Navigating the § 341(a) Meeting and Moving Toward Plan Confirmation

[1]The meeting of creditors is similar to an open-book exam. The test date is known, the questions are not a secret, and in a twist, the test-taker holds the answer key. It is an opportunity to get a perfect score, but every so often debtor and counsel are not fully prepared, and the issues are usually preventable.

The parties should take every opportunity to review the plan, schedules and supporting documents with a critical eye for accuracy. This point is reinforced at the U.S. Supreme Court and circuit court levels. In Espinosa[2] and Bateman,[3] the courts reminded each party of their responsibilities.[4] The following items provide general guidance on matters that concern trustees as they prepare for the § 341‌(a) meeting. Debtor’s counsel should possess all relevant documents and anticipate issues to ensure smooth plan confirmation. Early identification can avoid delays and save counsel time and money.

Payments

The debtor must understand when to start submitting payments to the trustee’s office.[5] The payment discussion should also include domestic-support obligations (DSOs),[6] leases,[7] adequate-protection payments,[8] mortgages, vehicles and homeowner’s association obligations. A debtor often appears perplexed when asked if he/she made the first plan payment to the trustee and has likely received an information packet from counsel, but the vital aspect of making trustee payments is lost in case preparation. By the § 341‌(a) meeting, the missed payment renders the debtor already one payment delinquent. A debtor’s failure to pay post-petition obligations creates a further confirmation hurdle.

DSOs

Since the October 2005 amendments, the DSO creditor is of special concern to trustees. Section 1302‌(d)‌(1) requires the trustee provide certain notices to domestic-support creditors, and there is no Bankruptcy Code-based deadline for issuing the initial letter. The trustee may prefer to send the letter shortly after the case is filed, since the DSO creditor could be the source of important information.

It is not uncommon to see a case where the creditor is not disclosed, yet the trustee knows there is a DSO based on a review of pay stubs or a budgeted child-support payment. A delay in the case occurs if the debtor does not provide the DSO creditor’s basic mailing information. For example, the trustee not receiving the necessary information until the eve of confirmation may delay confirmation for up to one month, as the trustee may want to issue the required letter and ensure that it is not returned for an insufficient address.

Payment Advices

The Bankruptcy Code and Rules direct that various documents be filed with the court or provided to the trustee. Payment advices, or pay stubs, are the initial documents that set the trustee’s financial review in motion. The debtor must file the payment advices or other evidence of payment received from any employer for the 60-day period prior to filing the petition.[9] Case law is divided when debtor’s pay stubs vary from this requirement.[10] Nonetheless, if the pay stubs, Schedule I and/or Form 122C-1 contrast, counsel should be prepared to provide additional documentation that supports the calculations on either or both official forms.

The trustee reviews the income disclosure from two different perspectives. The trustee first asks whether future income is fairly represented on Schedule I; then, whether the debtor’s income for the six months prior to filing is accurately disclosed on the means test’s first part (Form 122C-1). The former figure might impact the amount that the debtor is required to pay to the trustee, and the latter sets the trustee’s review of the applicable commitment period (ACP) and allowable expense deductions. In addition, the income disclosure helps to analyze whether the proposed return to the unsecured creditors is acceptable under § 1325‌(b).

Section 521(a)(1)(B)(iv) does not require filing all six months of pay stubs. To determine whether what has been provided is sufficient, the inquiry might include the length of time with the scheduled employer; consistency in income that has been received and the hours worked; consistency of an average income from the pay stubs provided with the year-to-date figure; the number of employers during the previous six months; any employment gap during the six-month pre-petition period; all raises, bonuses or incentive pay awards, and when during the year it was received; and any income reductions.

Some income sources do not fall under § 521‌(a)‌(1)‌(B)‌(iv)’s document-filing provision. Regardless of the source, if the debtor does not receive employer-provided pay stubs, the trustee still needs income proof.[11] Sources such as spousal income, Social Security, unemployment benefits, disability benefits, pensions, child support, alimony, rental income or contributions are not required to be filed, but the trustee must have the information to fully evaluate good-faith, feasibility and disposable-income issues. These sources are simple enough to prove with evidence such as award letters, remittance statements or itemized bank statements. Sometimes, the § 341‌(a) meeting testimony reveals that a contribution was either a one-time or sporadic receipt, or something the debtor was hoping to receive. It is important to elicit at intake whether the source is reliable and obtain satisfactory evidence.[12]

Pay stubs also provide the trustee with an opportunity for an analysis of the amounts deducted. Some instances reveal omissions or other useful information. For example, the pay stubs show whether the debtor withholds taxes, which is of special concern when the debtor has a pre-petition tax liability; whether there is a garnishment, ensuring that the creditor is scheduled and proper plan treatment has been provided; whether there are retirement contributions or loans, and that the budget and plan properly list and address them; whether there is regular overtime, bonus or incentive pay, ensuring that the budget, plan and Form 122C-1 adequately report it; and, if there is a DSO deduction, whether the creditor and payment are disclosed.

Courts are split on whether confirmation with an incorrect ACP or erroneous means test result binds the parties to the confirmed plan length.[13] Accordingly, for the benefit of all parties, counsel may expect a request to produce additional income proof if the documents initially provided are not consistent with the schedules, or the source is not an employer.

