Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

The Real Threat To Your Retirement Savings Isn’t Bankruptcy

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face in mirrorYour retirement accounts are safe from your creditors.

California state law and federal bankruptcy law protect your savings for retirement held in recognized retirement vehicles from levy or lien.

But retirement savings are at risk.

Look in the mirror.

The biggest threat to your retirement account isn’t your creditors, it’s you.

You are usually the only person who can withdraw money from an IRA or take a loan against your 401(k).

And your creditors would be happy to press you until you think that’s a good way out of a financial bind.

It is almost always a wretched idea.

M.O. of a debt collector

Debt collection through the courts is relatively inefficient and costly to the creditor.

Law suits require lawyers, filing fees, and a chance for the person sued to fight back.  And even with a judgment, exemptions protect some assets from lien or levy by the creditor with a judgment.

How judgments work

How much better and cheaper if the creditor can “persuade” you to dip into an account that a creditor with a judgment couldn’t get to in order to pay the bill.

Toward that end, the debt collector will try

  • annoyance,
  • shame, or
  • fear

Whatever the method, they ratchet up the pressure until you think it’s smart to rob your retirement funds to solve today’s problem.

Are retirement savings ever the right answer

My instinctual answer is “no”.

But individuals and their situations are so varied that a flat no is probably too broad.

But only a bit.

The questions I’d ask myself before raiding retirement savings include

  • How much working life do I have left to replenish my retirement
  • Do I have an employer retirement plan to rely on
  • Do I have other assets with equity to supplement retirement
  • Is the bill to be paid with retirement savings just part of a bigger problem

The last question is probably the most important.  Is resort to retirement savings a one time solution, or is it just the first, or the most recent, indicator that your bills are bigger than your ability to repay them?

If so, it’s time to talk with a bankruptcy lawyer.  Understand what your options are.  Look at the big picture that includes all of your debts and all of your assets.

You can probably find a better solution.

Image courtesy of Steve Calcott. 

My thanks to Peter Mullison, whose post on retirement savings and bankruptcy sparked this perspective on the problem.

Bankruptcy Busts Taxes If The Timing Is Right

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taxes dischargeable

Got unpaid taxes for 2015?  Three tax discharge timing rules control when those taxes can be wiped out in bankruptcy.

On April 15, 2019  those taxes reached the end of the line as priority claims in bankruptcy.  Or, the magic date may be October 15, 2019, if you got an extension to file the return.

As non-priority claims, the taxes lose their protected status and can be discharged in bankruptcy.

Discharged, as in, no longer a personal liability.  No longer entitling the IRS to levy and garnish because of a bankruptcy discharge.

Taxes are collectible for 10 years from assessment, outside of bankruptcy.

That’s the view from 30,000 feet on discharging taxes in bankruptcy.  Let’s look at the details and see why  April 15th  is important if you have old taxes you haven’t paid.

Three year rules to discharge taxes

To wipe out taxes in bankruptcy, three rules control.

The first one, the “three year rule”, says taxes can’t be discharged until three years have passed since the tax return was last due.

Taxes newer than that are priority claims.  Priority tax claims aren’t dischargeable.

There are a couple of wrinkles in the three year rule.

First, the rule starts running from the day on which the tax return was last due without penalty.  Without an extension of time to file, that’s usually April 15th.

So, the return for 2015 was due April 15, 2016.  You start counting from then.

Unless you got an an extension, 2014 taxes became dischargeable in bankruptcy on April 16 of this year.

Filing your tax return before the deadline doesn’t get you a head start on the three year rule.

Even if you got an extension and actually filed your return in June, the controlling rule still starts counting from the last day on which you could have filed the return:  October 15th.

Two year rule

The second rule governing the discharge of taxes is the “two year rule”.

The “two year rule” says that if the tax return wasn’t filed on time, it has to have been on file for at least two years to be discharged in bankruptcy.

So, even taxes where the three year rule is met don’t go away in bankruptcy if the return was late and hasn’t been on file for two years.

Recent assessment rule

The third rule, the “240 day rule”,  says that taxes assessed within 240 days of the bankruptcy filing aren’t discharged, even if the other two rules are met.

