Posted by Kevin on December 23, 2014 under Bankruptcy Blog | 
Protect your business assets immediately with the “automatic stay” and permanently with property exemptions.
Often, by the time you are ready to file a personal bankruptcy, your business has no meaningful assets—no inventory or equipment, no receivables, no brand or business name that you could sell. That simplifies your situation because, whether the business is in your own name or under an assumed business name as a sole proprietorship, or is in the form of a corporation, limited liability company, or partnership, its lack of assets avoids a bunch of thorny issues.
BUT, even if your business DOES have some assets, as long as that business is a sole proprietorship, filing a personal Chapter 7 case often provides you a sensible way for dealing with those remaining business assets. You may be able to keep those assets if you need them, or if not, you can let your Chapter 7 trustee sell them and pay some of your most important creditors.
Business Assets Protected by the “Automatic Stay”
You may want to keep business assets which you need to use to generate income after your bankruptcy—either as an employee or through self-employment.
As long as your prior business was in the form of a sole proprietorship, your personal bankruptcy filing will immediately protect your business assets (as well as your personal ones) from seizure by garnishment, foreclosure, repossession and such.
As for secured debts related to the business—secured by collateral like your business vehicle or equipment, for example—the creditor would be prevented from repossessing its collateral, at least temporarily. That gives time for your attorney to offer for you to “reaffirm” the debt—agree to remain personally liable on it—so that you can keep the collateral.
Business Assets Protected by Property “Exemptions”
Instead, the trustee will be interested in your “free and clear” business assets. However, you will be able to keep such assets to the extent they are covered by your personal “exemptions.”
A property exemption is a provision in state or federal law that allows you to shelter an asset from your creditors, and thus also from the Chapter 7 bankruptcy trustee who acts on behalf of all your creditors. Exemption laws can be quite complicated, and differ from state to state, often radically. In some states you must use that state’s system of exemptions, while in other states you have a choice of using either the state’s exemptions or a set of federal exemptions provided in the Bankruptcy Code. NJ allows a debtor to choose; however, it is not much of a choice. Why? Because the state exemptions are so puny that about 99.9% of debtors use the federal exemptions. Under the federal exemptions, you get to keep a little over $2,000 of business tools. Under NJ, it would come under the general exemption of $1000. Clearly, in either case, the exemption is far from generous. However, if the assets are older but usable to you, you can make an offer to the trustee. Most trustee will entertain even a lowball offer rather than go through an auction, especially on used items of questionable value.
Posted by Kevin on November 29, 2014 under Bankruptcy Blog |
Ongoing litigation, or the threat of it, against you and/or your business, usually dies with your bankruptcy filing.
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A Chapter 7 case can help by:
- immediately stopping most litigation against you and/or your business, at least temporarily;
- permanently stopping most litigation by legally discharging the disputed claim; and
- providing strong disincentives for your adversary to keep pursuing you after your bankruptcy filing.
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This series of blogs is about the benefits of filing a bankruptcy case when closing down your business. The reality is that businesses are often closed as a consequence of litigation, or the threat of litigation, against the business or business owner. These disputes can take every possible form—by way of example, simple collection actions by creditors, contractual disputes with customers, enforcement action by governmental regulators, and fights with other business owners or investors. A bankruptcy often becomes necessary when either the opposing party wins a judgment against the business and/or the owner, or the business runs out of money to pay the attorney fees and other costs of litigation. The business is often already on the ropes, and the judgment, or just the financial and emotional costs of the lawsuit, or sometimes even just the threat of one is enough to persuade the business owner to throw in the towel and close down the business.
The question is: what will happen to the dispute and/or litigation against you and/or the business?
Litigation Immediately Stopped by the “Automatic Stay”
The automatic stay legally stops creditors from taking any new collection action against you, and from continuing any action, including litigation. It is imposed simultaneously with the filing of your bankruptcy, without a judge needing to sign an order. The automatic stay requires your adversary to at least take a pause in his efforts against you, and often persuades him to do nothing further against you.
Why Most Disputes Will End at Your Bankruptcy Filing
This immediate stopping of collection and litigation usually ends up being permanent, for a number of reasons.
Your adversary is usually trying to get you or the business to pay something, and that alleged obligation is discharged—legally written off permanently—in your Chapter 7 case.
Bankruptcy law does allow any of your creditors (including those with alleged claims of any kind) to try to object to the discharge of their debts or claims. But these objections are relatively rare, for two reasons:
1. They are difficult for a creditor to win. The legal grounds for objections are relatively narrow. Debts are assumed discharged unless the creditor can prove to the bankruptcy court that those narrow grounds are met. Instead of just proving the existence of a valid debt or claim, as in a conventional lawsuit, the creditor has to provide convincing evidence that you engaged in certain specific bad behavior, such as fraud in incurring the debt, embezzlement, larceny, fraud as a fiduciary, or intentional and malicious injury to a person or property.
