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Who Does What in Your Bankruptcy-Part 2

Posted by Kevin on January 20, 2020 under Bankruptcy Blog | Be the First to Comment

In a previous blog, we talked about what is expected of a debtor in bankruptcy and what you could expect from your creditors. In this blog, we are going to discuss two other significant players in Chapter 7 and Chapter 13 bankruptcies- the trustee and the Judge.

Under the Bankruptcy Act of 1898, bankruptcy judges served in both a judicial capacity and an administrative capacity. As part of the administrative function, judges appointed trustees to cases and the trustees answered to those judges. Over the years, however, this practice came under criticism especially when third parties were litigating against a trustee who may have been appointed by and answered to the judge that was deciding the litigation. Under the Bankruptcy Code of 1978, Congress addressed this issue by separating the judicial function from the administrative function. The administration of a bankrupt estate was assigned to a new office, the United States Trustee, which is a branch of the Department of Justice.

For Chapter 7 cases, the US Trustee has assembled a panel of individual trustees who serve as the representative of the estate. Most panel trustees in NJ are lawyers who practice bankruptcy law. However, there are a few panel trustees that are accountants or business persons. In Chapter 13, the US Trustee has appointed three standing trustees for New Jersey. The standing trustee administers all the Chapter 13 cases in his or her region.

The Chapter 7 trustee reviews the bankruptcy petition, schedules and other documents that are part of the filing; reviews financial documents of the debtor including tax returns; examines the debtor at the meeting of creditors; takes possession of non-exempt property of the estate, liquidates that property, and distributes the proceeds of the liquidation to the creditors in accordance with the Code after providing to the debtor that portion of the sales proceeds which are exempt. In fulfilling the administrative duties, a trustee can sue the debtor or other third parties to bring assets into the estate, and can challenge the right of a debtor to a discharge of debts.

In Chapter 13, the debtor keeps his or her property, and operates his or her business. The Chapter 13 standing trustee analyzes the filing, collects monthly payments and distributes those payments in accord with the Chapter 13 plan, conducts the meeting of creditors, can negotiate with the debtor as to the terms of the plan and object to a plan that does not meet the requirements of the Code.

In the typical Chapter 7, the debtor (or debtor’s counsel) will have some dealings with the trustee. In the typical Chapter 13, however, debtor’s counsel will have more significant dealings with the standing trustee and his or her staff. The debtor will see the trustee only at the meeting of creditors unless the trustee and debtor are involved in litigation within the bankruptcy.

Under the Bankruptcy Code, the judge handles judicial matters associated with the estate. In most Chapter 7 cases, the debtor has no involvement with the assigned judge unless there is pending litigation. In Chapter 13 cases, the debtor may need to go before the judge if the trustee or a creditor objects to the confirmation of the plan, or if there is pending litigation.

The Benefits of Both “Asset” and “No Asset” Chapter 7 After Closing Down a Business

Posted by on July 14, 2019 under Bankruptcy Blog | Comments are off for this article

Besides wiping out (“discharge” is the legal term) your personal debts like credit cards and medical expenses, a Chapter 7 case can discharge all or most of your personal liability from a closed sole proprietorship, corporation, LLC, or partnership.  You are liable for the debts of a sole proprietorship and a partnership.  You can be liable for LLC or corporate debt to the extent that you signed a guarantee or in other circumstances.

 “Asset” and “No Asset” Chapter 7

Chapter 7 is sometimes called the liquidation form of bankruptcy.  That usually does NOT mean that if you file a Chapter 7 case,  all of your assets will be liquidated or sold.   One of the main purposes of the Bankruptcy Code is to give an honest debt a fresh start.  You get a fresh start by the discharge of most of your debts and keeping property that is exempt.

As a debtor in New Jersey, you can choose the exemptions listed in the Bankruptcy Code (called the federal exemptions) or you can use the exemptions provided under New Jersey statutes.  Since the federal exemptions are much more favorable to the debtor than the New Jersey exemptions, almost all NJ debtors utilize the federal exemptions.  If everything you own is exempt, you would have a “no asset” case, so-called because the Chapter 7 trustee has no assets to collect or distribute to your creditors .

