Posted by Kevin on May 14, 2018 under Bankruptcy Blog | 
Most people who close down a failed small business owe income taxes. Chapter 7 and Chapter 13 provide two very different solutions.
Here are the two options:
Chapter 7 “Straight Bankruptcy”
File a Chapter 7 case to discharge (permanently write off) most of your debts. This can include some or even all of your income taxes. If you cannot discharge all of your taxes, right after your Chapter 7 is completed, you (or your attorney or accountant) would arrange a payout plan (either lump sum or over time) with the IRS or other taxing authorities.
Chapter 13 “Adjustment of Debts”
File a Chapter 13 case to discharge all the other debts that you can, and sometimes some or even all the taxes. If you cannot discharge a significant amount of your taxes, you then pay the remaining taxes through your Chapter 13 plan, while under continuous protection of the automatic stay against the IRS’s or state’s collection efforts.
The Income Tax Factor in Deciding Between Chapter 7 and 13
In real life, especially after a complicated process like closing a business, often many factors come into play in deciding between Chapter 7 and Chapter 13. But focusing here only on the income taxes you owe, the choice could be summarize with this key question: Would the amount of tax that you would still owe after completing a Chapter 7 case (if any) be small enough so that you could reliably make workable arrangements with the IRS/state to pay off or settle that obligation within a reasonable time? If so, consider Chapter 7. If not, then consider Chapter 13 which provides the automatic stay during the 5 year period allowed to pay taxes.
How Do You Know?
To find out whether you need Chapter 13 protection, you need to find out from your attorney the answers to two questions:
1) What tax debts will not be discharged in a Chapter 7 case?
2) What payment or settlement arrangements will you likely be able to make with the taxing authority to take care of those remaining taxes?
The IRS has some rather straightforward policies about how long an installment plan can last and how much has to be paid. In contrast, predicting whether or not the IRS/state will accept a particular “offer-in-compromise” to settle a debt can be much more difficult to predict. Generally, it takes more attorney or accountant time to negotiate an offer in compromise, so the cost factor to the debtor should be considered.
When in doubt about whether you would be able to pay what the taxing authorities would require after a Chapter 7 case (either by installment plan or offer in compromise), or in doubt about some other way of resolving the tax debt, you may well be better off under the protections of Chapter 13.
Posted by Kevin on May 1, 2018 under Bankruptcy Blog |
The Regular “Automatic Stay”
The automatic stay—your protection against just about all collection efforts by your creditors—kicks in just as soon as your bankruptcy case is filed. It applies to all bankruptcy cases, including those filed under Chapter 7 and Chapter 13. It is one of the most powerful and important benefits of filing a bankruptcy case.
But it protects only you—the person filing bankruptcy—and your assets. It does not protect anybody else who may also be legally liable on one of your debts.
The Very Special “Co-Debtor Stay”
Chapter 13 adds another layer of automatic stay protection—applicable to your “co-debtors, or co-signers.
Section 1301 states that once a Chapter 13 case is filed, “a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any other individual that is liable on such debt with the debtor.”
A creditor on a consumer debt is already prevented by the regular automatic stay from doing anything to collect a debt directly from the debtor. Now, under Chapter 13 only, and only on consumer debts, that creditor is also prevented from collecting on the same debt from anybody else who has co-signed or is otherwise also obligated to pay that debt. The co-signer may not even know that you are protecting them from the creditor.
Conditions and Limits of the Co-Debtor Stay
Besides being limited to consumer (not business) debts, the “co-debtor” protection:
1. Does not protect spouses from joint liability on income taxes. That’s because income tax debts are not considered “consumer debts” for this purpose.
2. This protection does not extend to those who “became liable on… such debt in the ordinary course of such individual’s business.”
3. Creditors can ask for and get permission to pursue your co-debtor to the extent that:
(a) the co-debtor had received the benefit of the loan or whatever “consideration” was provided by the creditor (instead of the person filing the bankruptcy); or
(b) the Chapter 13 plan “proposes not to pay such claim.”
4. Even if a creditor does not seek or get the above permission, this co-debtor stay expires as soon as the Chapter 13 case is completed, or if it’s dismissed (for failure to make the plan payments, for example), or converted into a Chapter 7 case.
Conclusion
Choosing between Chapter 7 and 13 often involves weighing a series of considerations. If you want to protect a co-signer or someone liable on a debt with you from being pursued for that debt, seriously consider Chapter 13 because of the co-debtor stay.
Posted by Kevin on March 28, 2018 under Bankruptcy Blog |
Whether to file under Chapter 7 or Chapter 13 depends largely on your business assets, taxes, and other nondischargeable debts.
You have closed down your business and are considering bankruptcy. What are your options?
If you operated as a sole proprietor (DBA), then all the debts of the business are your personal debts. If you operated as a corporation or LLC, then the business was a separate entity. So, the business entity is liable for its debts, then, absent fraud, you are liable only for those debts which you personally guaranteed. In addition, you personally may be liable to taxing authorities for certain taxes.
Then, you have to consider remaining assets of the business. If a DBA, then you own the assets which become part of your bankruptcy estate upon filing. If it a corporation or LLC, then the entity owns the assets. But if you are the 100% owner of the business, then the stock or other ownership interest is an asset of the bankruptcy estate. So, the trustee can get to the assets through your ownership interest.
Your options would be to file under Chapter 7 or Chapter 13. A Chapter 7 is generally over in 4-5 months and requires no payments. A Chapter 13 lasts from 36-60 months and requires payments each month. It would be understandable if you preferred to file under Chapter 7.
