Posted by Kevin on August 6, 2019 under Bankruptcy Blog | 
Lawsuits against You that Bankruptcy Ends
Many legal claims against you or your closed or closing business are resolved by the filing of your bankruptcy case. They are resolved either legally or practically, or both.
Claims that are legally resolved by your filing of bankruptcy are those intended to make you pay money. The discharge (the legal write-off) in bankruptcy of whatever debt you owe will usually result in you not needing to pay anything on the claim under Chapter 7 “straight bankruptcy.” There’s not much point to a lawsuit to determine whether you owe money or about how much you owe if any such debt will just get discharged in bankruptcy.
Lawsuits that Bankruptcy Does NOT End
However, there are certain types of debts that would still need to be resolved by a court. In these situations the creditor would likely get permission from the bankruptcy judge to start a lawsuit or to continue one already started. Here are three types that need court resolution.
1) Determining the Amount of a Debt
If a debt is being discharged in a no-asset Chapter 7 case—one in which all assets of the debtor are “exempt” and protected—then, as indicated above, the amount of that debt makes no practical difference. Whatever the amount of the debt, it is getting discharged without payment of anything towards that debt.
But in an asset Chapter 7 case, in which the bankruptcy trustee is anticipating a pro rata distribution of the proceeds of the sale of assets, the amounts legally owed on all the debts need to be known for that distribution to be fair to all the creditors. That’s because the established amount of any single debt affects the amounts received by all the creditors. So litigation to determine the validity or amount of a debt needs to be completed, even if by a relatively quick settlement.
2) Possible Insurance Coverage of the Debt
If a claim against a debtor may be covered by insurance, then the affected parties likely want the dispute to be resolved legally.
That’s because a court needs to determine 1) whether the debtor is liable for damages, 2) whether those damages are covered by the insurance, and 3) whether the policy dollar limits are enough to cover all the damages or instead leave the debtor personally liable for a portion. The following types of business litigation tend to involve insurance coverage issues:
- vehicle accidents involving the business’ employees or owners, especially those with the complication of multiple drivers (and thus, multiple possible insurance coverages)
- claims on business equipment damaged by fire or flood, or stolen
In these situations the bankruptcy court will likely give permission for the litigation to continue outside of bankruptcy court, while not allowing the creditor to pursue the debtor as to any amount not covered by the insurance policy limits.
3) Nondischargeable Debts
Some of the biggest fights about business-related debts occur when a creditor argues that its debt should not be discharged in the bankruptcy case. The grounds for objecting to discharge are quite narrow—in general the debtor must have defrauded the creditor, embezzled or stolen from the creditor, or intentionally and maliciously hurt the creditor or its property.
Also, and much more prevalent in the last few years, are student loan debts. Since the average student loan debt for an undergraduate is zeroing in on $40,000, litigation over whether the student loan debt is dischargeable, is become much more commonplace.
Posted by Kevin on September 7, 2018 under Bankruptcy Blog |
A creditor can challenge the discharge of its debt in bankruptcy.
Why Creditor Challenges Are More Common in Closed-Business Bankruptcies
For the following reasons, creditors tend to object more to the discharge of their debts in bankruptcy cases that are filed after the debtor has operated and closed a business:
- The amount of debt owed in business bankruptcies tends to be larger than in a consumer case, making objection more tempting to the creditor.
- In the business context some debtor-creditor relationships can be very personal. Consider debts between former business-partners who are blaming each other for the failure of the business, or between a business owner and the business’ primary investor who believes the owner drove the business into the ground, or between the contract buyer of a business and its seller in which the buyer feels that the seller misrepresented the profitability of the business. In these situations the aggrieved creditor is more personally motivated to fight the discharge of its debt.
- The owners of businesses in trouble find themselves desperate to keep their businesses afloat. So they may make questionable decisions which then expose them to objections to discharge.
- In the kinds of close creditor-debtor relationships mentioned above, the creditor often has hints about the business owner’s questionable behavior, and so is more likely to believe it has the legally necessary grounds to object.
But Objections to Discharge Are Still Not Very Common
When former business owners hear that any creditor can raise objections to the discharge of its debt, they figure an objection would very likely be raised in their case. But in reality these objections occur much less frequently than might be expected, for the following reasons:
- The legal grounds under which challenges to discharge must be raised are quite narrow. To be successful a creditor has to prove that the debtor engaged in rather egregious behavior, such as fraud in incurring the debt, embezzlement, larceny, fraud as a fiduciary, or intentional and malicious injury to property. These are not easy to prove.