Tax year must be closed

There’s an additional strategic issue involving taxes and bankruptcy in Chapter 13.  A Chapter 13 plan can provide for payment of taxes  that aren’t dischargeable through the Chapter 13 plan.

But, BUT, the tax year must be complete in order to include the tax in the payment plan.  So, if you file in October, 2019 to discharge 2015 taxes, any tax you may owe for 2019 won’t be included in the bankruptcy case.

Depending on the amount you expect to owe for this year, you may be well advised to wait til January 2, 2020 to file your bankruptcy case.

The important point is well-advised.  Discharging taxes in bankruptcy is highly detailed.  Get good advice from an experienced bankruptcy attorney.

More about taxes in bankruptcy

Tax liens after bankruptcy

What about unfiled tax returns

Chapter 13 is a tax tool

 

Image copyright Fotolia.

Stop Making Quarterly Tax Payments

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quarterly tax paymentUncle Sam expects a quarterly tax payment from the self employed.  Since you don’t get a paycheck with regular tax withholding, the burden’s on you.

Lighten the burden. Make this the last quarterly tax payment you pay.

Seriously.  Don’t make any quarterly payments for this coming year.

Think I’m advocating tax resistance?  No way.

The tax collectors  have more weapons than you want to encounter.  It’s like the advice from the era of newspapers:  don’t pick a fight with someone who buys ink by the barrel;  

Don’t spit in the face of the tax man.

Give up making them quarterly, I say.

Pay taxes monthly, just like every other recurring bill in your life.

Why quarterly tax payments invite trouble

Folks who get a paycheck have their income tax liability, or at least some estimate of that liability, deducted from each paycheck.  No fuss, and, well,  only some bother.

Their take home pay has already paid the taxes.  The paycheck is what is available to pay the bills.

Not so the self employed.

We are expected to make quarterly estimated tax payments in January, April, July, and October.

I’m sure the quarterly arrangement was seen as a convenience when instituted.

But it’s not necessarily convenient.  You have to set aside money regularly so you have a fistful come quarter day.

If you free lance or run a small business, budgeting may be the hardest think you do.  Who knows, in this economy, how much you’ll make this quarter, or how you’re going to pay the bills?

Quarterly payments invite us to fudge.

Get caught not having prepaid enough and you get  hit with penalties.

Get really behind, and it’s tax liens and levies.

Pay this year’s taxes monthly

My charge?  Add Uncle Sam to your list of creditors that you pay monthly.

Most creditors expect monthly payment:  the rent, the car payment, the credit card.  Add your estimated taxes to that list.

Income taxes are a cost of doing business.  No reason not to pay them as you go, just like the folks on salary do.

  • You avoid the need to set up a separate savings account in which to accumulate the taxes to be paid quarterly.
  • You resist the temptation to use those savings for some intervening crisis.
  • You escape the urge to make no provision “just this month”.

Making regular and smaller payments makes it easier to get the total bill paid in a manner that avoids penalties for not paying regularly.

Send your monthly income tax prepayment to the same place the quarterlies were headed.  Write on your check your Social Security number and “estimated 2017  tax liability”.

Take care of taxes monthly and you don’t find yourself in a tax hole come next April.

Here’s the IRS  on making estimated tax payments.

More on taxes

Unfiled taxes live forever

Dig out of payroll tax trouble

  Getting rid of tax liens

Find the mortgage interest deduction in Chapter 13

Image courtesy of Wikimedia.

Is It Safe To File Corporate Bankruptcy? 5 Questions To Ask

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risk of business bankruptcy

When your incorporated business fails,  you personally may still be  at risk.

I know you incorporated to separate yourself as the owner from the risks of the business.  The corporation is a separate legal person, distinct from the individuals who own the stock in the corporation.

But when the business has to shut down, the actual degree of separation is tested.

You need to know if the business can safely file bankruptcy.

Or, will using bankruptcy to shut down the business drag the owners down as well?

Can this corporation safely file bankruptcy?

Businesses looking to go out of business typically file Chapter 7.  The business closes, a trustee is appointed, and any valuable assets are sold for the benefit of creditors.

The trustee then controls the corporate checkbook and the timeline on which creditors get paid through the courts.

