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    Wisconsin Lawyer
    October 01, 2000

    Wisconsin Lawyer October 2000: Sample Informed Consent Letter

     

    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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