Interview With Bankruptcy Expert

At the time of this interview in 2009, the average caseload of each bankruptcy judge in the Northern District of Georgia exceeded five thousand.


ROB:    This is Rob Hassett with Today, I’m going to be interviewing Judge Paul Bonapfel who is a bankruptcy judge in the Northern District of Georgia. Judge, it’s good to have you on today.

JUDGE:  Good morning. I’m glad to be here.

ROB:  Judge, now how long have you been a bankruptcy judge in the Northern District of Georgia?

JUDGE:  Actually, today marks the seventh anniversary, so it’s been seven years.

ROB:  How do you become a bankruptcy judge?

JUDGE:  The Court of Appeals in our circuit, the 11th Circuit, is the body that makes the appointment. The Court of Appeals is the Court that takes appeals from the District Courts, part of the federal system.

ROB:  And how long is the appointment?

JUDGE:  Fourteen years.

ROB:  How many bankruptcy judges do we have in the Northern District of Georgia?

JUDGE:  There are eight.

ROB:  Of course right now we’re in a recession. Has that increased the number of bankruptcies in Georgia?

JUDGE:  The bankruptcies have been increasing over the past couple of years, actually. Nationally, there was an increase from 2007 to 2008 of 31%, from about 851,000 cases to 1,100,000 in 2008. And Georgia has had a similar type of increase. We don’t have numbers, actually, for the first quarter of 2009, but our internal numbers indicate that case filings are going up even over last year’s.

ROB:  About how many cases does each bankruptcy judge handle?

JUDGE:  Well, I can give you the total for 2008. There were 40,122 cases filed in the Northern District, so at any given time I guess we’ve probably got five or six thousand.

ROB:  That sounds overwhelming.

JUDGE:  Well, many of them just go through on more or less of a routine basis. There’s judicial oversight all along the process, but many of the things are handled on more or less of a routine basis without the need for any particular judicial Court involvement as far as a judge looking at the matter. Of course, there’s a trustee in each case and they work through them on that basis. So it’s not like I see five thousand cases a year.

ROB:  How does somebody become a trustee?

JUDGE:  Well, actually, there are three types of trustees. In the Chapter 7 cases, there’s a panel of trustees who are appointed by the United States Trustee for this region. The United States Trustee’s Office is part of the Department of Justice. They interview and select usually members of the Bar, although business people and accountants and others are sometimes chosen to be trustees. They are selected and then they serve on what’s called the panel. And in a Chapter 7 straight liquidation case, the trustee is selected from that panel that the U.S. trustee appointed. In the Chapter 13 context, we have standing trustees and they are selected by the United States Trustee also, and that is a full time job for those folks. And they have a staff of people who assist them, and the U.S. Trustee selects the Chapter 13 trustees also. And in the Chapter 11 case, there is not the same type of regular appointment. Many times, a trustee is chosen from the Chapter 7 panel. Other times, there are people who have worked in bankruptcy cases in the past, and have developed expertise in the area: workout people, restructuring people, crisis managers, those types of folks, and they may be appointed to be a Chapter 11 trustee.

ROB:  What kinds of different types of bankruptcies are there and what are their purposes?

JUDGE:  Well, for present purposes, there are three and maybe four. Chapter 7 is what used to be called the straight liquidation bankruptcy case. That’s for individuals or business corporations. In a Chapter 7 case, a trustee is appointed, and the trustee’s job is to take the debtor’s assets except what the debtor is entitled to keep. The debtor can keep some property, and that’s called exempt property. The trustee then sees if there are assets that can be sold and then distributed to creditors in accordance with their priorities. That’s, again, a liquidation case. Then there’s, for individuals, a Chapter 13, and in a Chapter 13 the idea is that the debtor will propose a plan to pay some or all of his or her debts which will pay at least the amount those creditors would get in a liquidation case over a period of two to five years. That’s available only for individuals, and there are debt limitations that are applicable that limit the relief. Then, in a Chapter 11 case, it can be for individuals, but it’s usually used by corporations or partnerships or limited liability companies and the like. And Chapter 11 is designed to provide an opportunity for a business to reorganize much as a Chapter 13 provides that opportunity for an individual, although Chapter 11 is far more complicated. Creditors are entitled to vote by class, for example. And then, infrequently used in Georgia, there’s a Chapter 12 which is for a family farmer.