Likely Can File Under Chapter 7 Under the “Means Test”
The “means test” determines whether, with your income and expenses, you can file a Chapter 7 case. The “means test” will still not likely be a problem if you closed down your business recently. That’s because the period of income that counts for the “means test” is the six full calendar months before your bankruptcy case is filed. An about-to-fail business usually isn’t generating much income. So, there is a very good chance that your income for “means test” purposes is less than the published median income amount for your family size, in your state. If your prior 6-month income is less than the median amount, by that fact alone you’ve passed the means test and qualified for Chapter 7.
Three Factors about Filing Chapter 7 vs. 13—Business Assets, Taxes, and Other Non-Discharged Debt
The following three factors seem to come up all the time when deciding between filing Chapter 7 or 13:
1. Business assets: A Chapter 7 case is either “asset” or “no asset.” In a “no asset” case, the Chapter 7 trustee decides—usually quite quickly—that all of your assets are exempt (protected by exemptions) and so cannot be taken from you to pay creditors.
If you had a recently closed business, there more likely are assets that are not exempt and are worth the trustee’s effort to collect and liquidate. If you have such collectable business assets, discuss with your attorney where the money from the proceeds of the Chapter 7 trustee’s sale of those assets would likely go, and whether that result is in your best interest compared to what would happen to those assets in a Chapter 13 case.
2. Taxes: It seems like every person who has recently closed a business and is considering bankruptcy has tax debts. Although some taxes can be discharged in a Chapter 7 case, many cannot. Especially in situations in which a lot of taxes would not be discharged, Chapter 13 is often a better way to deal with them.
3. Other nondischargeable debts: Bankruptcies involving former businesses get more than the usual amount of challenges by creditors. These challenges are usually by creditors trying to avoid the discharge (legal write-off) of its debts based on allegations of fraud or misrepresentation. The business owner may be accused of acting in some fraudulent fashion against a former business partner, his or her business landlord, or some other major creditor. These kinds of disputes can greatly complicate a bankruptcy case, regardless whether occurring under Chapter 7 or 13. But in some situations Chapter 13 could give you certain legal and tactical advantages over Chapter 7.
Posted by Kevin on March 4, 2018 under Bankruptcy Blog |
In the prior blog, we learned that a corporation or LLC (business entity) can file bankruptcy under Chapter 7. Are there any situations where the owner of the business would file bankruptcy when the business fails? The answer is yes under the following circumstances:
– the business is being operated as a sole proprietorship; or
-the owner of the business has provided personal guarantees of the obligations of the business.
If the business entity is a sole proprietorship (for example, John Smith doing business as “The Hot Dog King”), the business and the owner are the same person for legal purposes. All the assets and liabilities of the business are in the name of the owner. If that business fails, the creditors can bring a lawsuit against the owner. Moreover, if the creditor obtains a judgment, that creditor can look to any of the assets of the owner to be made whole. That includes both the business assets and personal assets of the owner. To avoid this outcome and allow for an orderly liquidation of the assets of the sole proprietorship, the owner can file bankruptcy, and obtain a discharge of debt.
If the business is a corporation or LLC, the law considers the business to be an entity separate from its owners. In many cases involving businesses, creditors (especially banks, inventory suppliers, and the like) will require the owner to guarantee business debt. If the business defaults on the obligation, the creditor, which is the beneficiary of the guarantee, may sue the guarantor/owners, obtain a judgment, and attempt to levy on any assets of the owner including assets that have nothing to do with the business. To avoid this outcome, the owner/guarantor can file bankruptcy, and obtain a discharge of debt.
Will the owner of the business, either as a sole proprietor or a guarantor of debt, be able to file a Chapter 7 or will he or she be forced into a Chapter 13 where 3-5 years of payments to creditors are required. While individuals are generally subject to the means test (which we spoke about a few blogs back) , the good news is that you do not have to pass the means test at all unless your “debts are primarily consumer debts.” So if your debts are primarily business debts—more than 50%–you avoid the means test altogether.
Let’s be clear about the difference between these two types of debts. A “consumer debt” is a “debt incurred by an individual primarily for a personal, family, or household purpose.” So, business guarantees are not consumer debts. It can be argued that cash advances on credit cards which are used by the business are not consumer debts. If you had taken out a second mortgage on your home for the clear purpose of financing your business, that second mortgage would likely be considered a business debt. It depends on the purpose for incurring the debt.
Certainly there are times when the line between a business and consumer debt is not clear. Given what may be riding on this—the ability to discharge all or most of your debts in about four month under Chapter 7 vs. paying on them for up to 5 years under Chapter 13—be sure to discuss this thoroughly with your attorney.
Posted by Kevin on March 3, 2018 under Bankruptcy Blog |
Under State law, a business entity, such as a corporation or an LLC, is considered a person and is separate from its shareholders (in the case of corporations) or members (in the case of LLC’s). If a corporation or LLC fails, it will probably have to deal with creditors who may sue the business, obtain judgments and levy on the business assets. This can be a long, drawn out procedure. As an alternative, that failed business entity may file bankruptcy. The entity will be the debtor. If the plan is to shut down the business and walk away (as opposed to a restructuring and continuation of business), then Chapter 7 can be a useful vehicle. Upon the filing, the automatic stay goes into effect as to the business entity. A trustee is appointed who literally changes the locks on the door, deals with the landlord and other creditors, assembles and liquidates the assets, and pays off the creditors.
