The Case of the Smiths

Rick and Lori Smith are clients of your firm. They want to file a Chapter 7 bankruptcy and have paid a $3,000 fee which covers the bankruptcy filing fee and the firm's fee. The Smiths have never consulted with anyone else about filing for bankruptcy or trying to make settlement agreements with creditors. They have not previously filed a bankruptcy. Assume that the Smiths have received the required pre-filing credit counseling.

The Smiths have lived at 234 Main Street, Holland, MI for the past 5 years. Rick makes $42,000 per year working in vehicle maintenance for Kent County. For several years Rick operated a dba as Rick's Auto up until 5 months ago, but closed the business when he was hired by Kent County. Lori earns $30,000 per year as office manager for Ottawa Optical where she has worked the past 2 years for the same salary. After taxes and other deductions are taken out, Rick's net income (take home) is $2200/month and Lori's is $1500/month.

The Smiths have joint checking & savings accounts at 3^rd/5^th Bank. The checking account has an average balance of $800 and the savings account currently has $1,500.00. Rick has $5,000 in an IRA through Lakeshore Credit Union. They do not have a safe deposit box.

The Smiths have one child, a son Sam who is 6 yrs. old and attends a local charter school.

There are three lawsuits pending against the Smiths: Rental LLC, the landlord of the space Rick leased for Rick's Auto is suing Rick for back due lease payments totaling $2,400, and to evict Rick who still has a boat in the premises along with tools from the closed business; Loans R Us, Inc. is suing Lori for an unsecured personal loan which she partially used to pay for classes at GRCC, the balance owing is $3,500; Lakeshore Hospital is suing Rick for $25,000 in connection with surgery and related care required after an auto accident 15 months ago.

No creditors have seized any of the Smith's assets; the Smiths do not hold any property for a third party; and no third party holds any of their property.

The Smiths maintain their personal records including copies of their tax returns and have filed their own tax returns for years. They currently owe the IRS $2,00 in income taxes for last year and have not received a tax refund in the past two years.

The Smiths have owned their home for five years. They owe Rocketship Mortgage $150,000 on a 30-year fixed rate mortgage (4.35%) and are two months behind on payments. Monthly payments, including property taxes and insurance, total $900. The house is worth $180,00. They owe SE Credit Union $10,500 secured by a 3 yr old Ford Escape that is worth $13,000. Payments are $250.00 per month (5% APR), they are two payments behind, and have 42 payments remaining. The Smiths want to keep their home and the Escape.

Ottawa Credit Union is owed $2,500 secured by tools purchased by Rick for Rick's Auto. Payments are $150 per month; no payments have been made for 6 months and the credit union is threatening to sue. The tools are worth $2,000.

The Smiths have provided a list of 8 more unsecured creditors with debts totaling $11,000, this in addition to those unsecured creditors mentioned above.

The Smiths have also listed the following property and values. This property is jointly owned and is free and clear of any liens/debts:

Household goods and furniture - $2,500.00

Computer - $700

Clothing - $1,500

Jewelry - $1,300

Camping, fishing, and other sports gear - $600

10 ft fishing boat - $300

2012 Honda Civic - $1,200

Monthly expenses are listed as ($): mortgage 900; car loan 250; electricity 130; water 60; phone/internet/cable 230; food 750; childcare/education 225; clothing 125; personal care products 50; medical/dental 110; transportation - gas/maintenance 250; entertainment 100; vehicle insurance 220; home maintenance/repairs 100.

Prior to the bankruptcy Rick earned the following income from Rick's Auto: $3000 during the year before he was hired by Kent County; $10,000 the full calendar year before that; and $14,000 the calendar year before that. Lori has made the same salary each year.

Lori Smith acted as bookkeeper/accountant for Rick's Auto.

Rick's Auto never provided any financial statements during the years Rick operated the business.

The Smiths did make 1 mortgage payment in the 90 days before the bankruptcy was filed.

None of the Smith's property has been repossessed or foreclosed upon; none of their accounts have beeen frozen or offset.

The Smiths have never owed money to an insider and none of their property was ever given to an insider.

The Smiths have never made a gift or a contribution to a charity that exceeded $600.

6 months before the bankruptcy, Rick sold some old equipment and tools to his brother-in-law Thomas King for $200.

Additional information for Exercise 2 below: The Smiths wish to enter into a Reaffirmation Agreement with SE Credit Union. The terms indicated above will remain the same, no additional fees or expenses will be added. The Smiths originally paid $15,000 for the Escape.

Bankruptcy Forms Exercise #2:For the Smiths, submit a Reaffirmation Agreement Form B2400 (30 points) and Reaffirmation Agreement Form B427 (20 points) on behalf of the Smiths to reaffirm the debt with creditor SE Credit Union; and submit a Motion for Relief from the Stay (30 points) and Proposed Order (20 points) on behalf of creditor Rental LLC (refer to the sample motion in Weekly Materials above for format/structure purposes only). Instructions on how to access the other forms are below.

In your web browser access the bankruptcy court website for the Western District of Michigan: https://www.miwb.uscourts.gov.

On the landing page, there are five links - click on the third one down, labeled "forms." You will then click on the Official Forms to find the forms required for this exercise.