ROB:  What does it typically cost for a debtor to file for relief under Chapter 7?

JUDGE:  For an individual debtor in a Chapter 7 case, the typical fee would probably range from maybe $750 to $1500, perhaps more depending on the complexity. The more debt, the more assets, the more potential problems that a debtor may have, and problems that a debtor may have tend to increase with the amount of debt and the amount of assets and the amount of income; the fee could be as high as $2500 or maybe $5000.

ROB:  Is that fee subject to the bankruptcy judge’s approval?

JUDGE:  All bankruptcy fees are subject at some point to review by the Bankruptcy Court, but in a Chapter 7 case, that does not happen very often . That’s typically a matter between the debtor and his or her attorney, unless somebody thinks that it’s a really outrageous amount and brings it to the Court’s attention. Or, in some instances, Courts will come across a fee that the debtor has charged and will inquire into it and determine whether it’s reasonable under the circumstances.

ROB:  And what does it cost to file a Chapter 13 on average?

JUDGE:  Chapter 13, probably an average case would be between $3-4,000, maybe as high as $4500. The reason for that is that Chapters 13s are more complicated than Chapter 7s, and the debtor’s lawyer is looking at having to represent the debtor over the life of the case, which usually is at least three years, and in some cases as much as five years. So there’s a significantly greater time commitment for a debtor’s attorney in a Chapter 13.

ROB:  And what about for a Chapter 11? We read about these huge legal fees. I’m sure it depends on the case.

JUDGE:  Well, it does depend on the case, and you’re right. Those fees can get up in to what many people would think was just the stratosphere. Bear in mind that part of this is that in a Chapter 11 case, all of the professionals employed by the debtor are subject to Court approval and Court review of all of the fees, so those numbers that get reported included not just the fees of the bankruptcy or reorganization counsel or other professionals. They include all of the ordinary course of business lawyers as well in many instances. But those fees vary widely depending on the amount of assets, the amount of debts, and the problems that are anticipated in the case.

ROB:  And they are sometimes in the millions right?

JUDGE:  Oh, yes.

ROB:  If a debtor was trying to save their house and they’re behind on their mortgage, they would be more likely to file a Chapter 13, right?

JUDGE:  An individual behind on the house would probably file a Chapter 13 if they are unable to work something out with their lender prior to filing. I don’t have any statistics on this, but anecdotally, I think that in today’s economy there’s more of a desire on the part of lenders to try to work things out with borrowers who have the ability to get back on some sort of a payment schedule. But if a debtor is behind and cannot get something worked out with the lender, then Chapter 13 is an alternative because it permits what we call a cure and reinstatement, in that the plan can provide for the payment of the arrears that are due as of the time of filing over the life of the plan, which again is between three and five years. And then the debtor picks up the regular payments and continues to make them on a post-petition basis.

ROB:  Of course, that’s probably often a long shot because if the debtor had got behind on payments, it would be unusual that they would be able to pay not only the back payments, but start paying again the monthly payments.

JUDGE:  It is, in many instances, difficult for a debtor to do that, especially if the debtor has become unemployed and is facing continued unemployment or has a medical problem and is facing continued medical problems. I think, at least as originally contemplated, and Chapter 13 goes back to the ‘30s, the idea was that where there’s been some sort of temporary problem that has arisen, it is now fixed or is going to be fixed so that the debtor’s income has come back to a stable point that Chapter 13 provides the opportunity to catch up and get things rolling on a regular basis again. And the other thing is debtors may have been struggling with other debts and trying to keep all the balls in the air, so to speak, maybe debts that are on cars and the car is too expensive from what they can now afford. The payment is too high, so they could surrender that car and not have to make that car payment so that that would free up some money to make house payments, and then they could try and get a cheaper car. Or they may have been trying to keep up on their credit card payments as another example, and a Chapter 13 filing will permit possibly an elimination of some or all of that debt, or at least will stretch out those payments and eliminate, potentially, the interest on the credit card. So that may free up some cash flow on a monthly basis that would permit a debtor to keep the house.