How does a business chapter differ from a personal Chapter 7? In a personal Chapter 7, the debtor gets a discharge of many debts, and is allowed to keep a certain amount of property which is exempt. The discharge and keeping a baseline of property is part of the concept of giving the debtor a fresh start.
However, there are no exemptions for the business in Chapter 7. The trustee sells everything. I could understand that concept because if you are going out of business, you do not need assets for a fresh start. However, in Chapter 7, the business entity does not get a discharge. I always thought that was strange and looked at the legislative history behind this rule. The legislative history stated that discharges are not given to corporations (there were no LLC’s back then) so that people could not traffic in corporate shells??? My initial thought was, it only costs a few hundred dollars to set up a new corporation with no debt. So, why traffic in corporate shells? More history. It was only about 100 years ago that state legislatures passed business corporation statutes like the one’s we have today. Before that, if you wanted to incorporate, you would have to get your local State representative to sponsor a bill to establish your corporation. The legislature actually voted on it. It was an expensive and time consuming activity. Not surprisingly, there were not that many corporations. So, back in the day (as my kids would say) discharging debt within a corporation through bankruptcy could conceivably lead to a lucrative side deal if you were allowed to sell the debt free entity to a third party.
The bottom line is that business entities can file under Chapter 7. However, business Chapter 7’s tend to be more complicated because assets are involved, and the Trustee is usually more involved than in personal Chapter 7’s. If you are the owner of a failing business, it may be a good idea to consult with an experienced bankruptcy attorney.
Posted by Kevin on February 18, 2018 under Bankruptcy Blog |
If your income is lower than the median income for your household size within your State, there is a “no presumption of abuse” and you can, almost always, file under Chapter 7. If, however, your income is higher than “median income,” you may still file a Chapter 7 case by going through the expenses step of the Means Test.
The concept behind the Means Test is pretty straightforward: people who have the means to pay a meaningful amount to their creditors over a reasonable period of time should be required to do so. That means they must file under Chapter 13 where payments are made to creditors over a 3-5 year period.
But putting that concept into law resulted in an amazingly complicated set of rules.
One of the complications is that the allowed expenses include some based on your stated actual expense amounts, while others are based on standard amounts. The standard amounts are based on Internal Revenue Service tables of expenses, but some of those standards are national and some vary by state. There are even some expenses which are partly standard and partly actual (certain components of transportation expenses).
Disposable Income
If after subtracting all the allowed expenses from your “income” you have some money left over, whether you can be in Chapter 7 depends on the amount of that money and how that compares to the amount of your debts:
- If the amount left over—the “monthly disposable income”—is no more than $128.33, then you still pass the means test and qualify for Chapter 7.
- If your “monthly disposable income” is between $128.33 and $214.17, then apply the following formula: multiply that amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If the multiplied total is less than 25% of those debts, then you still pass the means test and qualify for Chapter 7.
- If after applying the above formula you can pay 25% or more of those debts, OR if your “monthly disposable income” is more than $214.17, then you do NOT pass the means test, UNLESS you can show “special circumstances”.
THAT’s Complicated!
If you don’t pass the means test you, will likely end up in a 3-to-5-year Chapter 13 case. Not only will that mean you cannot discharge your debts until the end of the 3-5 year period, but you may well also end up paying thousands, or even tens of thousands, more dollars to your creditors. It’s definitely worth going through the effort to find a competent bankruptcy attorney to help you, whenever possible, find a way to pass the means test.
Posted by Kevin on January 30, 2018 under Bankruptcy Blog |
The Constitution empowered Congress to “pass uniform laws on the subject of bankruptcies,” which then took more than 100 years to do so.
- The United States started its existence without a national bankruptcy law. The Second Continental Congress established the United States with its founding constitution consisting of the “Articles of Confederation and Perpetual Union,” drafted in 1776-1777. The Articles of Confederation were not ratified by the original 13 states until 1781. The Articles did not provide for a nationwide bankruptcy system.
- The American Revolutionary War formally ended in 1783 with the signing of the Treaty of Paris. The Articles of Confederation proved inadequate, so in 1787, a constitutional convention was called to draft a new constitution. The U.S. Constitution was ratified by the states in 1789. It did allow for, yet did not create, a national bankruptcy law. It merely empowered Congress to “pass uniform laws on the subject of bankruptcies”.
- Three different times during the 1800s, a federal bankruptcy law was passed in direct reaction to a financial “panic.” But these federal laws were each repealed after the financial crises were over. The first act was passed in 1800 but repealed in 1803. The second was passed in 1841 but repealed in 1847. The third bankruptcy act was passed in 1867 but repealed in 1878.
- During the long periods when there was no nationwide law in effect, the states developed a patchwork of bankruptcy and debtor-creditor laws. But these local laws became more and more cumbersome as commerce became ever more interstate.
- Finally, Congress got it right when it passed the Bankruptcy Act of 1898. The 1898 Act lasted 80 years. This law was inspired by commercial creditors to help in the collection of debts. However, it included the following very important debtor-friendly provisions: most debts became dischargeable, and creditors no longer had to be paid a certain minimum percentage of their debts.
- This Bankruptcy Act of 1898 was amended many times, significantly in 1938 in reaction to the Great Depression. Among other things, the 1938 amendment added the “chapter XIII” wage earners’ plans, the predecessor to today’s Chapter 13s.
- The 1978 Bankruptcy Reform Act, the result of a decade of study and debate, gave us the Bankruptcy Code. It has been amended every few years since then, most significantly in 2005 with BAPCPA, the so–called Bankruptcy Abuse Prevention and Consumer Protection Act.
