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Sunday, Dec 3, 2023



Staff Reporter

The only adornments in Steven Earl Smith’s Spartan downtown office are a batch of family pictures and a collection of statues of Don Quixote.

Why so many images of Cervantes’ idealistic, misguided hero?

Smith, a lawyer who reviews Chapter 7 liquidation petitions for the U.S. Bankruptcy Court, mounted a campaign in the 1980s to close down so-called “bankruptcy petition mills” that were clogging the courts with frivolous cases.

“It was my impossible dream,” Smith said. The campaign had limited success, but in recognition of his efforts, his friends and associates have been giving him the statues ever since.

They are fitting trophies for a man who spends his time reviewing more than 2,000 bankruptcy petitions each year.

Smith is a private panel trustee, working under a renewable one-year appointment with the U.S. Bankuptcy Court’s Central District in Los Angeles. He gets $60 for each case when the petitioners have no assets. In the rare instance when there are holdings, he will get a small percentage of the liquidated assets.

On a typical year he grosses about $200,000, the majority of which comes from processing no-asset cases. Out of that, Smith must first pay rent, various taxes and the salaries of three full-time staff members. A lawyer, Smith occasionally does other legal work but gets most of his income from processing petitions.

Every week, boxes of new cases arrive from the Office of the U.S. Trustee, the civil wing of the Justice Department that oversees bankruptcy petitions. Each petition contains a breakdown of the debtor’s income and expenses, along with a listing of assets.

It’s Smith’s job to review the petition, and then make a recommendation on whether it should be granted or denied. More than 90 percent of the time, Smith decides there are no assets to be liquidated and recommends the petition be granted freeing the petitioner of debt obligations.

In other cases, the petitioners declare assets, which Smith then liquidates to help pay off creditors. And in a few cases, Smith suspects that assets are being concealed. In those cases, he conducts a preliminary investigation and passes on his findings to the Trustee’s Office for further investigation.

With personal bankruptcy at record-high levels, Smith handles about 60 cases a week, the biggest workload he has faced in his 13 years on the job. Even so, he says he reads each petition from beginning to end.

“I don’t believe any other trustee does that,” said Smith, 61. “The general procedure is to delegate them to an assistant. To me, that is like a trial judge opening a trial without reading the proceedings. These people are going bankrupt. It is the least I can do.”

As he goes through the petitions he looks for listed assets that can legally be seized and liquidated. He once spent two years trying to sell a pair of full-length mink coats that he seized from an opera singer. He had been told they were worth $85,000 when new. Yet when he tried to sell them in sunny, politically correct Los Angeles, the best offer he could get was $10,000.

Told to get a better price by a bankruptcy judge, Smith gave the furs to a used-clothes shop to sell on consignment where they were stolen.

As he reads through the petition, Smith also looks for signs that the debtor is trying to hide assets. Those include any sizable transfers of assets, such as giving cash to friends or deeding a house to a family member.

Once the petitions are read, the next step is to meet the debtors face to face. Smith holds a public hearing at the U.S. Trustee’s office in Woodland Hills every Monday morning.

At the appropriate hour, he stands before a room crowded with debtors and reminds them that they will be testifying under oath. That done, Smith meets individually with each petitioner, who is usually accompanied by a lawyer. Smith asks if all the information on the bankruptcy petition is correct and will then ask if there are any creditors in the room who would like to contest the bankruptcy discharge. There rarely are.

“Usually the only creditors that show up are from large department stores,” he said. “In most cases the credit card companies will decide that it is not worth their time to try and get the money back.”

From beginning to end, each hearing usually takes less than five minutes. Most of the debtors who come before Smith will receive a “discharge” letter within a month informing them that their debts have been erased.

Smith, however, likes to think that he can spot the bankruptcy crooks when they come before him.

“I have raised four children. I know when I am being lied to,” he said.

Smith feels great sympathy for the vast majority of people whose cases he handles. “Most of them just made mistakes. Maybe they were too optimistic, or just too human,” he said.

Each debtor who receives a discharge from Smith also gets a letter entitled “The Fresh Start.” In it, Smith relates the story of Thomas Jefferson, who died in 1826 with debts of more than $100,000.

“Bankruptcy is not a disgrace,” he tells the debtor. “My advice to you is this: When you leave the room today just turn the page.”

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