ROB:  Got it. Now, in a lot of situations, a debtor would just rather file a Chapter 7 and that would not allow him or her to keep anything that was above the exemptions that are allowed. But that would mean that if they didn’t have any fraudulently procured debt or anything like that, they would be able to obtain a discharge and have all their debts wiped clean and not have to make any payments.

JUDGE:  If a debtor is relatively current on house payments or car payments, or at least on the payment on the house or car that the debtor wants to keep, then Chapter 7 may be a better alternative for that debtor than a Chapter 13. And the reason is that Chapter 7 permits a debtor to agree with a creditor, and of course that takes the creditor’s agreement, to reaffirm a debt, which means to continue to pay it and to remain liable on it, notwithstanding the filing of the bankruptcy case. So if the value of the debtor’s property is less than the amount of the exemption, in other words if the debtor can keep it without the trustee wanting to sell it, Chapter 7 may be the right choice for that debtor because he or she doesn’t have to spend three to five years in a Chapter 13 case and can get rid of all of the other debt and then reaffirm the house or car debt on the property that they want to keep.

ROB:  But sometimes those people who file Chapter 7 are not allowed to stay in Chapter 7. They are required to convert to a 13, right?

JUDGE:  Yes. This is a result primarily of the 2005 legislation which is called the Bankruptcy Abuse Prevention and Consumer Protection Act, and it’s frequently called BAPCPA for the initials. But BAPCPA brought in what is commonly referred to as the means test, and it provides a statutory test to measure the debtor’s income against statutorily permitted expenditures to determine how much over a five year period a debtor could pay to unsecured creditors. And if that amount exceeds statutory thresholds, then the debtor cannot stay in Chapter 7 so the Court either dismisses the case or, with the debtor’s consent, converts it to a case under Chapter 13 so the debtor can propose a plan to pay debts.

ROB:  Judge, in this time of recession, a small to medium sized corporation that is engaged in business has overwhelmingly secured debt and cannot survive without reduction of the debt, what’s available to them in bankruptcy?

JUDGE:  That’s a difficult situation for that small or medium sized business to be in. And it depends in part on the nature of the collateral for the debt. If the debt is part assets: equipment, machinery, real estate, that’s one thing. If the collateral is also accounts receivable inventory, that’s another. Because the inventory and accounts receivable situation gives rise to what is called cash collateral. And in the case of cash collateral, a debtor can’t use it without getting Court approval and/or with the lender’s consent and providing to the lender what’s called adequate protection. And adequate protection is a term of art that generally means that the lender won’t suffer a loss as a result of the bankruptcy case. Well, if all of the debtor’s assets are tied up in favor of the lender, there’s no other asset that the debtor can give to provide that adequate protection and so if the business is in a situation where it is losing money and is likely to continue to lose money, that makes it a very difficult situation for a lender to agree to permit its collateral to continue to fund those losses, and it makes it difficult for the Court to find that there is, in fact, any kind of adequate protection that would permit the use by the debtor of the lender’s collateral. So it’s a difficult hill for a debtor to climb when dramatically over-encumbered. Now often in that circumstance, a lender will prefer to have the debtor in a bankruptcy case either to liquidate or to reorganize on some basis, because the lender realizes that it is more likely that they can get more out of the collateral through an orderly liquidation process than foreclosing on it. But a debtor in that circumstance, without the cooperation at least of the lender, will have a very difficult time getting out particularly if the cash flow of the business is negative.

ROB:  You had mentioned that in a Chapter 7 there are exemptions in Georgia that the debtor is permitted to keep and the various kinds of exemptions. What are the main exemptions?