Posted by Kevin on January 28, 2018 under Bankruptcy Blog |
A constant theme in consumer bankruptcies is that a fundamental purpose of bankruptcy is to give the honest but unfortunate debtor a fresh financial start.
The fresh start is effectuated, in part, by allowing a debtor to get a discharge of his or her debts. “Discharge” is the permanent legal write-off of debts. The law says that all debts get discharged, except those that fit specific exceptions.
Exceptions to Getting a Discharge
There are two types of exceptions to the discharge of your debts. The first excepts discharge as to specific debts (while the remainder of the debts are discharged). The second excepts discharge as to all of your debts.
1. Specific Debts Not Discharged
Many of my clients have a general understanding that certain debts may not be dischargeable. They are surprised , however, when they find out how many different debts are or may not be dischargeable. The Rules indicate that the debtor or any creditor may file an action relating to the dischargeablilty of a debt. However, in practical terms, these debts fall into 3 groups based on how the debtor and her attorney may decide to deal with with the issue of dischargeability during the course of the bankruptcy.
- debts such as unpaid child support are never dischargeable and, for the most part, no special action need be taken by either the creditor or debtor;
- debts including income taxes and student loans are dischargeable but only under certain conditions. Since the taxing authority and student loan holder will usually begin collection efforts upon the conclusion of the bankruptcy, the onus usually falls on the debtor to apply to the court for a determination relating to dischargeability; or
- debts incurred through misrepresentation or fraud are deemed dischargeable unless a creditor objects AND successfully proves the misrepresentation to the satisfaction of the court.
2. NO Debts Discharged
The second, less familiar set of exceptions is actually more dangerous. That’s because these doesn’t affect just a specific debt or two. Rather this set of exceptions affects your ability to receive a discharge of ANY of your debts whatsoever in a Chapter 7 case.
The following kinds of dishonesty could result in not being able to discharge your debts in a Chapter 7 case:
- Hiding or destroying assets during the year before filing bankruptcy
- Hiding or destroying assets after the bankruptcy case is filed
- Hiding, destroying, falsifying, or failing to keep records about your financial condition
- Failing to satisfactorily explain a loss of assets before the filing of bankruptcy
- Making a false oath.
Actions to deny discharge of all debts can be brought by a creditor, the trustee assigned to the case, or the United States Trustee’s office. A negative result is devastating to a debtor. At a seminar, I recall a judge referring to this type of denial of a general discharge as a death sentence for a debtor.
Conclusion
Most of the time, you’ll be able to discharge all the debts you expect to discharge. Furthermore, your right to an overall discharge of debts will very likely not be challenged. But if you have ANY reason for doubt about these, be sure to tell your bankruptcy lawyer. And do so right away, preferably early in your first meeting.
Posted by Kevin on January 21, 2018 under Bankruptcy Blog |
The beginning of a year is a good time to take stock of yourself. People routinely make New Year’s resolutions about diet, exercise, going back to school.
Are your debts getting out of control? Worried about harassing telephone calls from debt collectors? Getting sued? Wages being garnished? Now is the right time to do some financial assessment. Bankruptcy may be the right tool for you to put your financial problems in the rear view mirror.
A New Start with Chapter 7
With Chapter 7 “straight bankruptcy” you get a new start very fast. As soon as your case is filed most of your creditors can’t collect their debts against you. They can’t go after your money or your property. Then usually about 3-4 months later the bankruptcy court enters an order discharging your debts. As quick as that, you become debt-free. The only exceptions would possibly be debts you want to keep and special debts you can’t discharge under the Bankruptcy Code.. Debts you might want to keep could include a vehicle loan or home mortgage. Debts you can’t discharge include recent income taxes, unpaid child and spousal support, and criminal fines.
A New Start with Chapter 13
With Chapter 13 “adjustment of debts” the new start is more nuanced, but sometimes much better.
Just as with Chapter 7 your creditors can’t take any action to collect their debts as of the moment you file your case. But under Chapter 13 that protection from creditors lasts not just a few months but for years. You finish your Chapter 13 payment plan in 3 to 5 years. Whatever debts you have not paid off get discharged. The final discharge of debts happens much later but in the meantime you can get many benefits unavailable under Chapter 7. You can deal in creative ways with special debts like home mortgages and car loans. Same thing with income taxes and child support arrearages that can’t be discharged. Plus you get protection from collection actions against any co-signers that you don’t get under Chapter 7.
Don’t kick the can down the road. Take control. We are available for consultation.
Posted by Kevin on November 27, 2017 under Bankruptcy Blog |
In a prior blog, we talked about the credit counseling course that a debtor must take before he or she can file under Chapter 7 or 13. After the petition is filed, the debtor must take the debtor education course. This is sometimes called the personal financial management course.
The course is given by a non profit budget and credit counseling agency approved by the United States Trustee. The course is usually taken online but, depending on the provider, can be done over the phone, or even in person. The purpose of the course is to provide the debtor with insight into his or her current financial situation which led to the bankruptcy, and how to budget income and expenses to avoid financial problems going forward.
The debtor education course requirement was part of the 2005 amendments to the Bankruptcy Code. As I stated in the blog dealing with the credit counseling course, in my opinion, one of unspoken policies for the 2005 amendments to the Bankruptcy Code was to discourage bankruptcy filings by making them more time consuming and expensive. The debtor education course requirement (just as the credit counseling course requirement) is an additional hoop through which a debtor is forced to jump. Hate to sound cynical, but in the 12 years since the 2005 amendments, I have never had a debtor tell me how valuable either course was.
