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Keeping All that You Own in Bankruptcy

Posted by Kevin on June 20, 2017 under Bankruptcy Blog | Be the First to Comment

Can you really keep everything you own if you file bankruptcy?  The Answer: Usually Yes.

Some basics. 

There are two basic types of consumer bankruptcies.  Chapter 7  is an asset based approach.  The Chapter 7 trustee sells your “non-exempt” property and pays your creditors.  Chapter 13 is an income based approach where you generally keep your assets but have to make payments to your creditors over a 36-60 month period.

There are two types of creditors:  secured creditors (they took collateral as a condition of granting you credit, and can look to the collateral to be paid even after the bankruptcy), and unsecured creditors (basically no collateral).

The purpose of bankruptcy is to give an honest debtor a fresh start.  That means that most, if not all,  of your debts are discharged, and you can keep all or most of your property.

Now how is that accomplished.

In a Chapter 13, as stated above, you keep the property you want to keep in exchange for making payments over the term of 36-60 months.

In a Chapter 7 “straight bankruptcy,” your debts are discharged—legally written off forever—in return for you giving your unprotected assets to your creditors (as represented by the bankruptcy trustee). But here is the good part: for most people, all or most of their assets ARE protected, or “exempt.” from the trustee and your creditors.  Why?  The fresh start.

Property Exemptions- The Basics

  • The Bankruptcy Code has a set of federal exemptions, and each state also has its own exemptions. In some states you have a choice between using the federal exemptions or the state exemptions, while in other states you are only permitted to use the state exemptions.  In New Jersey, we can use either.   In many states, choosing which of the two exemption schemes is better for you is often not clear.  However,  in New Jersey, debtors generally use the federal exemptions.  Why?  Because many of the New Jersey exemptions were created by statute about 100 year ago or more, and were not adjusted for inflation.  Moreover, New Jersey has no homestead exemption.
  • If you have moved relatively recently from another state, you may have to use the exemption rules of your prior state. Because different state’s exemption types and amounts can differ widely, thousands of dollars can be at stake depending on when your bankruptcy case is filed.
  • In some circumstances, it is not clear how the federal exemptions will be applied.  What if you own a car and you owe $10,000 on your car loan.   Clearly, the bank (secured lender) has an interest as do you.  But, the trustee also may be able to make a claim to part of the value to the car, and sell it.

Navigating through exemptions can be much more complicated than it looks, and is one of the most important services provided by your bankruptcy attorney.  It can maximize the amount of property you keep after receiving your bankruptcy discharge.




If Your Business is Eligible to File Bankruptcy, Should It Do So?

Posted by Kevin on April 15, 2017 under Bankruptcy Blog | Be the First to Comment

Most small businesses do not have any reason to file bankruptcy after they fail. Instead it’s the individual owner or owners of the business who may well have to think about bankruptcy.

Business Corporation Is No Shield for Owners of Small Businesses

Why does a small business owner sets up his or her business as a corporation?  One reason is a concept called limited liability.  The corporation is legal entity that is separate from its owners.  A corporate debt is just that- it is a debt of the entity and not its owners.  In other words, the investor-owners of the business are not liable for those business debts. That’s the theory.

But in practice it doesn’t work that way, not with small businesses. Why? Because:

  • Many new businesses cannot get any credit at all, and so have to be financed completely through the owner’s personal savings and credit. This credit tends to include credit cards, second mortgages on homes, vehicle loans, and personal loans from family members.
  • For those businesses fortunate enough to receive financing in the name of the corporation, the creditors will very likely still require the major shareholder(s) to sign personal guarantees. This makes the shareholders personally obligated if the corporation fails to pay. Common examples of this are commercial leases of business premises, major equipment and vehicle leases or purchases, franchise agreements, and SBA loans.

As a result, when the business cannot pay its debts, the individual shareholder(s) are usually on the hook for all or most of the debts of the business. The business corporation’s limited liability is trumped by the shareholders’ contractual obligations on the debts.

Ever Worth Filing Bankruptcy for the Business Corporation?