JUDGE:  Well the main exemption is, of course, for the debtor’s house. And the debtor can exempt $10,000 of equity in a residence. Actually, it can be a condominium or a co-op unit as well as a house. But that’s $10,000 for an individual debtor, $20,000 if the debtor is married. So that’s the primary exemption. There’s an exemption for household goods, personal effects and the like. There’s an exemption for automobiles. They are somewhat limited. There’s an exemption for jewelry. IRAs, 401Ks, those are exempt as a matter of federal law also.

ROB:  What about cash?

JUDGE:  Cash is not exempt. There is what’s called a wild card exemption which is the unused portion of the residential exemption up to $5,000. So if a debtor either doesn’t have a house or doesn’t need to use all of the exemption for the house, then that so-called wild card exemption is available for cash.

ROB:  Now exemptions vary from state to state and are set by the state legislatures, right?

JUDGE:  That’s correct.

ROB:  So we always hear about people moving to Texas and Florida that are having financial problems. What is the advantage there?

JUDGE:  Well, Florida does not have any limits on the homestead exemption for a residence and Texas does not either. And so a debtor who lives in Texas or Florida and gets in to trouble with the creditors, the creditors cannot levy on or take the house to satisfy their debts. That doesn’t apply, of course, if it’s a mortgage. IF there is a mortgage then it can be foreclosed. But generally a debtor can keep the house regardless of its value in Texas and Florida. The BAPCPA (The Bankruptcy Abuse Prevention and Consumer Protection Act) limits the ability to use exemptions in a very complicated way, so anyone who has that particular issue needs to talk to the lawyer about it.

ROB:  A bankruptcy lawyer?

JUDGE:  Yes.

ROB:  If somebody in Georgia has a lot of cash but a lot of debt and is about to file bankruptcy, could they move to Florida, buy a million dollar house, wait six months or so to become a resident of Florida, then declare bankruptcy and keep the house?

JUDGE:  There’s a lot of problems with that type of scenario. That is one of the things that Congress thought was going on to a large degree and prompted the passage of the 2005 legislation, the Bankruptcy Abuse Prevention and Consumer Protection Act. And in the 2005 legislation, there are limits on the availability to move in to a state and use that state’s exemptions. And there are limitations on the property that can be exempted when it has been recently acquired. So those are very complicated provisions of the new legislation that are really beyond the scope of this discussion and anyone interested in that subject needs to talk to a bankruptcy lawyer.

ROB:  Understood.

JUDGE:  That’s another way of saying I’m not sure if I could completely explain all those provisions. Those provisions do not usually apply in Georgia because Georgia’s exemptions are limited, and Georgia is not a state that someone would want to move in to in order to take advantage of the exemption law.

ROB:  Now in a Chapter 11, you mentioned that you need a vote of creditors to get approval. Chapter 11s are used for businesses generally, you had mentioned. If a corporation goes into a Chapter 11, what vote of creditors do they need to get their plan approved?

JUDGE:  The voting is by classes, and the classes are determined by the rights of the creditors. In a typical case, the secure lender will be in a class by itself, although in some instances, the secure lender may itself be a group of creditors. So theoretically at least, they could vote among themselves. The main class in a Chapter 11 case is the unsecured creditor class, and in that instance the vote is the majority in number, and 2/3 in amount. In the context of stockholder interests, it’s simply a vote based on the number of shares. In a small case, the stockholder vote usually doesn’t matter because the stockholders are the family or a small group of people in a closely held corporation.

ROB:  And they often may lose something themselves or they may get wiped out. In a large Chapter 11, the stockholders often get wiped out, right?

JUDGE:  Stockholders usually get wiped out in a Chapter 11 case of a publicly held corporation. And that’s the danger that some people have fallen in to because the filing of a bankruptcy by a public corporation does not in and of itself stop the trading on the exchanges. So Delta, for example, when it filed, they continued to trade and people continued to buy and sell. Well the people who bought and sold after the bankruptcy case were surprised once the bankruptcy case went through its whole process that the existing stock, the pre-confirmation stock, got completely wiped out. And the reason is that creditors have a first call on the assets of a corporation. So if the assets are not sufficient to cover all of the debts, then the creditors, unless they agree otherwise, get to take over the ownership of the company.