2. The creditor is faced with practical indications that it is wasting its time and money to pursue you further. In filing bankruptcy, you present to the court a rather detailed set of specific information about your finances. You are able to be questioned by the creditors about those documents and about anything else relevant to the discharge of the debts. When these reveal that you genuinely have nothing worth chasing—which is almost always the case—most creditors accept that pursuing you further will do them no good.
The Exceptions: Disputes Not Be Stopped by Your Bankruptcy Filing
There are two sets of exceptions: 1) when you are not protected by the automatic stay; and 2) when a creditor challenges the discharge of its debt or claim. These will be addressed in the next two blogs.
Posted by Kevin on October 1, 2014 under Bankruptcy Blog |
There are pros and cons to the above statement. That is why we say “Can Help” as opposed to “Will Help”
What happens when a small business goes under. It usually means that not enough money is coming in to pay bills and employees (much less the owner). This can lead to collection efforts from vendors which go from holding back product to suing the business entity and perhaps even the owner for money. Multiple, disgruntled vendors lead to multiple, usually unwinnable lawsuits. Ultimately, you realize that you cannot stay open any longer.
Shutting down a business can be very time consuming and emotionally draining, especially when the vendors are suing the company and you. You have to deal with vendors and suppliers, advertisers, workers, customers, etc. You may have physical plant which will be subject to foreclosure or tenancy action. You may have product that needs to be liquidated. You may need to go after accounts receivable. That is a lot of work, and your inclination is to put everything behind you and move on.
If your business is incorporated or an LLC, it cannot receive a discharge under Chapter 7. For that reason, many of my colleagues at NACBA believe that you should not put a small corporation (sometimes called a close corporation) or an LLC in bankruptcy. However, if the corporation is being sued by multiple creditors and needs to be liquidated in an orderly fashion, a Chapter 7 may be helpful. The automatic stay will stop the lawsuits. The trustee will be responsible for the liquidation. This can free up the owner to move on to new pursuits. (In NJ, this process can be accomplished also but means of a State court Assignment for the Benefit of Creditors.)
On the other hand, if the corporation or LLC is service oriented as with few assets, bankruptcy may be an unnecessary expense.
Under either scenario, a possible issue can be what to do if the principal of the corporation or LLC finds himself as a defendant in multiple lawsuits. If the principal guaranteed the obligation, then he is SOL. Even if principal did not guarantee, a favorite tactic of NJ collection attorneys is to sue the entity and sue the principal under theory of piercing the corporate veil. This is usually a bogus lawsuit but requires that you interpose an answer and move for summary judgment. This can be a major expense especially if you get sued by 10-12 aggressive creditors and may lead to consideration of filing a individual 7. This decision, however, would have to be made on a case by case basis.
If the business entity is a sole proprietorship (d/b/a), then the debtor is really the owner. d/b/a’s can fail for the same reasons that close corporations or LLC’s fail. But, in this case, it is the owner of the business that is on the hook so the owner files the Chapter 7. Filing a Chapter 7 will stop most collection actions because of the automatic stay, and the owner/debtor can receive a discharge. Of course, the bankruptcy will include both the business assets and the personal assets. Most, if not all, of the business assets will probably be sold and the proceeds will be used to pay the trustee and the creditors. The debtor is able to utilize his or her exemptions to save many of his or her personal assets such as the house, car, household furniture and furnishings, clothing and other things.
If you are running a small business that is failing, you need to speak with your accountant first, and then an experienced bankruptcy attorney.
In the next few blogs we will discuss this issue: after closing down a business and filing bankruptcy, when would Chapter 7 be adequate vs. when the extra power of Chapter 13 would be needed, in dealing with particular debt and asset issues. We’ll start the next blog on dealing with taxes.
Posted by Kevin on September 22, 2014 under Bankruptcy Blog |
Filing Chapter 7 bankruptcy while letting go of your home can be a smart combination.
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Chapter 13—the three to five year partial payment plan—consists of an entire toolbox full of different tools to help people hang onto their homes. But that may not be what you need. After getting informed about how those tools would work (or not work) in your situation, you may decide that it’s best for you to walk away from your home. If so, here are some advantages of doing that in conjunction with filing a Chapter 7 bankruptcy:
- Have more control over when you leave:
If you have a foreclosure sale date scheduled, or a foreclosure lawsuit pending, usually you would have no say about when you have to leave. You could even be forcibly evicted by county sheriff deputies. However, if you file a Chapter 7 bankruptcy case, that will delay the foreclosure sale or lawsuit, at least for a few weeks, and possibly for a matter of months. That alone could save you a couple thousand dollars in rent. Also, after a bankruptcy filing, your mortgage lender may well be willing to negotiate a departure date convenient to you, in return for avoiding their need to rack up a lot of attorney fees. As part of the deal you may be willing to sign over your title through a “deed in lieu of foreclosure,” with no risk of further liability since your bankruptcy case is discharging any remaining debt.