Self-Employed Debtor

When a debtor is self-employed, the trustee considers the efficacy of treating the case differently than that of an employed debtor. The trustee may simply request specific business documents, or request these business documents and reschedule the meeting of creditors for a more extensive review. Should the trustee provide online access to the “business packet,” debtor’s counsel optimally gathers all the necessary documentation and pertinent information at the outset, rather than wait for the trustee’s response after reviewing the petition and schedules.

The initial disclosures dictate the course of action. Underdisclosure, such as merely stating “self-employed” on Schedule I with nominal net income and no business expenses listed, sometimes results in the § 341‌(a) meeting going forward as originally scheduled but being reset when the case’s complexity unfolds. Complete disclosure saves time and expense when the trustee can tell the difference between a mobile mechanic as opposed to one operating a shop, a hairstylist who rents booth space as opposed to owning a salon, or a truck driver who operates one truck as opposed to running a fleet of vehicles. In analyzing the business, the trustee reviews bank statements; monthly profit-and-loss statements; monthly operational reports; personal and business tax returns; financial statements or documents provided to third parties; proof of self-employment, payroll, and use and sales tax deposits; insurance policies; and business licenses.

With the business inquiry, similar to the disclosure requirements of the Statements of Financial Affairs and Schedule B, the trustee will want to see specificity regarding business property, such as leases, business equipment, accounts receivables and inventory; a list of business assets and whether the business has pledged any assets as collateral; the presence of accounts payable; a listing of employees, contractors and the owners’ salaries; and the business’s accountant’s information.

Also of interest is the business’s value and its impact on § 1325‌(a)‌(4)’s best-interest-of-the-creditors test. For example, if the debtor is the sole shareholder of a corporation that owns fast-food chains, a medical professional, a truck driver with a fleet of vehicles or an insurance agent, the business value will be beyond the debtor’s goodwill of creating and maintaining the business.[14] Debtors sometimes list on Schedule B a business value of $0, yet there are unencumbered assets and income streams that are part of the liquidation analysis.

Tax Returns

The Bankruptcy Code is replete with provisions that address tax returns. For the purposes of this article, it is important that counsel review the complete returns early and provide the trustee with the most recent tax return at least seven days before the first scheduled § 341‌(a) meeting date.[15] While providing the return resolves one issue, the return itself might create additional issues that can be addressed before or during the § 341‌(a) meeting. Examples include significant differences in income received compared to scheduled, undisclosed sources of income, and undisclosed real property or other assets.

In addition, the return may also reveal issues with its preparation, such as incorrect filing status, questionable dependents, itemized deduction expenses disproportionate to the income earned and unreasonably high business expenses compared to the income that was generated. A case that had appeared ready for confirmation is now unfortunately delayed for further review. Notably, if the debtor has not filed the previous four years’ returns by the originally scheduled § 341‌(a) meeting date, has not had the meeting held open, and a party-in-interest or U.S. Trustee pushes the issue, case law is uniform on § 1307‌(e)’s directive to either dismiss or convert the case to chapter 7.[16]

Nonbankruptcy Litigation

An area that can lead to potential malpractice is failure to disclose a nonbankruptcy cause of action. Learning about the matter at the § 341‌(a) meeting and filing an amended Schedule B likely prevents a later judicial estoppel effort. However, a failure to disclose until the defendant pursues the affirmative defense may cause problems for the debtor and his/her counsel. At the meeting of creditors, the debtor typically testifies that the bankruptcy attorney either did not ask about possible or pending litigation, or that he/she told the attorney about the lawsuit.

Despite the many circuit opinions addressing judicial estoppel, cases continue to wind their way through the courts and ultimately turn on a factual analysis that creates an adversarial relationship between debtor and bankruptcy counsel. If judicial estoppel applies, the estate might not suffer, but the debtor’s personal recovery might be limited or precluded.[17] It is important that debtor’s counsel consider the form of their intake questions when asking about any current or potential causes of action.

Property Transfers

As part of the full disclosure requirements, it is imperative that the debtor disclose any transfer that could be subject to the trustee’s strong-arm powers. There are many ways to research the debtor’s actions, such as online asset-search programs, state court clerks’ real estate and UCC filing records, and nationwide CM/ECF to review previous cases, as well as matters filed in other federal courts, state court online records, and general internet searches, including the debtor’s social media accounts.

In chapter 13, the trustee might pursue the transfer or seek conversion to chapter 7. In other situations, the debtor provides an incentive to prevent the trustee from pursuing the matter, such as a dividend to satisfy § 1325‌(a)‌(4). Should the latter occur, the trustee must still preserve the cause of action by filing an adversary proceeding or a motion to toll the statute of limitations in the event that the case is converted to chapter 7.[18] To that end, it is important that the debtor fully disclose all transfers and provide the transferee’s name and address. Any delay in providing this information will postpone plan confirmation.[19]

Conclusion

A person filing for bankruptcy is required to provide a significant number of documents to his/her attorney. Within this process, a discerning eye is required to identify variances and analyze whether the provided documents will be sufficient to satisfy the confirmation requirements. In addition, counsel’s use of all available resources will help ensure that they are exercising reasonable care[20] before presenting documents to the court and trustee. This will further the goal of a smooth transition from filing to confirmation with full and accurate disclosure of all assets, liabilities, income, expenses and other financial matters.