I was recently at the Chapter 7 meetings of creditors waiting for my clients turn. The meeting takes place at the Plano Center with many attorneys, along with their clients, waiting for their turn with the trustee. You can read more about the meeting in general here. During this time I witnessed another hearing being conducted by another attorney. At the hearing, the trustee came to the conclusion that he was going to take all the money out of the debtor’s bank account and distribute the money to the debtor’s creditors. The debtor had a look of horror on their face because they had no idea what was going on. The trustee simply stated… “you need to talk to your attorney if you have questions.” I knew immediately what had happened — the dreaded packet!
The Information Packet
Every attorney in town has an information packet. These packets mirror the information needed to complete the Bankruptcy schedules and statements. Most attorneys in town ask the client to fill out the packet and provide financial documents (paycheck stubs, tax returns, bank statements). Then an entry level person will enter that information into the Bankruptcy software before the client ultimately reviews and signs off on the documents in paper form.
So how did the information packet hurt the clients mentioned above? The clients put the value of their home into the packet. The value they chose was a number that was well below the true market value. The debtors most likely didn’t know or remember the correct value.
In Texas, you have to choose between the Federal Exemptions and Texas Exemptions. The Texas exemptions generally allow an unlimited amount of equity for your home (homestead exemption). The Texas exemptions do not allow for money in your bank account. If your home does not have a lot of equity you can choose the Federal Exemption System. The Federal exemptions limit your equity to approximately 25K per person (so 50K) if married. With the Federal, you also have a “wild card” exemption which allow you to exempt money in the bank account. You can read more about Exemptions here.
What happened: the attorney did not double check the value of the home. The value of the home was in fact much greater than what the debtors put in their “information packet.” The wrong value allowed the Chapter 7 trustee to object to the Federal Exemptions. The debtors then had to choose between Federal exemptions (which would have allowed the debtors to keep the money in their bank accounts on the day they filed the case but limited the equity in their home) OR amend over to the Texas Exemptions (which exempts all the home equity but leaves the money in the bank account non exempt). The obvious conclusion here was for the Debtor to choose Texas Exemptions so that their home would not be sold. However, the lack of detail in going over the debtor’s situation still caused them to lose a significant amoutnt of money.
How Could Have This Been Prevented
In our office we get the information for the Bankruptcy paperwork from a personal one on one interview(s). This does two unique things that benefit you the client. First, no one likes packets — so it makes it easier from the time you have to commit. Second, it allows the attorney to spot issues as they come and communicate those to you the client. We can then plan accordingly to overcome those issues.
Here is how that same situation would have played out in our office. I would have asked the client how much their house is worth. I would have also asked the client how much money was in their bank accounts. I would have then double checked the value on the applicable county appraisal district and an appraiser service like Zillow (which I do for all clients). I would have instantly noticed that the client needed to use Texas Exemptions and therefore that the amount of money in the bank was non exempt property. Generally speaking, anybody who owns their own home in Texas uses the Texas Exemptions as property values have climbed in recent years.
I would have advised the client to spend the money AND/OR evaluate what day they filed the case. The bank account balances only matter on the day you file the case. So when choosing Texas Exemptions you generally want to file the case on the day of the month where you have the least amount of money in your account (generally right before payday). If needed, the debtor could have engaged in exemption planning so they could get the benefit of that money versus just losing it. Things like house repair, car repair, items needed for kids, etc are deemed appropriate.
Collins & Arnove uses the phrase “We make becoming debt free hassle free.” This phrase is partly used because we don’t use long and tedious packets. In addition, the packet can get you into trouble because you are not a Bankruptcy attorney and don’t know the relevance of why these questions are being asked. Finally, the packet just takes longer than working with the attorney directly to get the information needed to fill out the paperwork correctly.
At Collins & Arnove we offer a free one on one consultation with an attorney. Call us at 972-516-4255 OR schedule your own consultation through our online scheduling system.
Post by William Collins, Attorney at Law
Founding partner at Collins & Arnove