ROB:  Judge, with respect to a Chapter 7 versus a 13, I understand that in a Chapter 7 there are certain situations in which the debtor cannot receive a discharge or certain debts that can’t be discharged, but which they can be discharged in a Chapter 13 if they propose a plan that’s approved. Is that right?

JUDGE:  Yes. That is true. Although the differences have been significantly narrowed as a result of the 2005 legislation, the Bankruptcy Abuse Prevention and Consumer Protection Act. Prior to that, there was in Chapter 13 what was called the Super Discharge. And a number of debts that were excepted from discharge in Chapter 7 were nevertheless discharged in Chapter 13. Originally, the concept behind that was if the debtor was making an effort to pay debts in a Chapter 13 case, the case ought not to be bogged down by litigation over whether a debt is going to be discharged, and that the debtor having made an effort to pay debts ought to receive a discharge at the end of the case that would include everything. The problem arose because some debtors would propose a Chapter 13 plan to pay little or nothing on unsecured debt, and nevertheless receive a discharge and thereby get rid of debt that could not have been discharged in a Chapter 7 case. And that led to a great deal of litigation over good faith and other issues. The 2005 legislation for the most part eliminates, in many instances, that argument because the Chapter 13 discharge is now narrowed so that the primary exceptions to the discharge of a debt that is in a Chapter 7 case that usually occur in a consumer case are now excluded from the Chapter 13 discharge as well. For example, debts for fraud that are excepted from the Chapter 7 discharge and used to be not excepted from the Chapter 13 discharge, are now excepted from both. A primary example of the difference that currently exists is that an obligation for property settlement is excepted from discharge in a Chapter 7 case, but in a Chapter 13 case, a property settlement obligation is dischargeable. Alimony or child support continue to be excepted from discharge in both chapters.

ROB:  Got it. Judge, what is the automatic stay and when does it apply?

JUDGE:  The automatic stay is a statutory provision that says when a bankruptcy case is filed, almost all actions against a debtor and the debtor’s property by creditors to try to collect debts must stop on a temporary basis, pending what goes on in the bankruptcy case. So for example, if a creditor is foreclosing on a house or trying to repossess a car or garnishing a debtor’s wages or bank account and a bankruptcy case is filed, that creditor has to stop that enforcement activity because of the bankruptcy case. And the reason is one, to give the debtor what’s called a breathing spell to try to figure things out, and two, basically to protect other creditors. For example, in the foreclosure situation, it may be that if the property could be sold at an orderly sale, it will generate more money than the foreclosure sale and would make money available to pay other creditors besides the foreclosing lender. So those are the two reasons that the automatic stay exists. It’s in order to permit an administration in a judicial process in an orderly way of the debtor’s assets, and to provide the debtor an opportunity to try to keep the assets in a Chapter 11 or Chapter 13 situation, work out a plan to pay some or all of the debts in accordance with the bankruptcy code. It applies generally to the collection of debts. One academic once said that if you have a question about whether the automatic stay applies, it probably does. It is very broad. There are some exceptions for police and regulatory activities, criminal activities, certain activities or judicial proceedings in the domestic area, for example, termination of paternity is not stayed. Collection of child support from property that is not property of the estate is not stayed. In a Chapter 13 case, that does not help the collecting spouse much because the wages of the debtor are property of the estate in a Chapter 13 case. But there are exceptions to the stay. If a creditor is being harmed by the stay or thinks that for some reason the stay should not be continued, the creditor files a Motion with the Bankruptcy Court seeking relief from the stay, and a hearing is held. At that point, the Court will determine whether or not the stay should be continued or whether it should be lifted. For example, going back to our foreclosure situation, if it appears that the property is not worth more than the debt, then the stay will probably be lifted unless the debtor is in a Chapter 13 case and is trying to do a plan to cure the arrearage and bring the debt current and continue to make regular monthly payments. But continuing that situation, if the debtor has been in bankruptcy and has defaulted again and it doesn’t look like the debtor is going to be able to make the payments on a regular basis, then it’s quite probable that the automatic stay will be lifted to let the lender foreclose.

