To those who are not familiar with the process, the bankruptcy process can be complicated and confusing at times. As such, the Bankruptcy Code and Rules require certain notices to creditors and meetings as a means of expediting and organizing the administration of the debtor's estate. One of the first and most important steps in this process is the "creditors' meeting," or "341 meeting" (named after the section of the Bankruptcy Code which requires the meeting). This is a meeting at which the creditors and the debtor can meet face to face in the presence of a trustee appointed by the bankruptcy court. To a limited extent, the parties may explore the debtor's financial situation, the existence and location of assets, and other matters that may affect the debtor's right to bankruptcy relief or the administration of the estate. The length of the meeting and the number of questions which the Trustee will allow varies from state to state, and can vary depending on the type of proceeding. For example, a creditor's meeting in a Chapter 11 business reorganization case may last for hours, while a creditor's meeting in a simple consumer Chapter 7 bankruptcy may last five minutes from start to finish.
In New Mexico, the creditor's meetings are typically fairly short and limited to certain direct questions regarding the information contained on the debtor's filed bankruptcy documents. For example, creditors are permitted to ask questions such as whether the debtor's insurance is current on any vehicles or homes, or whether tax payments are current on any secured property. In addition, since the debtor is under oath, a creditor's attorney may establish, on the record, the debtor's response to questions concerning inconsistencies in the filed documents. When representing a creditor, a bankruptcy attorney well versed in the matters addressed at these meetings can obtain significant information from the debtor. When representing the debtor, a competent bankruptcy attorney can help the debtor to protect these important rights.
Creditors' Meeting Explained
The creditors' meeting is a forum in which creditors may probe the debtor's estate to determine the legitimacy of the debtor's petition for discharge of their debt under the bankruptcy laws. The bankruptcy court assigns a trustee to take charge of this estate and to collect assets and regulate the transfer of property from the estate. In some cases, the parties present at the meeting vote to elect a trustee of their choosing. The debtor's estate is made up of essentially all property to which the debtor has any type of legal or equitable claim. While all of the debtor's property is part of the "estate," the debtor is permitted to "exempt," and retain, a significant amount of property in a bankruptcy. Generally, "exempt" property may include most household goods and furnishings, certain amounts of jewelry, tools, books, pictures, a limited amount of equity in a home and a a limited amount of equity in a vehicle. An attorney's advice can be very helpful in determining which claimed exemptions would maximize the benefit to the debtor.
The bankruptcy code requires that a creditors' meeting be convened within a reasonable time after a petition for bankruptcy is filed or that it be held between twenty and forty days after an order for relief has been entered. These deadlines are designed to allow prompt notice of the filing of the petition and adequate time to consult with an attorney and prepare for the meeting. In New Mexico, the clerk of the court automatically sets a meeting date, designates the location of the meeting, and assigns a Trustee to preside over the meeting. The clerk of the bankruptcy court automatically sends a notice announcing the meeting to all the creditors listed in the debtor's bankruptcy documents, immediately after a bankruptcy petition is filed.
At the meeting the trustee and the creditors may question the debtor and inquire into matters affecting the administration of the estate such as the location of assets, for example. At this meeting, if asked, the debtor must disclose their financial situation. The debtor is duty-bound to provide truthful information and to assist the trustee in the honest administration of the estate. Specifically, the debtor must file with the court: 1) a list of creditors; 2) a schedule of assets and liabilities; 3) a schedule of current income and current expenditures; 4) a statement of contracts not yet fulfilled; and, 5) a statement of financial affairs. Depending on the type of bankruptcy filed, additional statements may be required. The debtor must also relinquish all of the non-exempt property of the estate to the trustee, and make available to the trustee any recorded information about the estate such as books, documents, records and papers, relating to the property of the estate.
The debtor and their attorney must make reasonable efforts to ascertain correct and complete information. The list of creditors provided by the debtor must contain the name and current address of each creditor. The court relies on this information to notify the creditors so that they have an opportunity to assert their rights under the law. Creditors may object to the discharge of the debt and, if a creditor has no knowledge of the filing, their claim against the debtor will not be discharged.