- In his or her bankruptcy case the debtor files, under oath, papers containing quite extensive information about his or her finances. The debtor is also subject to questioning by the creditors about that information and about anything else relevant to the discharge of his or her debts. If the information on the sworn documents or gleaned from any questioning reveals that the debtor truly has no assets worth pursuing, a rational creditor will often decide not to throw “good money after bad” by raising an objection.
Conclusion
In a closed-business bankruptcy case there are these two opposing tendencies. Challenges to discharge are more likely, especially by certain kinds of closely related creditors. But these challenges are still relatively rare because of the narrow legal grounds for them and the financial practicalities involved. A good bankruptcy attorney will advise you about this, will prepare your bankruptcy paperwork to discourage such challenges, and will help derail any such challenges if any are raised.
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 April 7, 2014 under Bankruptcy Blog |
The risk that creditors will not allow you to discharge some of their debts can be minimized through smart timing of your bankruptcy.
One of the most basic principles of bankruptcy is that honest debtors get relief from their debts, dishonest ones don’t. One way you can be “dishonest” in the eyes of the bankruptcy law is to use credit when, at that point in time, you don’t intend to pay it back. That makes sense. Each time you sign a promissory note or use a credit card you are directly stating in writing, or else strongly implying, that you promise to pay the debt you are then creating. That makes moral common sense. And it’s the law: a creditor can challenge your ability to write off a debt that you did not intend to pay when you incurred it.
Creditors Have the Burden of Showing Dishonest Intent
But most of the time when a person takes out a loan or uses a credit card, they DO intend to pay the debt. The law respects that reality by holding that most debts are discharged (legally written off) unless the creditor can prove to the court that the debtor had bad intentions when incurring the debt. So, for example, if a person completes a credit application with inaccurate information, for the creditor to successfully challenge the discharge of that debt it would not only have to show this inaccuracy was “materially false,” but also that the person provided that information “with intent to deceive” the creditor. See Section 523(a)(2)(B) of the Bankruptcy Code.
Dishonest Intent Inferred from When You Incurred the Debt
However, in the delicate balancing act between the rights of debtors and creditors, the law also recognizes that it’s quite hard to prove an “intent to deceive.” So the Bankruptcy Code gives creditors a significant, although limited, advantage when consumer purchases or cash advances are made within a short period of time before the bankruptcy filing. A debtor’s use of consumer credit during that period is presumed to have been done with the intent not to pay the debt, on the theory that the person likely was considering filing bankruptcy at the time, and likely wasn’t planning on paying back that new bit of debt. So the statute says that this new portion of the debt is “presumed to be nondischargeable.”
Limitations on the “Presumption of Fraud”
This presumption is limited in lots of ways:
- Applies only to consumer debt, not debts incurred for business purposes.
- Covers only two narrow situations:
- 1) cash advances totaling more than $750 from a single creditor made within 70 days before filing bankruptcy;
- 2) purchases totaling more than $500 from a single creditor made within 90 days before filing bankruptcy, IF those purchases were for “luxury goods or services,” defined rather broadly as anything not “reasonably necessary for the support or maintenance of the debtor or a dependent.”
- The debtor can override the presumption by convincing the court—by personal testimony and/or other facts—that he or she DID, at the time, intend to pay the debt.
So there is no presumption of fraud, and no presumption of nondischargeability of the debt, if cash advances from any one creditor add up to $750 or less within the 70-day period, or if credit purchases for non-necessities from any one creditor add up to $500 or less within the 90 days. See Section 523(a)(2)(C). This means that one simple way to avoid the presumption is to wait until enough time has passed before filing bankruptcy so that you get beyond these 70- and 90-day periods. That is, this is easy unless you have some urgent need to file the case. Either way, your attorney will help determine when you should file your case.
Possible Creditor Challenge Even Outside the Presumption
With all this focus on the presumption, be sure to understand that even if your use of credit doesn’t fit within the narrow conditions for the “presumption of nondischargeability,” a creditor could still believe that the facts show that you did not intend to repay a debt, or that you incurred the debt dishonestly in some way. However, these kinds of challenges are relatively rare because:
- As stated above, the creditor has the burden of proof, and it’s not easy for it to prove your bad intention;
- The creditor can spend a lot of money on its attorney fees to make the challenge, with a big risk that the debts will just be discharged anyway; and
- The creditor may also be required to pay YOUR attorney fees in defending the challenge if it loses. See Section 523(d).