ROB:  Judge, if a business has equipment pledged as security for a loan and the business files a Chapter 11 bankruptcy, what’s the range of time a debtor can expect that the stay will continue without having to make payments?

JUDGE:  Well, in the case of equipment, you would typically find that the lender is not going to be moving real aggressively like on the first day. But if a lender is concerned about its equipment and it’s depreciating, that’s the big question. If it’s depreciating in value, then the lender is going to move for relief from the stay or, in the alternative, for adequate protection payments. And many lenders are satisfied, they may not be happy, but they are satisfied if, during the course of bankruptcy case, they are receiving some sort of payment with regard to their collateral to guard against depreciation. And the other thing they’re going to be concerned about is making sure that the property is insured and making sure that it is being properly maintained and is not being abused or misused. That’s typically a big, big, big issue on all those fronts when equipment is rolling stock or a tractor or trailer or moving equipment. But how long the debtor will be able to keep the property will depend on the ability to make adequate protection payments if required, and the progress that is made in the case. Bankruptcy is not a permanent solution. It is a temporary stop on the way to restoring financial health and the ultimate objective of a Chapter 11 case is to propose a plan that deals with all of the debt. So depending on the complexity, some of the public company cases can take years. And some of the smaller cases, likewise, will take a considerable period of time. But it’s not an indefinite process. It’s difficult to say exactly how long it would be, but the bottom line measuring stick is there needs to be some progress towards a solution to the debt problem that will work either because the debtor can get a plan approved over a creditor’s objection or the creditor is happy with the treatment that is being proposed. In many instances, the debtor and creditor are able to work something out because the creditor is interested in getting payments from the debtor, not the collateral. So there is an incentive on both sides for them to come to some sort of agreement as to what the debtor can realistically afford to pay and what will be at least acceptable to the creditor and better than foreclosing or repossessing the collateral.

ROB:  Judge, do you have any other suggestions for small to medium sized business owners relating to the bankruptcy issues in this time that we’re having the recession?

JUDGE:  This is a very difficult time for everyone, and particularly small business people. When I was in practice, which was before this type of situation, we did not have this type of economic situation when I was in practice. But what I would tell my debtor clients was one, they really have to be candid and up front with the lender because in most instances it is difficult, if not impossible, to litigate with a lender and come out of Chapter 11. And the reason is not because you can’t win, although that’s a problem because in many instances the law and facts are often on the side of the lender. But the mere uncertainty and the cost of the litigation itself may make it such that it’s not possible to go forward with the reorganization effort. It’s difficult enough being in an insolvent financially distressed circumstance without having to go to Court on a regular basis to argue with your lender. So one of the things that is very important is to try and get an agreement with the lender, and that requires honesty and candor with the lender so that the lender has confidence at least in the debtor’s basic integrity. One thing that will justifiably drive lenders nuts is a debtor who is dishonest and the lender thinks that the debtor is stealing the collateral basically. So that’s probably the key — having a good relationship with the lender. Beyond that there are a lot of details that have to be done in a bankruptcy case, and a lot of situations arise that are unique in a bankruptcy case that don’t frequently arise in the regular ordinary course of business. So particularly as bankruptcy laws have gotten more complicated, I think it is important to have, in addition to a good lawyer, a good financial consultant or someone who is able to come in and be able to recognize how to deal with the bankruptcy accounting problems and the bankruptcy business issues on a day-to-day basis. So in addition to a lawyer, I think some sort of assistance in the accounting and business consulting area. In some instances, a company will appoint a chief restructuring officer. That obviously adds a layer of cost that may not be feasible for a small to medium sized business. In that circumstance, I still think it’s helpful to find some sort of financial or accounting person who, if not a chief restructuring officer, is nevertheless available to provide some advice and assistance on what do I do today in response to this creditor threatening to cut me off. So those are some of the suggestions I would have. The main suggestion is find a good lawyer out there.

ROB:  Judge, thanks a lot for being on today. I really appreciate it.

JUDGE:  I have enjoyed it. Thank you very much.