By the time most small businesses close their doors, they have run themselves into the ground and do not have much remaining assets. And often, what little is left is mortgaged, with the assets tied up as collateral, leaving nothing for the corporation’s general creditors. This applies not just to purchases and leases of assets, but also to bank loans which require a blanket lien on all business assets, and commercial premises leases with broad landlord liens.

Without any assets with which to operate, the business dies. Without any assets for creditors to pursue in the business, the debts die with the business, except to the extent the shareholders are personally liable.

But sometimes the business does still have substantial assets when it closes its doors. Assuming the business is in the form of a corporation or partnership and so is eligible to file its own Chapter 7 bankruptcy, doing so may be worthwhile for three reasons:

  • A bankruptcy would enable the owners to avoid the hassles of distributing the corporate assets by passing on that task to the bankruptcy trustee.
  • There are risks for the owner of a failing business in distributing the final assets of the business, which can result in personal liability for the owner. Filing bankruptcy avoids that risk because the bankruptcy trustee takes care of that responsibility.
  • In some situations, a debt owed by the business corporation is also owed by the business’ shareholder. So when that debt is paid through the trustee’s distribution of assets, that reduces or eliminates the shareholder’s obligation on it.

Most of the Time You’re Left Holding the Business’ Debts

Regardless whether your business can or can’t file bankruptcy, and whether or not it ends up doing so, you will likely have to bear the financial fallout personally. By their very nature bankruptcies arising out of closed businesses tend to be more complex than straight consumer bankruptcies. So be sure to find an attorney who is experienced in these kinds of cases.

Who’s Who in Chapter 7 and Chapter 13

Posted by Kevin on November 6, 2013 under Bankruptcy Blog | Be the First to Comment

The Cast of Characters

You—the Debtor

A Chapter 7  debtor is looked at quite differently from a Chapter 13 debtor. Focusing here on one main difference, Chapter 7 fixates on who you are financially at the moment your case is filed. Chapter 13 focuses not only on that moment,  but also who you are financially for the next the three to five years (the length of your payment plan).

For example, if you started earning a higher income a year after your case is filed, that would have no effect if you had filed a Chapter 7 case.  But in a Chapter 13 case, that income increase would likely increase what you’d have to pay your creditors. On the other hand, because Chapter 7 pretty much doesn’t get involved in your future, it also doesn’t protect your future income from certain potentially dangerous debts which are not written off, such as certain taxes and child and spousal support arrearage. Chapter 13 does protect such future income. It allows you to pay these kinds of special debts based on your budget instead of leaving you at the mercy of those creditors’ aggressive collection powers.

Your Primary Challenger—the Trustee

In both Chapters 7 and 13, most likely the person you would have the most contact with would be the trustee. They are carefully selected and supervised individuals who are assigned to your case to take care of certain tasks.  I called them your “challengers” because that’s their primary job, but most of the time your attorney and you will work cooperatively with them.

The Chapter 7 trustee’s most important task is to determine whether or not he or she has the right to take anything from you—in other word whether everything that you own is “exempt,” meaning that you can keep it all, as is usually the case. The Chapter 13 trustee’s two primary tasks are to raise any appropriate challenges to your proposed payment plan, and then, once a plan is approved by the bankruptcy judge, to distribute to creditors payments that you make under that plan.

Your Adversaries—the Creditors

Under both Chapter 7 and 13, your creditors can play a major role but often don’t. They can challenge your ability to discharge (write-off) their debts, and can raise a variety of objections. Often, we don’t hear from them at all, but if we do it’s usually a secured creditor (one who has a right to collateral such as your home or vehicle) or a special “priority” creditor—a taxing authority or support enforcement agency. How the various kinds of creditors are handled in Chapter 7 vs. 13 will be discussed in future blogs.

The Enforcer—the U.S. Trustee

This is an office under the U.S. Department of Justice which administers and, to a large degree, oversees the whole system, including the Chapter 7 and Chapter 13 trustees. You will usually not hear directly from them, and if you do it’s usually not good news, indicating that you or your paperwork are not following the rules.