Bankruptcy trustees are further empowered to recover money paid by the debtor corporation where the transfer is a preference or a fraudulent transfer.  That’s the beginning of the complications in a business Chapter 7.

Before choose bankruptcy as the method for winding down, consider these five potential complications.

1.   Owe payroll taxes?

Corporate officers may have personal liability to the IRS and any state taxing authority for amounts withheld from the paychecks of employees.  Liability may extend to anyone with signature authority on the corporate bank account

This liability exists whether the corporation files bankruptcy or winds down outside of bankruptcy.

More about “borrowing” from Uncle Sam

Filing corporate bankruptcy may preserve assets from other aggressive creditors from which those taxes can be paid.  That benefits the individual officers, since every dollar the trustee pays on payroll taxes reduces what they’ll have to pay.

But bankruptcy empowers the trustee to hire professionals, investigate the debtor’s books, and pursue recovery of money owed to the corporation, either under state law, or under bankruptcy law.

The expenses of that pursuit are paid ahead of the priority taxes.

Thus a bankruptcy filing could work to shrink the pool of money for payment of payroll taxes, and drag out the time before payment is made.

2.  Made guarantees?

Landlords often require the personal guarantee of the individual shareholders before they commit to a real property lease for the corporation.  Or the lease may have been in the shareholder’s name from the start.

Any individual guarantor on a lease gets no protection from his obligations to the landlord when the tenant corporation files bankruptcy.

A bankruptcy trustee calls the shots when a corporation files Chapter 7.  He’s got the keys.

Trustees are usually quick to either vacate the premises or surrender it back to the landlord, freeing the landlord to look for new tenants.

But  pre bankruptcy lease arrears have no priority for payment in the bankruptcy case.  If there is a dividend payable to the landlord, it may be small and far in the future.  The individual is on the hook in the mean time.

3.  Used corporate credit cards ?

Almost without exception, some living, breathing human being is personally liable for every credit card.  Even if the card has the business name embossed on it, the application for that card undoubtedly contains a promise of the owner to pay the card issuer.

So, any liability of the individuals on the credit card won’t be eliminated by the business’s bankruptcy.

It can get worse:  the corporation may not, in fact, be liable at all on the card.  Not all “business credit cards” are really issued to the business. They’re issued to the people who run the business.

Filing bankruptcy doesn’t make the situation worse:  if the corporation is liable and if there are assets to pay creditor claims, the credit card folks get something toward the balance.  Only it’s a long time down the road.

4.  Benefited from paying the bills?

File bankruptcy for the business, and you may get yourself sued by the trustee for an avoidable preference.

When you and the business are jointly liable for a debt, every payment the business makes on that debt reduces your personal exposure to the creditor.  And that, in the eyes of the law, is a preference.

Payments the business made on the joint debt benefit you.  If other bills weren’t getting paid, we have an unfair discrimination between creditors of the business.  The trustee is authorized to sue you to make it more fair to other creditors.

The problem of preferences is the only item on this list of complications that is unique to bankruptcy.  Depending on the facts of the business’s operation, filing a Chapter 7 may just invite a lawsuit against you as the shareholder.

5.  Enjoyed  business help with personal expenses?

The more corporate money that flowed to insiders, the greater the threat that a bankruptcy trustee will challenge the payments,.

“Challenge” here is shorthand for “sue you”, or at least look hard at expenditures that made life easier for shareholders at a time when other creditors weren’t getting paid.

Often, the facts are just the opposite:  the shareholders were putting more money into the corporation, or going without to keep the business afloat.

But the idea of a fraudulent transfer, a payment for which the payor did not get a fair return for its money, has a long lookback period.  A bankruptcy trustee could be looking back years to see if the shareholders got more than was fair under fraudulent transfer law.

And if the books and records are sketchy, the shareholders may end up spending lots of time producing documents or explaining what happened.

Even if the end result is OK, the experience can be unnerving.

The bankruptcy takeaway

How to close out a failed corporate business can be complex.  While I’ve listed the ways a corporate bankruptcy might end up biting the shareholders, the benefits can be equally significant.

File bankruptcy and much of the wind down work passes to the trustee.  The business creditors understand there is nothing available to pay their claims against the corporation.  Assets are distributed in an orderly and predictable manner.

