Generally bankruptcy means that a person has become unable to repay his debts in a timely manner due to a lack of funds in the foreseeable future. The debtor is seeking relief from all or part of his debt. According to a Supreme Court decision in 1934 this is the purpose of the bankruptcy law:
“It gives the honest but unfortunate debtor a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”
Bankruptcy Law is federal statutory law, and can be found in Title 11 of the United States Code. Based on the U.S. Constitution, only Congress can regulate bankruptcy. The individual states can only pass laws that govern other aspects of the debtor-creditor relationship. Since the federal government governs bankruptcy law, bankruptcy proceedings are supervised and litigated in the U.S. Bankruptcy courts, which are part of the District Court system of the United States. These proceedings
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are governed by the Bankruptcy Rules set by the U.S. Supreme Court under the authority of Congress.
There are different chapters under which an individual or business may file for bankruptcy, with different rules governing each. The following information is meant as an overview for the Fraud Investigator. Please remember that each case is unique. The county investigator must research each situation as it occurs. This is important in order to insure the debtor pays as much of their debt to the county DSS (creditor), as the law will allow. Once you learn a debtor has filed for bankruptcy, it may be necessary to call on the county attorney or the agency attorney for advice on how to approach the Medicaid overpayment.
The first order of business should be that the county DSS is notified by the court that this debtor has filed for bankruptcy, and the county DSS has been named as a creditor
from whom the debtor is seeking relief, either partially or fully, through the Bankruptcy court.
The agency may hear about the bankruptcy, but never receive official notification. This could happen if the client failed to list DSS as a creditor. In order to receive any distribution from the bankruptcy estate, the county generally will need to file a proof of claim with the Bankruptcy Administrator. The necessity and advisability of filing a proof of claim may require evaluation by an attorney.
At some point each creditor is notified of the “341 meeting”. Section 341 of the Bankruptcy Code requires a meeting be held at which the debtor(s) is questioned by the creditors. Depending upon the circumstances of the case, it might be advisable for a representative of the county DSS to attend this meeting. DSS may learn whether the debtor is seeking a full or partial discharge of the debt he owes. It is also a chance to hear what assets and disposable income this debtor is presenting to the court. The debtor is bound by law to be truthful, as concealing assets can lead to a dismissal of the Bankruptcy plan, if discovered at a later date.
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Exception: The client could request an Amendment to his Bankruptcy plan in order to add this new debt for discharge. Be aware that this could most likely happen in order to avoid tax intercept, or prosecution.
Chapter 7: Entitled Liquidation. This is an orderly, court supervised procedure by which a trustee collects the assets of the debtor’s estate, liquidates them, and distributes the proceeds to creditors. This is of course subject to certain rights of the debtor to retain exempt property and is also subject to the rights of secured creditors. Usually there are no assets in a Chapter 7. Also, under Chapter 7 a debtor can receive relief from dischargeable debts fairly quickly. He does not have to propose a repayment plan. For a creditor to receive anything from a Chapter 7 case, there needs to be assets, and the debtor must file a “proof of claim” with the bankruptcy court.
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Chapter 9: Entitled Adjustment of Debts of a Municipality. This provides for reorganization just as Chapter 11 does, except it is only for municipalities, which includes cities, towns, villages, counties, taxing districts, municipal utilities, and school districts.
Chapter 11: Entitled Reorganization. This is usually used by commercial enterprises in order to continue operating a business while repaying creditors through a court-approved plan of reorganization.
Chapter 12: Entitled Adjustment of Debts of a Family Farmer with Regular Annual Income. The difference between this and chapter 13 is that it allows a family farmer to continue to operate his farm while the repayment plan is being carried out.
Chapter 13: Entitled Adjustment of Debts of an Individual with Regular Income. This is designed for those with regular source of income. It also may enable the debtor to keep a valuable asset such as a house. The debtor must propose a “plan” to repay his creditors over a period of time, usually three to five years, through a trustee. The plan must be based on the debtor’s anticipated income. The majority of Bankruptcy filings for individuals and couples are done under Chapter 13.
Below you will find widely used terminology relating to Bankruptcy procedures.
Assume – An agreement to continue performing duties under a contract or lease.
Automatic Stay – An injunction that automatically stops lawsuits, foreclosure, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed.
Bankruptcy Administrator – An officer of the judiciary serving in the judicial districts of Alabama and North Carolina who, like the United States trustee, is responsible for supervising the administration of bankruptcy cases, estates, and trustees, monitoring plans and disclosure statements, monitoring creditors’ committees, monitoring fee applications, and performing other statutory duties.
Bankruptcy Estate – All legal or equitable interests of the debtor in property at the time of the bankruptcy filing. (The estate includes all property in which the debtor has an interest, even if it is owned or held by another person.)
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Bankruptcy Petition – A formal request for the protection of the federal bankruptcy laws. (There is an official form for bankruptcy petitions.)
Claim – A creditor’s assertion of a right to payment from a debtor or the debtor’s property.
Complaint – The first or initiatory document in a lawsuit that notifies the court and the defendant of the grounds claimed by the plaintiff for an award of money or other relief against the defendant.
Confirmation – Approval of a plan of reorganization by a bankruptcy judge.
Creditor – A person to whom or business to which the debtor owes money, or that claims to be owed money, by the debtor.
Debtor – A person who has filed a petition for relief under the bankruptcy laws.
Discharge – A release of a debtor from personal liability for certain dischargeable debts. (A discharge releases a debtor from personal liability for certain debts known as dischargeable debts (defined below) and prevents the creditors owed those debts from taking any action against the debtor or the debtor’s property to collect the debts.
The discharge also prohibits creditors from communicating with the debtor regarding the debt, including telephone calls, letters, and personal contact.)
Equity – The value of a debtor’s interest in property that remains after liens and other creditors’ interests are considered.
Exempt Property – Property or value in property that a debtor is allowed to retain, free from the claims of creditors who do not have liens.
Fraudulent Transfer – A transfer of a debtor’s property made with intent to defraud creditors or for which the debtor receives less than the transferred property’s value.
Lien – A charge upon specific property designed to secure payment of a debt or performance of an obligation.
Liquidation – A sale of a debtor’s property with the proceeds to be used for the benefit of creditors.
Liquidated Claim – A creditor’s claim for a fixed amount of money.
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Motion to Lift Automatic Stay – A request by a creditor to allow the creditor to take an action against a debtor or the debtor’s property that would otherwise be prohibited by the automatic stay.
Non-dischargeable Debt – A debt that cannot be eliminated in bankruptcy.
Priority – The Bankruptcy Code’s statutory ranking of unsecured claims that determines the order in which they will be paid if there is not enough money to pay all of them in full.
Proof of Claim – A written statement describing the reason a debtor owes a creditor money. (There is an official form for this purpose.)
Secured Creditor – An individual or business holding a claim against the debtor that is secured by a lien on property of the estate or is subject to a right of setoff.
Secured Debt – Debt backed by a mortgage, pledge of collateral, or other lien; debt for which the creditor has the right to pursue specific pledged property upon default.
Schedules – Lists submitted by the debtor along with the petition (or shortly thereafter) showing the debtor’s assets, liabilities, and other financial information. (There are official forms a debtor must use.)
Trustee – The representative of the bankruptcy who exercises statutory power, principally for the benefit of the unsecured creditors, under general supervision of the court and the direct supervision of the United States trustee or Bankruptcy Administrator.
Unscheduled Debt – A debt that should have been listed by a debtor in the schedules filed with the court, but was not. (Depending on the circumstances, an unscheduled debt may or may not be discharged.)
For questions or clarification on any of the policy contained in these manuals, please contact your local county office.