A few days ago I posted To File or Not to File talking about my decision making process when I consult with a client. When a client is filing because of business debt then there are other considerations. A business owner may opt for a personal bankruptcy because they cannot obtain a discharge of debt if their business filed a Chapter 7 and because Chapter 11s are incredibly expensive. So, I must decide if the owner debtor can filed a personal Chapter 7 even if their personal household income is healthy.
Some jurisdictions use a “totality of the circumstances approach that looks at both the numbers of creditors who are business creditors and also the amount of business debt. In Kentucky (part of the Sixth Circuit), it is a more mechanistic test as to whether 51% of the debt is business debt. If so, then even if the debtor does not pass a means test to do a Chapter 7, they can still file a Chapter 7.
A caveat to the rule above is that debts on residences are going to be consumer debts and not business debts. Another one is that student loan debts are consumer debts rather than business debts. So, even accounting for those debts, if there is 51% business debt and even if the household has a healthy income, the business owner can file a personal bankruptcy. The business itself will need to be dissolved and wapped up.
When you meet with an attorney to discuss your debt and the options for relief from the weight of that debt, he or she should engage in a decision making process. Some attorneys tend to keep that process to themselves (this is more of a style thing for the lawyer), and others, like myself, try to explain and educate the client. While I cannot lay out every twist and turn that the discussion may take with any particular situation, I will put forth a few basics.
I typically start with an overview of the debt which includes the numbers of different creditors as well as the amounts of debt. Part of this inquiry involves what debts are secured and unsecured. If there are secured debts (a lien or mortgage is filed on some sort of property), I look at whether the client is behind on those debts and whether they wish to keep the property securing the debt.
If there is one primary debt that is creating the financial consternation, then I pursue questions about whether there is any deal that might be worked out with them. Some creditors simply dig their heels in and refuse to accept payments or refuse to reduce the debt to a manageable level. But, if they will work with the debtor on a reasonable and feasible repayment plan, then that is often the best way to proceed.
However, if there are jseveral creditors where the debtor has fallen behind, working out multiple deals to avoid bankruptcy just will not work. There is always one creditor that throws a wrench into such a process; if any single creditor refuses to work out a deal, then working with the other ones becomes futile. The one creditor that refused to work something out and so files suit would create a snowball effect because insufficient funds would be available to successfully pay all the people who did negotiate a deal.
If the debtor is behind on secured debts and they want to be sure to keep the assets, then I must look at a Chapter 13 as the most likely way to make that happen. This leads to my second primary consideration of income. Regardless of whether a Chapter 13 is likely, I must look at the disposable income of the household (even if only one person is filing). This inquiry gives me two key pieces of information: 1) is there left over money after necessary living expnses are paid that can fund a Chapter 13 or a work-out deal, and 2) could the debtor qualify for a Chapter 7 instead.
At this point, I have a good idea of the recommendation I am likely to make. If there is only one creditor who is a problem and there are some spare funds to make payments, then it is good to attempt a work-out with them. If there are multiple creditors or the one creditor refuses negotiations, then a bankruptcy will be inevitable. If there are assets with liens that the person wants to keep or the household income is pretty high, then I probably steer towards a Chapter 13. In all other circumstances, a Chapter 7 serves best.
As a tangent to all of the above for business owners, I look at whether the debt is primarily consumer debt or primarily business debt.I will take this inquiry up in a separate post. But, this is a glimpes into the process I use to help people in debt trouble navigate their way to being financially healthy.
It is good practice for a Debtor’s attorney’s to always obtain all four years of returns prior to filing to avoid a hiccup. I often run into the challenge of my client not retaining copies ot their tax returns. This can be quickly remedied by having your client go onto irs.gov and apply for “Tax Transcripts” for the years in question.
This Tax Transcript is not to be confused with an Account Transcript. The Account Transcript provides various codes and dates of events over time for a given tax year. These codes can allow an attorney to determine what taxes can and cannot be discharged in a Chapter 13.
