debtor's Statement of Intention—no later than 30 days after the 1st creditors meeting, listing the secured property along with whether he is going to surrender it, redeem it by paying a lump sum, or sign a Reaffirmation Agreement to continue paying on the debt. If not represented by a lawyer, he will also have to attend a court hearing so that the judge can ascertain that the debtor understands the Reaffirmation Agreement and whether he wants to cancel it.
The trustee may also require that the debtor relinquish any nonexempt property so that it could be sold for the benefit of creditors or the trustee may require information on specific property to ascertain its value to the estate. Failure to cooperate with the trustee or comply with a court order can result in the dismissal of the case or a denial of a discharge.
Amending the Bankruptcy Petition
Sometimes the bankruptcy petition must be amended to correct mistakes or because the petitioner became entitled to money or property after the filing that must be included in the bankruptcy estate. Bankruptcy Rule 1009 allows the debtor to amend the petition any time before the case is closed. Bankruptcy petitions are commonly amended to add property or creditors that were not previously listed.
The debtor must give notice of the amendment to the trustee and to any party-in-interest affected by the amendment. If, after a hearing, the court agrees, then it will order a voluntary petition, list, schedule, or statement to be amended and the court clerk will send notice of the amendment to the affected parties.
- Federal Rules of Bankruptcy Procedure: Part I — Commencement of Case: Proceedings Relating To Petition And Order For Relief