Similarly, debtors must use reasonable diligence in preparing schedules, lists of assets and other statements. The creditors and trustee rely on these documents as being truthful and thorough, which are provided so that they may accurately evaluate the debtor's financial condition. It is important to note that incomplete knowledge of one's own financial situation does not relieve one of the obligation to disclose all assets and debts. Because there are many different types of debt, it can be difficult to assemble a thorough report to the court. It is here that the help of a bankruptcy attorney can be invaluable as inaccuracies and omissions (especially intentional ones) can have serious consequences such as court imposed sanctions, the dismissal of the case, or criminal prosecution.
Attendance at the meeting is mandatory for the debtor and their attorney with few exceptions. In a joint case involving a married couple, both spouses must attend. If the debtor is a corporation, the bankruptcy rules allow any or all of the corporation's officers, members of its board of directors, a controlling stock holder, or any other person in control, to attend and be examined as the debtor for purposes of the creditor's meeting. If the debtor is a partnership, any of the general partners, or other persons in control and designated by the court, may represent the partnership.
The meeting itself is generally fairly informal. The Trustee may make preliminary statements about their role as trustee and of the ground rules for the meeting, such as the protocol for dealing with disputes which arise throughout the course of the meeting. Generally, in New Mexico, Consumer Chapter 7 (liquidation) Trustees do not make any introductory remarks, while the Chapter 13 (Wage Earner Reorganization ) Trustee does generally make such introductory statements. In Chapter 11 Reorganization cases, a representative of the United States Trustee's Office conducts the creditor's meeting, and the introductory remarks are more involved. The trustee tape records the debtor's examination and takes notes of the meeting. The debtor is under oath and must respond honestly under penalty of perjury. The questions posed to the debtor by both the trustee and the creditors must directly relate to the acts, conduct, property and financial condition of the debtor, or to matters which may affect the administration of the debtor's estate or their right to discharge. If the testimony given at the meeting would make the debtor open to criminal prosecution, the debtor may assert the privilege against self-incrimination. This privilege is not a tool for avoiding examination and must be substantiated by the debtor if asserted. Note that the privilege may inadvertently be waived if the debtor voluntarily testifies without invoking the privilege. Here is another key area in which a bankruptcy attorney can be helpful.
A creditors' meeting will include a review of the required documents provided by the debtor. After the trustee has concluded the examination, creditors attending the meeting may ask questions of the debtor. At this time creditors may not only examine the debtor, but also submit requests to the trustee concerning the disposition of their interest in the estate. Once all the creditors present have completed their examinations, the meeting is concluded. After the meeting, the creditors are allotted a number of days to make objections to the claims of the debtor regarding what properties were exempted from the estate. They may also object to the discharge of particular debts within the estate, or file additional proofs of claims.
The creditors' meeting is a pivotal juncture in the bankruptcy proceedings and its importance for both the debtor and the creditor should not be underestimated. It is here that the debtor substantiates their position that he is entitled to the benefits conferred by the bankruptcy laws, and that the creditor defends their interests in the debtor's estate. It is important for all parties to be well prepared for this important event.
Davis & Pierce and Our Experience with Bankruptcy Creditor's Meetings
At Davis & Pierce, we realize that the creditor's meeting may be an important event in a bankruptcy case, both from the point of view of a creditor and a debtor. From a creditor's perspective, the creditor's meeting may allow the creditor to obtain valuable information under oath from the debtor without the additional cost of a deposition, and may help the creditor to determine whether the debtor has assets to satisfy debts despite the filing of the bankruptcy. From the debtor's perspective, it is important for the debtor's attorney to be prepared for the creditor's meeting in order to educate the debtor about questions that may be asked, and to prevent the debtor from answering erroneously or imprecisely with regard to questions by the Trustee and creditors.
William F. Davis is a Recognized Business Bankruptcy Specialist by the New Mexico Board of Legal Specialization, and has attended hundreds of creditor's meetings representing both creditors and debtors. Mr. Davis has represented creditor's committees, trustees and debtors in numerous large and complex Chapter 11 proceedings in New Mexico and other states across the country. Chris W. Pierce has also attended hundreds of creditor's meetings representing both creditors and debtors.
Both William F. Davis (DavisWF@nmbankruptcy.com) and Chris W. Pierce (ChrisP@nmbankruptcy.com) can be contacted at (505) 243-6129.