So, what happens if you decide to save a few bucks by not taking the debtor education course. The punishment is draconian. No course taken- no certificate of completion filed with the Clerk of the Bankruptcy Court, no discharge. That means that your debts are not wiped out.
I remind my clients at the meeting of creditors that if they have not already taken the debtor education course, they should do so immediately.
Let’s say you mess up and don’t take the course. Any recourse? You may be able to re-open your case to take the course and file the certificate of completion. However, you will incur additional legal and filing fees. In the meanwhile, because your debts are not discharged, your creditors can take action to collect of their debts. Finally, there is some risk that the judge will not let you reopen the case. Don’t put yourself in that position.
Posted by Kevin on November 22, 2017 under Bankruptcy Blog |
In the prior blog, we learned that you may be required to file under Chapter 13 because, simply put, you make too much money to file under Chapter 7. Guess what? There are restrictions on filing Chapter 13 also. First, you must be an individual. That means a live person. Second, you must have regular income. That usually means a job, but it can even include social security or public assistance. Third, your secured debts cannot exceed $1,184,200. Fourth, your unsecured debts cannot exceed $394,725. Items three and four are commonly called Debt Limits which are adjusted periodically.
So, what’s a secured debt. It means generally any debt for which you have given collateral. Examples: a home mortgage or a car loan. But, it can also include a judicial lien, a statutory lien or a filed IRS tax lien. A judicial lien comes about when someone gets a judgment against you, and the sheriff attaches a specific item of property like your bank account. A statutory lien comes about by law. An example is your real estate taxes.
Unsecured claims can be credit cards, medical bills, loans that you guaranteed for your business, and priority debts like back child support.
In the prior blog, we learned that a debtor in Chapter 13 can strip off a second mortgage if that mortgage is totally underwater. For example, your home is worth $200,000. The first mortgage is for $250,000 and the second mortgage is for $100,000. The second mortgage is recorded and would otherwise be considered a secured claim except that there is no collateral to attach to it because the first mortgagee is owed more than the collateral is worth. In that case the stripped off second mortgage becomes an unsecured claim.
So, how do you count the second mortgage when you are figuring out the Debt Limits for Chapter 13. In our example, the stripped off second mortgage is counted with the unsecured claims. So, in our case, you have to add the $100,000 to your other unsecured debts even though there was a mortgage.
Sometimes, the stripped off second mortgage can put you over the Debt Limit for unsecured debt. What happens then? Well, if you do not qualify for Chapter 7, your only alternative is Chapter 11. Ouch. Although individuals can file Chapter 11, that is an expensive proposition.
Posted by Andy Toth-Fejel on November 20, 2017 under Bankruptcy Blog |
Since the 2005 amendments to the Bankruptcy Code, you can’t file an individual bankruptcy case (Chapter 7, 13 or individual Chapter 11) without first taking the so-called “credit counseling.” course from an approved nonprofit budget and credit counseling agency.
What’s Actually Required?
Not much. It’s actually a simple procedure you do on the internet, or by phone if you prefer. You simply provide some information about your debts, income, and expenses. Then are almost always told that your income is not sufficient to pay for your expenses.
180 Days before Filing
The “counseling” session must take place “during the 180-day period” before filing bankruptcy. So be sure that you’re going to be filing bankruptcy within that length of time after you do it. Otherwise, if your bankruptcy filing is delayed beyond the 180 days, you will have to take the course again.
Usually people run into the opposite problem, putting it off too long. Even though you can usually get the requirement out of the way within 24-48 hours, there are situations where debtors come to an attorney to file on the day of a foreclosure sale. In that case, the debtor can be SOL.
Reason for this Requirement
The supposed reason for this requirement was to encourage people to consider options other than bankruptcy.
The United States Government Accountability Office has issued a report which questions that viability of that rationale:
“The counseling was intended to help consumers make informed choices about bankruptcy and its alternatives. Yet… by the time most clients receive the counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy. As a result, the requirement may often serve more as an administrative obstacle than as a timely presentation of meaningful options.”
My opinion is that one of unspoken policies for the 2005 amendments was to discourage bankruptcy filings by making them more time consuming and expensive. The credit counseling requirement (and the financial management course requirements, see below) are just additional hoops through which a debtor is forced to jump.
Costs/Where to Go ?
When the requirement first came out, it cost about $75-100 for the credit counseling course. Now, the cost is down to $20-35 on the average. You can find a list of approved providers on the US Trustee’s website, but it is easier to get a recommendation from your lawyer.
You also have to take a financial management course after the filing. Same cost. No course, no discharge.
Posted by Kevin on November 3, 2017 under Bankruptcy Blog |
In Chapter 7, debtors make no payments to their creditors but a Chapter 7 trustee can sell all non-exempt property and pay unsecured creditors. The process is over in 4 months or so, and the debtor obtains a discharge of most of her debts. In Chapter 13, however, debtors get to keep even their non-exempt property but must make monthly payments to the Chapter 13 trustee for a period of 36 to 60 months before they can get a discharge of most of their debts.
So, we are assuming that you are having trouble paying your bills. You are contemplating bankruptcy. Why would you choose to make payments for 3 to 5 years to get a discharge when you can pay nothing and get a discharge in 4 months. Well, there are a number of reasons why prospective debtors pick Chapter 13. In 2005, Bankruptcy Code was amended by a law referred to as BAPCPA. BAPCPA adopted what is called the Means Test to determine if you could file under Chapter 7. If your income based on family size exceeds the median for your State, you must pass the Means Test to file under Chapter 7. The Means Test is based on IRS tests to determine how much a taxpayer can pay in back taxes. So, if you are above median income and you fail the Means Test, you cannot file Chapter 7, and are be required to file under Chapter 13 if you otherwise qualify.