The Paper-Pusher—the Bankruptcy Clerk

This is the office where we file the bankruptcy documents (which is virtually all done electronically, not by paper being physically delivered anywhere). They send out the official bankruptcy court notices.

The Deciders—the Bankruptcy Judges

A bankruptcy judge is assigned to every Chapter 7 and Chapter 13 case, but mostly they work behind the scenes. You will almost never actually go to the judge’s courtroom in a Chapter 7 case, and seldom in a Chapter 13 case.

In most Chapter 7 cases, a judge is hardly involved, except in signing the discharge order releasing you from your debts at the completion of your case, assuming that it proceeded appropriately. In the relatively unusual situation of a creditor objecting to the discharge of its debt, the bankruptcy judge will decide whether the objection meets the relatively limited grounds for a debt not to be discharged.

In contrast, a judge is always involved in a Chapter 13 case, at the very least in the approval of your payment plan at what is called the confirmation hearing. But again, you almost never need to attend this hearing, which is taken care of by your attorney.  Because of the length of a Chapter 13 case, it’s more likely than in a Chapter 7 case that issues will arise that need the judge’s attention—changes in your plan if your circumstances change, challenges by creditors  or the trustee if you are not meeting the terms of your plan, and such. Chapter 13 is a 3-5 year journey that you take with the court, the trustee, your creditors and most importantly, your attorney.   So a word to the wise, make your payments in a timely manner and stay in close communication with your attorney throughout your case so that you know whether issues are being put before your judge and how he or she is deciding them.

The Trustee in Chapter 7

Posted by Kevin on November 14, 2012 under Bankruptcy Blog | Be the First to Comment

I am sure that you all have heard the term Trustee in the news.  What exactly is a trustee and what does he do in a Chapter 7 case?

First, let’s get out of the way a whole other kind of “trustee” who you might hear about in the bankruptcy world, the “United States Trustee.” That’s someone who usually stays in the background in consumer bankruptcy cases, so you’ll usually not have any contact with anyone from that office. It is part of the U.S. Department of Justice, tasked with administering and monitoring the Chapter 7 and 13 trustees, overseeing compliance with the bankruptcy laws, and stopping the abuse of those laws.

The United States Trustee establishes a “panel” of trustees throughout the State of New Jersey who actually administer the Chapter 7 cases.  That panel consists mainly of attorneys who are experienced in bankruptcy, but also includes some accountants and other business persons. The debtor and her legal counsel deal with the panel trustee.

A Chapter 7 case is a “liquidation,” meaning that if you own anything which is not “exempt,” it has to be surrendered and sold to pay a portion of your debts. But the reality for most people is that everything they own is “exempt,” so they get to keep their stuff. There is no “liquidation” in those situations.

The Chapter 7 trustee is an investigator-liquidator.  He or she is the person assigned to your case by the bankruptcy system who does primarily three things:

1) investigates your filing to determine if you are honestly disclosing your assets and liabilities, income and expenses;

2) determines whether or not everything you own is “exempt,”;

3) only in the relatively few cases in which something is not “exempt,” decides whether that asset is worth collecting and selling, and if so, liquidates it (sells and turns it into cash), and distributes the proceeds to your creditors.

The Chapter 7 trustee’s investigation starts with a review of the Petition, Schedules and other Statements that are a part of  your bankruptcy filing.  In addition, the Chapter 7 trustee will require that we send him certain documents to verify what is said in our filing  (tax returns, paystubs, deeds, mortgages, mortgage payoffs and appraisal). Then he or she presides at the so-called “meeting of creditors,“ and asks you a list of usually easy questions about your assets and related matters. Lastly, the trustee can expand his investigation and take other action such as deposing the debtor and/or third parties, hire experts like accountants or appraisers, and the like.   It should be stressed that an expanded investigation rarely happens in a consumer bankruptcy.

In those cases where some of the debtor’s assets are not exempt and these available asset(s) is(are) worth collecting, the trustee will gather and sell the asset(s), and pay out the proceeds to the creditors, all in a step-by-step procedure dictated by bankruptcy laws and rules.