Bankruptcy and Claims Investigation By Sandy Williams, Jennifer Seidler, and Tonda Lee SmithAmundsen, LLC

What is Bankruptcy? ► A legal procedure provided by Federal Law (Title 11 US Code) to assist debtors who are unable to pay their debts ► Provides a “fresh financial start” ► Approx. 90 Federal Bankruptcy Courts ► Common Types of Bankruptcy:  Chapter 7 – liquidation of debts  Chapter 13 – reorganization of debts  Difference: sell off all non-exempt assets to pay debts (Chapter 7), instead of paying debts over a number of years (Chapter 13)

Why File Bankruptcy? ► Three main reasons – living on the financial edge:  Credit card debt (misconception that bankruptcy wipes out credit card debt – it does not)  Medical bills (is it a one-time expense or recurring?)  Housing costs (mortgage, real estate taxes, etc) ► Alternatives  Credit counseling  Allow debts to continue because debtor is judgment proof  Consolidation loan

Changes in the Law ► Bankruptcy Abuse Prevention and Consumer Protection Act – 2005  More difficult to file Chapter 7  Debtor must obtain credit counseling first  Un-filed tax returns must be filed  Greater liability for bankruptcy lawyers  Less dischargeable debts  More presumptions of fraud

Who is Involved? ► Debtor ► Creditors (secured and unsecured) ► Bankruptcy Attorney ► Trustee ► Bankruptcy Judge

How Does It Work? ► Debtor obtains credit counseling – 180 days ► Debtor files petition in local bankruptcy court  Pays a fee  Lists assets and liabilities  Determines exempt properties (excluded from bankruptcy) ► Clothes, household goods, tools of trade ► Homestead exemptions ► Automatic stay on collection activities ► Chapter 13 requires debt repayment plan

How Does It Work? Cont. ► Attend creditor’s meeting  Questions about finances and assets  Plans made for collection and sale  Under Oath ► Discharge  Not all debts are dischargeable  Reaffirmation agreement

Limits on Bankruptcy ► Cannot be discharged from Chapter 7 if debtor filed a case less than 8 years ago. ► Cannot be discharged from Chapter 13 if debtor filed for Chapter 7 less than four years ago and was discharged.

Relevance to Claims Investigation ► General cash flow information  If recently filed  Lists assets ► Need for cash/motive  Spending habits normally do not change, and the debtor may repeat the behavior even after discharge – this time with no recourse in bankruptcy! ► Material misrepresentation/concealment  Income  Personal property ► Debtors try to “hide” assets in bankruptcy; but will try to increase assets in claims investigation ► Can use assets list from bankruptcy to compare against PPIF.

Statements/EUO’s: What to Ask ► Focus on what the insured knows and believes  Did the insured know about the new laws?  Did the insured know about the time limitations?  What did the insured know about exemptions? ► Why was the petition filed? ► Did insured seek Attorney’s counsel recently? ► Change in income since petition filed? ► Were all debts discharged? If not, what remained? ► Is information on petition true and correct? ► If assets liquidated, how did insured afford to purchase new, or to purchase items on PPIF?

Take Notice of These Facts. ► Debtors routinely underestimate their assets in bankruptcy ► Debtors do not know much about the law and rely heavily upon attorneys ► Be aware of disappointed expectations on the part of the debtor seeking bankruptcy ► Changes in circumstances ► Bankruptcy often leaves debtor unable to obtain credit – or credit has very high interest rates ► Bankruptcy can leave debtor with little depending upon aggressiveness of creditors

Where to Get Information. ► Recorded statement or examination under oath ► Document requests to the insured ► PACER (Bankruptcy court website/fee) ► Credit report (Bankruptcies may be reported for up to 12 years)