But, there are other reasons to file under Chapter 13 even if you pass the Means Test. Say you own a home with significant equity. In a Chapter 7, the trustee can sell your home and pay off your creditors. In a Chapter 13, if you make all payments under a Plan confirmed by the Court, you can keep your home. In addition, let’s say that you own a home but are in arrears on the mortgage. In Chapter 13, you can pay off the arrears over the term of the Plan. That could be up to 60 months.
Finally, say your house was worth $400,000 when you bought it, but after the mortgage crisis, it is only worth $250,000. You owe $270,000 on a first mortgage and $50,000 on a second mortgage. In this case, the collateral covers most of the first mortgage, but the second mortgage is completely unsecured. In other words, if there was a foreclosure, the first mortgage holder would be paid a good amount of what it is owed, but the second mortgage holder would get nothing. In Chapter 13 in our example, you can “strip off” that second mortgage and treat it as unsecured debt since there is no collateral to attach to that mortgage. So, instead of making monthly payments of, say, $300 per month on the second, that creditor gets only a pro rata share of what is paid to the unsecured creditors. If your plan payment is, say, $100 per month, then the second mortgage holder gets to share that $100 with the other unsecured creditors instead of getting $300 per month. A substantial savings. If you make all the payments, the second mortgage holder is required to release the mortgage lien of record.
In some cases, you are forced into Chapter 13, but that does not mean that Chapter 13 cannot provide some real benefits, especially to homeowners. If you think Chapter 13 can help your situation, you should speak with an experienced bankruptcy attorney. Chapter 13 is not a DIY project.
Posted by Kevin on October 15, 2017 under Bankruptcy Blog |
The Bankruptcy Code is divided into chapters. Chapters 1, 3, and 5 deal with basic concepts that apply to all the various types of bankruptcies. Chapter 7 deals with liquidations for individuals or businesses. Chapter 9 deals with municipalities. Chapter 11 deals with reorganizations and/or planned liquidations of mainly businesses. Chapter 12 deals with family farms (do not get many of them in northern New Jersey). Chapter 13 deals with repayment plans for individuals. For the average consumer, Chapter 7 and Chapter 13 are the two alternatives methods of filing bankruptcy. For individuals, the object of any bankruptcy is to get a discharge of your debts. In other words, wiped out.
Let’s look at Chapter 7. This is sometimes called a straight bankruptcy or a liquidation. Chapter 7 is basically an asset driven analysis. You do not make payments, but a trustee can sell your non-exempt property, and pay out your creditors. The repayment scheme is set out in the Bankruptcy Code. Upon the conclusion, many of your debts are discharged. Certain enumerated debts are not wiped out such as domestic support obligations, debts incurred by fraud, certain taxes and most student loans.
After the Bankruptcy Code went into effect, creditor groups complained for the next 25 years that it was too easy for debtors to file under Chapter 7, which in a vast majority of cases, translated into no payments to creditors. Creditors wanted more debtors to file under Chapter 13 where monthly payments must be made to a trustee and certain creditors need be paid in full. The 2005 revisions to the Bankruptcy Code considers a debtor’s income in whether he or she can file under Chapter 7. If the debtor’s income is below the median income for the State based on family size, it is presumed that the debtor can file under Chapter 7. If the income is above median, a debtor has to pass the “means test” to qualify for Chapter 7. The means test looks at the debtor’s income for the 6 months prior to filing to arrive arrive at what is called current monthly income. It then subtracts categories of expenses- some based on national or regional averages, and others based on actually cost. If the net income is above a certain amount, the debtor cannot file under Chapter 7.
Assuming that you qualify for Chapter 7, the next issue is what property is exempt. In New Jersey, we can use either the exemptions set forth in the Bankruptcy Code or the exemptions listed in New Jersey statutes. The New Jersey statutes are mostly about 100 years old and have not been adjusted for inflation, so we almost always use the federal exemptions.
You file a Chapter 7 by filing with the Bankruptcy Clerk a Petition, Schedules of assets, liabilities, income and expenses, and various ancillary documents (over 40 pages). A trustee is appointed to oversee the case. If the exemptions cover the value of all of your assets, the case is called a no-asset case. That means no assets go to the Trustee-you get to keep them subject to any security interests (mortgages and the like).
About 4 weeks after filing, the debtor (and legal counsel) appear before the trustee. The debtor is required to answer questions from the trustee and any creditors. Creditors rarely appear at this hearing. If the trustee believes that your filing is in order and no further action is necessary, a discharge order will be issued within about 6 weeks. The whole process takes about 4 months. You cannot file another Chapter 7 and obtain a discharge for 8 years from filing date of the first Chapter 7.
Clearly, Chapter 7 is a bit more complex, but as the title states, these are Chapter 7 basics.
Posted by Kevin on October 3, 2017 under Bankruptcy Blog |
Over the last couple of years, this blog has dealt with many Chapter 7 and Chapter 13 issues. Some simple, some complex. Every once and awhile, however, it is good to go back to the basics. So, in the next few blogs, that is what we will do.
We will begin with an overview. Many people are skittish about filing bankruptcy. Yes, they are in a bad financial situation. Not enough money coming in, debts are mounting, creditor calls are becoming more than annoying, and maybe there are lawsuits. In society, we are brought up to be responsible and honor our obligations. It is part of being an adult. For many, the thought of bankruptcy is equated with failure. But I take a different point of view. Bankruptcy should be looked as a vehicle for a new start, a fresh start.