In contrast, if you own something that is not exempt, and the trustee decides that it is worth liquidating and using the proceeds to pay a portion of your debts, then your case is an “asset case.”

The Quick “No Asset” and the Drawn Out “Asset” Case

Generally, a “no asset case” is simpler and quicker than an “asset case” because it avoids the asset liquidation and distribution to creditors process.

A simple “no asset” case can be completed in about three to four months after it is filed (assuming no other complications arise).  An asset case can take a year or more.

The Potential Benefits of an “Asset” Case

If you have an asset case, that can be turned to your advantages.  Two situations come to mind.

First, you may decide to close down your business and file a bankruptcy immediately in order to hand over to the trustee the headaches of collecting and liquidating the assets and paying your business creditors .  If you’ve been fighting for a long time to try to save your business, you avoid the added headache and expense of negotiating work-out terms with all the creditors.

Second, in the Chapter 7 process, certain debts, called priority debts, are paid first.  General debts get paid afterwards to the extent there are available funds.  More importantly, certain priority debts are not discharged by the bankruptcy.  That means you still owe them after the bankruptcy is completed.  Examples of priority debts that are not dischargeable include child and spousal support arrearages, and certain tax claims.

So, as a debtor, you want to pay off as much non-dischargeable debts as you can.  To the extent you have non-exempt assets, the Trustee can use the proceeds of the sale of those assets to pay off some or all of your priority, non-dischargeable debts. Non priority debts (except for most student loans) are discharged regardless of whether they receive payment in the Chapter 7.

Should I Put My Business in Chapter 7?

Posted by Kevin on September 9, 2017 under Bankruptcy Blog | Be the First to Comment

You wanted to follow the American dream and set up your own business.   Two years down the road, however, you realize that you are working 70 hours per week and the business is not making money.  You have exhausted all your savings and the business has incurred debt out the wazoo.  You just want out, and you have heard about Chapter 11 or Chapter 7.  What to do?

While you can liquidate your business in a Chapter 11 (liquidating plan), this is very expensive and time consuming.  Unless, the business is very large, this may not be the way to go.  But what about a Chapter 7?

The first question you have to answer is who (or what) is going into Chapter 7?  To a degree, it may depend on how your business was set up.  If you have a sole proprietorship (DBA), then under the law of New Jersey, you are the business.  So, if the business fails and you want out, you will have to file a Chapter 7.  A trustee will be appointed and will administer not only your business assets and liabilities, but also your personal assets and liabilities.

If the business is a corporation or LLC, then under the law, the business is considered an entity separate and apart from you.  So, now the issue is who files bankruptcy?  One of the primary reasons to file bankruptcy is to get a discharge of your debts.  However, the Bankruptcy Code states that a discharge in a Chapter 7 is limited to individuals.  The Code defines “individuals with regular income” but not “individuals”.  The Code also defines “persons” which includes people but also includes corporations and partnerships.  Well, without going into too much more detail, the bottomline is that people can get discharged in a Chapter 7 but corporations and partnerships and LLC’s cannot.  So, if you put your LLC into Chapter 7, it does not get a discharge.

But, the analysis does not end there.  Your LLC may be have sued by numerous creditors so you have lawsuits pending.  Also, these creditors have a penchant for not only suing the LLC but suing the principal and that is you.  You have other creditors who have not sued yet but are hounding you on phone.  You have inventory and accounts receivable.  You have the bank pressuring you on that line of credit which you guaranteed.

Even though the LLC does not get a discharge in Chapter 7, it may be worthwhile to file a Chapter 7 for the business.  First of all, because of the automatic stay, all pending lawsuits are put on hold, and your creditors cannot file any new actions unless they get the permission of the bankruptcy court (relief from automatic stay).  Also, the trustee takes over and chases the business’s creditors, deals with the landlord and liquidates the inventory.  You must cooperate, but the trustee does the heavy lifting.

If you cannot work a deal out with lenders on guarantees, or if the collection lawsuits naming you become too much of a hassle, then the owner should seriously consider an individual Chapter 7.

Bankruptcy issues involving a failing business are complicated.  You should seek experienced bankruptcy counsel work work you through the process.