- Avoid house-related debt following you:
Depending on your situation, and on your local state laws, after surrendering a house without bankruptcy you risk being saddled with debts coming at you from various directions. Sometimes you could be liable for any deficiency on the first mortgage. Surrendering your house to a first mortgagee does not take you off the hook on a second mortgage. You could also be liable on other debts related to the home—such as unpaid utilities, contractor liens, property tax liens, or homeowner association dues. Many of these debts would be discharged if you filed a bankruptcy.
- Have an attorney in your corner:
Fair or unfair, your mortgage lender will likely treat you better when it knows you are being advised and represented by an attorney (assuming that you would be filing your Chapter 7 case through an attorney). You will have the peace of mind that comes from knowing your rights, understanding what will happen when, and having an advocate available to get directly involved as needed.
- Get a fresh financial start instead of a continuation of a vicious cycle:
If you are surrendering your house and reducing your monthly cost of keeping a roof over your head, you may be tempted to think you don’t need a bankruptcy. Perhaps you don’t. But if you have fallen so far behind on you mortgage that it’s gotten to the point of foreclosure, the odds are that you need more help than giving up your house alone will achieve. You at least owe it to yourself to get legal advice about your financial situation and your realistic options. You can then be pro-active to turn your situation around rather than waiting for the other shoe to drop.
Think about it
Posted by Kevin on April 4, 2014 under Bankruptcy Blog |
To qualify for Chapter 13, you must be an “individual with regular income, meaning that your income is sufficiently stable and regular to enable you to make payments under a Chapter 13 plan. That requirement of a “stable and regular” income means not only at the time of filing, but for the entire duration of the plan (36 to 60 months). In a way, every Chapter 13 is a leap in faith that the debtor’s financial situation will be stable (or better) through the duration of the plan. Of course, life throws you curve balls. You lose a job, or your hours are cut. You or a member of your family gets sick and insurance does not cover the whole bill. The car breaks down-more than once. Your wife has to quit her job to take care of her sick mother. Whatever. The Code takes this into account. How? One way is by allowing you to convert your Chapter 13 to a Chapter 7.
Here’s an example to illustrate this. You own a home and have two mortgages. You are $5,000 behind in payments on your first mortgage (balance $250,000) and cannot remember when you last paid the second (balance of $75,000). You owe $25,000 in credit card bills, and another $10,000 in medical expenses that the insurance did not cover. The home is worth a less than the first mortgage. You had been laid off, but got a new job, and are starting to get significant overtime. But now, almost miraculously the debt collectors are calling again. You are making enough to take care of that first mortgage, your current expenses, and if everyone tightens belts, a little more, say $250 per month.
Chapter 13 may be the answer. How, you say. Even if everything goes right, what am I going to do about that second mortgage? Chapter 13 gives you the power to “strip” the second mortgage; that is, convert the second mortgage secured debt into unsecured debt. Then, the second mortgage gets paid pro rata with the credit cards and medical bills. How much? What ever is left over after paying your current monthly bills, your first mortgage arrearages, and the fee to your lawyer and the trustee. Could be very little. Plus the “second mortgage strip” also lowers the debt against the home by the amount of that second mortgage, bringing the debt down closer to the home’s market value. Seems to satisfy both your short term and long term goals. Chapter 13 looks good, so you file under that chapter. You know it is going to be a bit of a stretch, but if the stars line up right, you get to keep your home and discharge your debts.
15 months into the plan, your boss cuts back on most of your overtime. You can’t even pay the first mortgage much less the trustee. If the case is dismissed, there is no more automatic stay so your creditors will come after you because you now have wages that can be garnished. What to do?
The Bankruptcy Code explicitly states in that a Chapter 13 debtor may convert a case under this chapter to a case under chapter 7 at any time. Any waiver of the right to convert under this subsection is unenforceable.
Not a perfect solution, by any means. However, better than being thrown to the wolves. Let’s look at the scenario under the converted Chapter 7. First, you do not have to make any more payments to the trustee. That comes out to $3000 per year. Second, your Chapter 7 case is over in about 3 months and you most probably get a discharge. That means that you have knocked out all your debts (mortgage, credit card and medical).
BUT, the Code differentiates between the debt and the security for the debt. The debt is discharged but the security (mortgage) remains on the property. Unless you can make a deal with the mortgagees, you will probably lose your home. But you will not owe any deficiency on the first mortgage or anything on the second. Moreover, you will knock out the credit card and medical debt.
Now, if you work with experienced bankruptcy counsel, he or she will lay out this scenario in a way that you know or should know that you are taking a “shot” to save your home. If it works, God bless. If not, you switch into a 7, get your discharge and move on with your life.
So conversion to Chapter 7 can be a decent result when the goals of Chapter 13 cannot be met, either because of unexpected circumstances or because the debtors took some calculated risks which did not go their way.