Many people do not know this, but the right to file bankruptcy is in the Constitution. Congress is given the right to establish uniform laws concerning bankruptcy. The first bankruptcy law was adopted by Congress in 1800. It was clearly pro-creditor. There were subsequent bankruptcy acts in 1841, 1867, 1898 and 1938.
The next major revision was the Bankruptcy Reform Act of 1978, commonly referred to as the Bankruptcy Code. The Bankruptcy Code marked a significant change in the point of view of bankruptcy laws. It was decidedly more pro-debtor compared to prior law. It allowed a vast majority of debtors to file Chapter 7 where debtors are not required to make cash payments to creditors and keep most, if not all, of their assets.
Creditor groups complained that the Bankruptcy Code was too pro-debtor and lobbied Congress for changes. This led to minor revisions in the 1980’s and 1990’s. The lobbying continued. In 2005, Congress adopted the Bankruptcy Abuse Protection and Consumer Protection Act (BAPCPA). Although this was a major overhaul of many areas of the Bankruptcy Code, from a consumer’s point of view, BAPCPA tries to force more debtors into Chapter 13 where monthly payments must be made by the debtor for periods ranging from 36 months to 60 months. All in all, BAPCPA has made the bankruptcy process more complex and more costly to a prospective debtor.
If there is anything that you should take from this blog, it is that bankruptcy is a right that you have under the Constitution of the United States. It gives you an opportunity to deal with your debts and get a fresh start.
Posted by Kevin on September 9, 2017 under Bankruptcy Blog |
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.
Posted by Kevin on September 1, 2017 under Bankruptcy Blog |
FACT: In bankruptcy, creditors seldom fight the write-off of their debts. Why not? And when DO they tend to fight?
Debts That Creditors Must Object To
This blog post is NOT about the kinds of debts that simply can’t be discharged (legally written off), and don’t need the creditor to object for that to happen. Examples of those are child and spousal support obligations, recent income taxes debts, and criminal fines. Those survive bankruptcy without any effect on them.
Instead this is about ordinary debts and the ability of any creditor to raise certain limited kinds of objections (like fraud) to the discharge of its debt.
Why Objections Aren’t Usually Raised
But if creditors have a right to object, why don’t they do so? If they can make trouble for you, why don’t they?
Simply because doing so is very seldom worth their trouble.
Why not?
1. Creditors seldom have the factual basis on which to object.
2. It takes money for creditors to object, money they may well not recoup.
3. The risk that the creditor would have to pay your attorney fees.
That would happen if the judge decided that “the position of the creditor was not substantially justified.” So if creditors are not very confident of their argument, they could be dissuaded further by the risk of having to pay your costs fighting the objection.
So that’s why most creditors just write off the debt and you hear nothing from them during your bankruptcy case.
When Creditors Tend to Object
Creditors do object sometimes, often involving one of the following two situations:
1. Using leverage against you.
If a creditor thinks it has a sensible case against you, it could raise an objection knowing that you are not willing or able to pay a lot of attorney fees to fight it. The creditor knows that even if you have a good defense to its accusations so that you could well win if the matter went all the way to trial, it would cost you a lot to get to that point. So they raise the objection in hopes of inducing you to enter into a settlement quickly.
2. A Personal Grudge
If a creditor is very angry at you for some reason, he, she, or it might be looking for an excuse to harm you or cause you problems. Ex-spouses and ex-business partners are the most common creditors of this sort. Irrationality is unpredictable, so it sometime drives an objection even when there are little or no factual grounds for it.
The Creditors’ Firm Deadline to Object
Creditors have a very limited time to raise objections: their deadline is only 60 days after the Meeting of Creditors (so around 3 months after your bankruptcy case is filed).
So, talk with your attorney if you have any concerns along these lines. And then if whatever assurances he or she gives you doesn’t stop you from worrying about this, you’ll at least know that you won’t have long to worry before the creditors’ right to object expires.
Posted by Kevin on August 26, 2017 under Bankruptcy Blog |
Is Filing Bankruptcy a Moral Choice?
As a bankruptcy practitioner, I take for granted that filing for bankruptcy is a practical, economic choice. But for many of my clients, it is also a moral choice. They took the money or used the credit with the good faith expectation that they would pay back the creditor, and now they cannot. Does that make them a bad person? How do you reconcile this apparent disconnect?
For many of my clients with misgivings about filing, I advise to meet the issue head on. You’ll feel better (even good) about the decision only after you believe in your head and in your heart that it really is the right step to take.
How to Make a Good Moral Decision
1. What got you to this point of your finances?
You made legal commitments to pay your debts. What has changed so that you are having trouble now meeting those honest intentions to pay? What is making you seriously consider breaking those commitments permanently?
2. Understand your present: what are the costs and benefits of now trying to meet those financial commitments?
The moral benefit of not filing is that you would be keeping your promises to pay your debts. It’s easy to fixate on this and feel guilty about breaking these honest promises. But how about the real costs if you kept struggling to meet them? Consider your physical health, and your emotional health as you deal with the constant stress. Consider the debts’ effect on your marriage and family relationships. What financial and emotional responsibilities do you have to spouse, children, parents, siblings, community that you just can’t handle? You clearly have moral obligations to all these people in addition to obligations to your creditors.
3. You CAN make a good decision: you now have the opportunity to choose and act wisely.
Face your situation honestly. Don’t hide from the truth, even if it means accepting that you’ve made mistakes. Own them. But don’t beat yourself up about them. Focus on the future. Focus on what you have to do (or not do) to insure a better economic future. Not just generalizations but concrete steps. Resolve to make better economic (and other) decisions every day going forward. And then walk the walk.