Frequently, debtors who seek bankruptcy relief under chapter 13 have not yet filed some of their tax returns with the IRS or state taxing authority. Section 1308 of the Bankruptcy Code gives chapter 13 debtors an opportunity to get those returns filed so they can deal with their tax debts in the chapter 13 case, but there are deadlines to be met and consequences for failure to comply. Until all tax returns for the previous four years are filed, the plan cannot be confirmed, and if the returns are not timely filed, the debtor’s case could be dismissed.
What tax returns are required? Section 1308 refers to “all tax returns.” This means not only federal and state income tax returns, but returns for state sales tax, state highway tax, employers’ state and federal tax returns, and all other returns the debtor has been required to file during the previous…
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In my practice, I have found it important to do just as this post advises: review claims filed carefully to make sure interest accrues only as allowed by law and for the attorney fees added in. Statue also guides the amounts that can be charged in attorney fees.
Furthermore, it is incredibly valuable to make sure the Debtor gets a copy of ALL active liens on their property just prior to filing the Chapter 13. And, after the bankruptcy is filed, to make sure the claims are filed on all of those liens. It just makes things nice and clean when the Chapter 13 concludes.
Property taxes on real estate in Kentucky constitute a statutory lien on the property. Under state law (KRS Chapter 134), the lien has priority over any other debt on the property. If the property were to be sold, property tax claimants are paid ahead of any mortgages or other liens. How should delinquent property tax claims be treated in a chapter 13 case? Practitioners first need to understand what happens to delinquent property taxes under state law.
When property taxes are unpaid as of April 15 and the sheriff files the uncollected tax claims with the county clerk, those unpaid tax bills, along with certain fees and costs, become certificates of delinquency which can be and frequently are sold to third party purchasers.
The purchaser of the certificate of delinquency is now the first priority lienholder. The lien secures not only the tax owed, but interest, penalties, fees, commissions, costs…
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As an attorney primarily serving debtors, many of whom are in Chapter 13 bankruptcies, these “Lessons Learned” are quite valuable. As for the first case described, that may not be the end of the road for those debtors. Depending on how severely their income was restricted and if/when they may have received a discharge in a prior bankruptcy, a subsequent Chapter 7 may give them a fresh start. However, if they could not afford the Chapter 13, they would need to surrender the motorcycle in the Chapter 7.
As for the second case discussed, I find that it is very, very common that debtors miss various deadlines. This happens most often in a Chapter 13 with reporting bonuses and with step-ups in payments. These increases in plan payments often occur because loan repayments on 401k loans are completed and this is planned for at the beginning of the Chapter 13. With the loan repaid, they have more income to devote to the plan. I strongly encourage my clients to create an electronic calendar, such as a Google calendar, and go ahead and input every deadline for the duration of their plan with reminders.
Attorney’s can advise and inform, but ultimately it is your life and livelihood, so be sure to be pro-active by being organized. Sometimes, disorganization was a factor that led to the financial challenge to begin with, so forcing this discipline of advance scheduling may help stay on track after the bankruptcy concludes.
When debtors cannot comply with terms of a confirmed plan due to unexpected circumstances, the noncompliance cannot always be fixed by modifying the plan or seeking court approval after the fact. This post is about two cases that were dismissed for reasons you might find surprising (but shouldn’t).
Case #1 – Keeping “Toys”: Debtors proposed a 100% plan in exchange for keeping a Harley and three vehicles. They only had about $7,000 in general unsecured claims, but they really wanted to keep their Harley and a truck they didn’t need, and they had a very good income at the time. Plan confirmed.
By month 50, the debtors’ income dropped because their employers cut back on hours and reduced hourly rates, and the debtors fell behind in plan payments. They tried to modify the plan to surrender the Harley, lower plan payments, and substantially reduce the dividend to unsecured creditors. …
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Most of the items in this Chapter 13 Trustee’s blog post pertains mainly to your Chapter 13 attorney. However, the section about obtaining a new car while in your Chapter 13 is very pertinent to you as a Debtor. This is no longer a streamlined process. Now, you will have to have a more in-depth communication with you attorney. Also, you will need to plan on spending more time shopping around for the least expensive car that will meet your needs and a reasonable interest rate.
