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Sample Informed Consent
Letter
Dear Client,
Your bankruptcy petition, statement of affairs, and schedules are
now ready for signing. Please call our office and make an appointment
to come in, review, and sign those documents.
We have prepared your bankruptcy documents carefully, and to the best
of our knowledge they are accurate. However, the accuracy of these documents
depends upon the correctness of the information you have provided us,
and we occasionally make errors of our own. You are ultimately responsible
for the accuracy of your bankruptcy documents, both practically and
in the eyes of the law, because you are signing all these papers under
penalty of perjury. It is essential that you review your papers carefully
to be sure that they are correct, that they fully disclose all of your
assets and liabilities, and that all questions are answered completely
and accurately. Inadvertent errors do occur, and can be corrected without
penalty, if they are truly inadvertent. Deliberate or reckless omissions
or deceptions are another matter; they may constitute federal bankruptcy
crimes, subject to investigation by the FBI and punishable under federal
law.
The date of filing these documents can have important effects on you
in the future. Certain kinds of debts are eliminated in bankruptcy only
if the debt is old enough to qualify for elimination; the elimination
of debts by bankruptcy is called a "discharge." Two important kinds
of debt which are discharged only if they are old enough are student
loans and income taxes.
Generally speaking, income taxes are dischargeable if the return was
filed on time, and was last due more than three years before filing.
If you had an extension of time to file your return for a year on which
taxes are still unpaid, that debt would not become dischargeable until
three years after the extension expired, even if you filed the return
earlier.
Because time periods are very important with regard to taxes and because
we rely on you to provide us with the facts that determine the dischargeability
of tax debts, we ask you to pay particular attention to the accuracy
of the information affecting the dischargeability of those debts. Of
course, if you do not expect a discharge of those debts, you need not
be concerned about these issues.
Misconduct on your part, such as deliberately omitting assets from
your bankruptcy papers, selling assets in which the bankruptcy trustee
has an interest, selling mortgaged property without turning proceeds
over to the secured creditor, or failing to comply with other requirements
of the Bankruptcy Code, may result in an objection to discharge of your
debts. The trustee or any creditor may object to discharge.
"Discharge of debts" is the declaration of the bankruptcy court that
you no longer personally owe the debts you had when your bankruptcy
was filed. Obtaining this discharge is the purpose of your bankruptcy
proceeding. The discharge can be denied in cases of serious misconduct,
leaving you owing all the debts you had when you started. This is a
severe punishment, and not one to be risked lightly.
The filing of your bankruptcy petition gives the trustee a claim against
all your assets, effective on the filing date. This claim is subject
to the rights of secured creditors, and subject to your right to exempt
property. The trustee has the duty to review the claims of secured creditors,
and your claim of exemptions, to determine whether assets exist from
which unsecured creditors could receive a payment. The trustee may object
to a secured party's claimed security interest, or to your claim of
exemptions. The trustee's initial position on these matters usually
becomes clear at the first meeting of creditors, held about one month
after your petition is filed. During the time between the filing and
the hearing, do not sell or mortgage anything you own, except for perishable
items such as milk. After the hearing, I will advise you whether the
trustee is likely to claim an interest in any of your assets. If the
trustee is claiming an interest, I will advise you how to proceed.
Until your exemptions are approved, you should treat all pre-petition
assets in your hands as the trustee's property. You cannot sell, pledge,
or do anything else with these assets until after your exemptions are
approved (as to exempt property) or until the assets are abandoned,
as to nonexempt property. Any objection to exemptions is generally apparent
at the first meeting, and I will advise you concerning those if they
occur.
As a rule, all your post-petition earnings, and assets you obtain
after your petition is filed, are free from any claim of the trustee
or your pre-bankruptcy creditors, unless they are the result of contracts
made before bankruptcy, or money owed to you when you filed. There are
exceptions to this rule. If, within 180 days after your petition is
filed, you inherit property, receive a property settlement payment from
a divorce, receive proceeds of a life insurance policy, or receive benefits
under a death benefit plan, those may be subject to the trustee's claims.
If you are now aware of a possibility that one of these events may
happen in the next six months, please let me know so that we can plan
accordingly. If one of these things happens within 180 days after your
petition is filed, you have 10 days to notify the Bankruptcy Court and
the trustee. You can handle that responsibility by consulting with us
and having us file the necessary papers with the court, but you are
ultimately responsible for the performance of this duty.
If you are filing a Chapter 7 case in which the trustee will administer
assets for the benefit of unsecured creditors, the Tax Code requires
that you file a short-year tax return. The short-year filing covers
the period between the end of your last tax year and the date your bankruptcy
petition is filed. If this filing results in a tax liability, we must
file a claim on behalf of the IRS so that the taxes will be paid first
out of the trustee's funds. In our experience, this procedure works
better on paper than it does in practice. Bankruptcy administration
can be slow in asset cases, and the distribution to pay the IRS claim
will come long after the tax return due date. The IRS assesses penalties
and interest on the balance due until the IRS receives the funds; the
bankruptcy trustee, however, will not pay the penalties or interest,
which ultimately will be your responsibility.
You also are required, of course, to file a return for the period
between the petition date and your normal year-end date. Preparation
of that return will require special care, because the trustee has the
use of your petition-date tax attributes (depreciation, ITC carryovers,
net operating losses, and so on) until the bankruptcy case is closed.
Your tax preparer must be alert to any use of tax attributes by the
trustee if you have regained the use of those tax attributes for the
second return; if they are still in the trustee's hands at that time,
and the trustee does not use all of them, it may be advantageous to
file an amended return after the bankruptcy case is closed, in order
to minimize your tax liabilities.
As I explained during our office conference, the law recognizes the
right of bankruptcy debtors to convert nonexempt assets to exempt assets
prior to filing bankruptcy, but it also contains provisions for denying
exemptions where fraud is involved. Fraud is not just converting nonexempt
assets to exempt, nor is failure to volunteer information ordinarily
fraud. The court will consider as signs of fraud: use of credit to acquire
exempt assets, conversion to exempt assets after entry of a large judgment,
deception or sharp dealing, and conversions that create insolvency.
Tricking creditors into delaying their efforts to collect debts while
you secretly convert assets would be considered sharp dealing. There
are other forms of deception and concealment that would probably result
in denial of exemptions or denial of discharge; be sure to consult us
regarding any statements to creditors concerning this process or your
intentions. It is especially important that you avoid misrepresenting
your intentions to a creditor in any way.
Aggressive pre-bankruptcy asset conversion is likely to cause creditors
to object to your claim of exemptions. In addition, creditors may object
to the discharge of your indebtedness. Our chances of having the court
deny the objections of creditors will be enhanced by forthright conduct
toward those creditors. The risk of an unfavorable ruling, however,
is always present.
The risk that the court would deny exemptions is greater, in my opinion,
than the risk of a denial of discharge. The court might be persuaded
to deny the exemptions in total, but would more likely be persuaded,
if persuaded to do anything, to deny exemptions to the extent that they
were acquired on the eve of bankruptcy.
I believe that you have a good chance of winning on all issues, but
you must be aware of the risks as well as the benefits of the proposed
course of action.
Please be sure to let me know if you have questions regarding the
contents of this letter.
Sincerely yours,
Attorney
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