4. Get good advice: you can only make good decisions if you know your legal and practical options.
You can’t make good economic or moral choices about how to attack your debts without knowing your legal alternatives for doing so. You can’t know whether the best way to deal with your creditors if you don’t know those legal options. It may turn out that credit counseling will allow you to manage your debts within your budget and without filing bankruptcy. It may turn out that a Chapter 13 payment plan fits your set of life obligation better than a Chapter 7 “straight bankruptcy”. But you cannot make those decisions unless you have the facts and options.
5. Weigh your legal options: consider effects on your creditors, yourself, your spouse, your family, and anyone else involved.
Get help from the right people and resources. Do whatever helps YOU make a good decision. Although bankruptcy attorneys are legal advisors, experienced bankruptcy attorneys have dealt with many people in their careers who have focused not only on the economic issues but the moral issues in filing bankruptcy. Discuss these concerns with your attorney. It will help you make the best, well informed decision which is the first step to a much better future.
Posted by Kevin on August 20, 2017 under Bankruptcy Blog |
You can usually get out of an ongoing Chapter 13 “adjustments of debts” bankruptcy case by simply asking to do so.
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Unlike Chapter 7, if you file a Chapter 13 case you can end it—“dismiss” the case—at any time, and in just about any circumstance. But why the difference?
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Explicit Right to Dismiss
Why can a Chapter 13 case be dismissed by the debtor? Because unlike with Chapter 7, Section 1307(b) of the Bankruptcy Code says so. And quite strongly.
“On request of the debtor at any time… the [bankruptcy] court shall dismiss a case under this chapter [13].”
Notice that the debtor can ask for a dismissal “at any time.” This implies that the request could come any time during the life of a Chapter 13 case, including when it might be particularly inconvenient for a creditor. Or whenever. Also notice that the court does not seem to have any discretion about whether or not to dismiss–it “shall” dismiss the case. Not “may” or “might” dismiss it, but “shall” do so.
An Absolute Right to Dismiss?
Actually there has been debate among bankruptcy judges about whether a court can ever prevent a Chapter 13 case from being dismissed on request of a debtor. And a number of judges have decided that in situations of serious abuse or fraud by the debtor, there are other provisions in the law that trump this section and prevent a Chapter 13 case from being dismissed. But still, in the vast majority of situations, a request by a debtor to dismiss a Chapter 13 case results in its near-immediate dismissal.
Why So Different Than Chapter 7?
But why does the Bankruptcy Code—the federal statute governing bankruptcy—provide for a right to dismiss a Chapter 13 case when it does not provide for Chapter 7 dismissal the same way?
Because (beyond the reasons given in the last blog related to Chapter 7) when Congress established the bankruptcy options, it wanted to encourage debtors to file Chapter 13 cases. This was in part so that they paid back at least some of their debts. Congress probably also recognized that filing a Chapter 13 case is generally riskier than filing Chapter 7. That’s mostly because it involves making payments diligently over the course of years, while not getting the reward of the discharge (legal write-off) of the debts unless successfully getting all the way to the end of it. To encourage taking on the risk of starting a Chapter 13 case, Congress made it easy to get out of it if things did not go as planned.
Posted by Kevin on August 5, 2017 under Bankruptcy Blog |
Although the Great Recession started in December, 2007 and ended technically in June, 2009, economic growth has been sluggish through the 2016 election and even to this day. Participation in the work place went from 66.4% in January, 2007 down to 62.5% in October, 2015. That means that people lost their jobs and withdrew from the work force for extended periods of time for a myriad of reasons.
In July, 2017, the Department of Labor indicated that US employers added 209,000 jobs. More importantly, wages are going up. This is bringing many people back into the work force.
It is not surprising that many of the people who had been sitting on the sidelines for extended periods of time have accumulated significant debt over the past few years. In the past, I would receive a steady stream of calls from people who were outsourced (or otherwise laid off) or downsized concerning lawsuits or threatened lawsuits, and garnishments from their creditors. In the last few years, however, I get less such calls. That does not mean that people have not accumulated debt. It probably reflects certain policy decisions made by creditors about the viability of suing people when they are out of work and, therefore, judgment proof.
Once you get a job, however, you may not be judgment proof. Granted, if you go from unemployment to a minimum wage job, you may not be subject to creditor harassment. But, what if you were unemployed for a year or more because your job was outsourced. You have education and skills that in the right job market, could translate into a sizeable salary. In that case, if you get back into your field, it is only a matter of time before debt collectors will be in touch with you.
So what do you do? Wait for the telephone call? Or the summons and complaint to be delivered by the sheriff? Probably, it would be better to be proactive. At the least you should do a personal financial audit. How much debt do you have? Is it unsecured like credit cards or medical bills, or secured (collateral involved). Is it student loan debt that may not be dischargeable in bankruptcy? How much are you going to have from each paycheck after your monthly expenses to pay those back debts? Are there areas where you can cut back?
When we deal with prospective clients, we try to tailor our advice to their specific economic situation. Some may have defenses to creditor action so fighting a collection action in State court may be the way to go. Others may find negotiation with specific creditors can get a payment plan or settlement at a reduced amount. Some are better served by engaging a reputable creditor counseling agency. Others may need the protection afforded by the Bankruptcy Code.
Congratulations. The economy is getting better and you are back in the job market. But, if you have accumulated debt over the last few years, have a plan to deal with it.