You may think you are limited to the buy here/pay here type of car sales. However, most of the larger new and used car dealers are familiar with Chapter 13 issues and they will work with you. One of the things your car dealer needs to understand is that the new debt would not be discharged at the end of the Chapter 13 so it is “safe” to loan to you in that respect. It could be surrendered and discharged if you convert to a Chapter 7, but let’s not go there. No need to make your dealer nervous.
This post briefly discusses the following topics: Amended Federal Rules of Bankruptcy Procedure eff. 12/1/16; Motions to Incur Debt for Purchase of Vehicle; Motions to Compel Debtors to File Notices of Address Changes; and the 2017 Judge Joe Lee Bankruptcy Institute.
AMENDED FEDERAL RULES OF BANKRUPTCY PROCEDURE BECAME EFFECTIVE 12/01/2016: Of particular importance to creditors’ attorneys is Rule 3002.1(a), which governs notices relating to claims secured by a security interest in the debtor’s principal residence. The rule is now applicable to claims “for which the plan provides that either the trustee or the debtor will make contractual installment payments.” The amended rule also provides that unless the court orders otherwise, the notice requirements of Rule 3002.1 cease to apply when an order terminating the stay is entered.
All practitioners should note that Rule 9006(f) removes the 3-day additional time for taking action if service is by electronic means.
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Every year I offer just a bit of information about Christmas shopping. We all feel the push to buy nice presents for those whom we love. But, if your budget is tight and you have begun to wonder about whether you might have to file bankruptcy in the coming months, then take care. This is because debt for “luxury items” may not be part of a discharge of debt. Luxury items are defined in statute as being over a certain dollar amount. Also, debt incurred in anticipation of bankruptcy may also fail to be discharged in a bankruptcy. So, enjoy the season. Know that the best present is to be present for your loved ones. And manage debt wisely.
Mr. Rodgers offers some great insights. Many potential clients call mainly to find out the cost and pick the least expensive provider. I would add to what John says that a person shopping for a bankruptcy attorney should also look for the degree of personal, one on one time the attorney provides in answering your questions and concerns.
It’s not always the most expensive bankruptcy lawyers that are the best or the cheapest that are the worst. In most areas, the prices for filing bankruptcy are determined by the market. The filing fees and credit counseling fees are set fees. The attorney fee, in most cases can vary. (The exception is Chapter 13 where, in most jurisdictions, the price is set by the court)
One of the most important things to look for, other than price, is the experience of the lawyer. How many bankruptcy cases do they usually handle per month? How many cases have they filed in the last year ?
Is the lawyer a member of any bankruptcy attorney professional associations ? The National Association of Consumer Bankruptcy Attorneys is the largest professional association of consumer bankruptcy attorneys representing folks filing bankruptcy. If a lawyer is a member, chances are good that they stay current…
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Entrepreneurs who launch their own small business are brave souls. I applaud them and share in their story. Launching into the practice of law with nothing rather than working for a salary or wages was risky. The common observation is that a substantial percentage of small businesses do not survive past the three year mark. Of those that do go beyond that milestone, some thrive and some limp along. The debt that usually accompanies a business start-up and the extent to which creditors will work with these business owners can determines these outcomes. In a sense, when a small business goes into debt, they become partners with the lender and that partner can make or break it. This is where entrepreneurship and bankruptcy intersect.
The typical scenario for entrepreneurs is that they are “all in” to birth their endeavor. They become personally obligated on the debts and usually collateralize their home and other assets. It is no surprise when small business owners blur the lines and end up identifying with their business as if it is an extension of themselves because they pour themselves into their fledling enterprise. Unfortunately, this over-identification often keeps the owners from seeing when the business has gone past the point of no return. That leads to the proverbial “good money after bad” scenario.
Compounding the dilemma for these entrepreneurs who have businesses that are failing to thrive is that the bankruptcy code only offers two options. I am not referring to Chapter 11 as an option because the business reorganization chapter of the bankruptcy code is a very expensive endeavor. Even with the changes to the code that made it easier for smaller businesses and individuals to file an 11, it is still cost prohibitive to the vast majority.
The two options are either shutting the business down and filing a personal bankruptcy, or attempting a “work-out” with the lenders. A work-out is essentially a systematic negotiation with lenders one on one to get enough relief to keep the doors open. This only happens when the lenders can see an upturn in revenue coming soon and when all the lenders are willing to cooperate. Only one lender drawing their line in the sand derails any work-out.
A personal bankruptcy can be filed in conjunction with an ongoing work-out. It might be the element that makes the lenders realize how serious the situation is so that they decide their best chance of getting paid is to cooperate. Unless the attorney in that personal bankruptcy and work-out are savvy, though, the owner could end up right back on the hook realizing no real relief from the bankruptcy.
The more likely way a personal bankruptcy plays out is coupled with the dissolution of the business. There is little to no benefit to the business entity filing a Chapter 7 because it does not receive a discharge of debt. The only time it would be beneficial is if the business has substantial assets. Then the bankruptcy allows for the controlled distribution of those assets to lenders. Usually, though, the business has few assets and so it is just dissolved prior to the filing of the personal bankruptcy.
After the bankruptcy is filed, a new business could be formed, but it needs to be done in consultation with the bankruptcy attorney. This approach is cleanest with a Chapter 7, but it can work with a Chapter 13. Usually the income of the debtor going into a bankruptcy determines whether they do a Chapter 7 or a Chapter 13, but there is a means test exception for individuals who have predominantly business related debt. So, most small business owners can do a Chapter 7. Personal debt does include one’s home loan though, and that is usually the largest personal debt weighing in against the business debt. The attorney needs to analyze the debts to insure there is more business debt than personal, and the formula used differs from circuit to circuit.
Even if you qualify for a business related Chapter 7, there may be other reasons to pursue a Chapter 13. One of the most common reasons for a Chapter 13 is when there are payroll tax arrears that end up being assessed personally to the owner. Another reason may be to cure priority income tax arrears. A Chapter 13 provides an avenue to cure these arrears over five years.
This will add a much appreciated and helpful payment option so that clients do not have to be concerned about checks through the mail. I do receive inquiries by clients from time to time where they are concerned that a check they mailed had not yet cleared the bank.
Debtors can now make their chapter 13 plan payments in EDKY online (for a fee) through www.TFSbillpay.com (“TFS”). Debtors’ attorneys, here is what you need to know about this new service.
First, payment by payroll deduction is still required by KYEB-LBR 3070-1, unless otherwise ordered by the court or agreed to by the trustee.
I generally agree to waive the payroll deduction requirement for debtors who: do not receive regular income from wages; have seasonal employment; work part-time and don’t earn enough to cover the plan payment; or change jobs often.
Even if a debtor is making regular plan payments by payroll deduction, payments for tax refunds, bonuses, other lump-sum payments, or to catch up delinquent plan payments will not be made by payroll deduction.
In all of those instances, debtors might prefer to make online payment via TFS rather than paying by check, money order, or ACH bank draft. …
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- When Business Owners Should File Bankruptcy
- To File or Not to File: Attorney decision making
- Deadlines for Filing Prepetition Tax Returns in Chapter 13 Cases
- Delinquent Property Tax Claims in Chapter 13 Cases
- Lessons Learned the Hard Way
- Miscellaneous Hot Topics in the EDKY
- ‘Tis the Season
- How to Choose a Bankruptcy Lawyer
- The Entrepreneurship – Bankruptcy Intersection
- Making Chapter 13 Plan Payments in the E.D. Ky. – New Online Payment Option
- “I’ve Changed My Mind – I Want to Surrender My House”: What Effect Does Post-Confirmation Surrender Have on the Debtor’s Discharge?
- Nondischargeable Debts in Chapter 13 Cases
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