Before you file bankruptcy for a corporation, make sure you’ve asked yourself the five questions I’ve laid out.  Take your answers to experienced bankruptcy counsel for a review.

More

Winding up a failed business

 

Bankruptcy Discharge Slays IRS Form 1099

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In a duel between a Form 1099 and a bankruptcy discharge, bankruptcy wins every time.

The prize?  no tax on debt discharged in bankruptcy.

So, if you’ve already gotten your discharge, the creditor’s 1099, with your social security number on it, is no threat.

But you do need to file another form to secure the prize.

Bankruptcy is exception to tax

Normally, when an obligation is forgiven, the tax code treats the amount of forgiveness as if it were income.  And income is exposed to tax.

Insolvency is another exception to tax on forgiven debt

But forgiveness in bankruptcy in the first exception to the rule.

Debt forgiven in bankruptcy is not treated as income.

Creditor is clueless

So, if bankruptcy is outside the IRS rule, why are you getting a form 1099?

Because there’s another rule, requiring creditors to report to the IRS, just the way your employer is required to send the IRS your W-2.

And seemingly, the creditor can’t figure out that the reason its claim is worthless is because of the bankruptcy discharge.  So it’s easier for the creditor to just send out Form 1099, and make it your problem.

Fixing the 1099 problem

The solution is simple:  file IRS form 982.

Title 11 is the part of the United States Code on bankruptcy.  Cases are filed under different chapters of that title

Form 982 is your rebuttal to the report that you have taxable income because your debt was forgiven.  Check the very first box on the form claiming the bankruptcy exception.

This debt is excluded from income because of  Discharge of indebtedness in a title 11 case 

The IRS provides a set of instructions for filing  your “get out of tax” form.  Form  982 Instructions.

Other tax consequences of discharge

If you have real property, you may have to reduce your basis in assets by the amount of debt discharged in your bankruptcy.

But thankfully, there is an exception to this rule too:  no reduction in basis is required with respect to your principal residence claimed exempt in your bankruptcy case.  IRC 1017(c).

Tax action plan

So there you have the skinny on form 1099 and your bankruptcy discharge.

Bankruptcy has other tax implications:

Taxes dischargeable in bankruptcy

Unfiled tax years are never dischargeable

Chapter 13 gets an interest-free tax repayment plan

Your accountant needs to know about your bankruptcy

What to do with a flat-wrong 1099

 

Five Tax Tips For Two Cents

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8328967338_37e260ff6b_h_optThe tax filing deadline approaches.

So why is a bankruptcy lawyer talking about taxes?

I’ve found over three decades as a bankruptcy lawyer that there’s a surprising degree of overlap between bankruptcy and tax .

All too often, it’s tax troubles that brings a family to me for help.

Here’s my two cents on what I know about taxes.  It’s not a lot, but what I know is both simple and critical.

File those tax returns

Lots of folks who end up in my office discussing bankruptcy held off filing their returns because they figured they couldn’t pay the tax that would be due.

Bad decision.

Without a return, taxes never die

The IRS will not descend on you the week after you file a return with tax due but no check.  They’re still opening envelops.

But filing a return gets all kinds of time periods running that may benefit you:  the 3 years til the taxes are dischargeable in bankruptcy;  the 10 years til the tax collection statute runs.

Whatever you do, don’t let the IRS file a tax return for you.

Don’t pay tax on discharged debt

If your debts were discharged in bankruptcy last year, that discharge has no tax consequences.

The Internal Revenue Code specifically excludes from taxable income any debts forgiven in bankruptcy.

Cancellation of debt is tax free

You may get a 1099 reporting the cancelled debt.  The creditor whose debt is forgiven is required to do so.

It’s up to you to assert that there’s an exception to tax.  And there’s an IRS form to rebut any tax consequences.  Get it and file it.

Claim deductions for Chapter 13 payments

If you’re in a Chapter 13 that catches up arrearages on real property loans, claim those payments as deductions of your own.  Just because the trustee writes the check, it’s still you paying the mortgage interest in that payment.

How to find and claim the deduction

The concept here goes beyond mortgage interest.  If the expense was deductible had you written the check, it’s deductible if the trustee pays it.

Get the trustee’s disbursement records in your case from  the trustee’s web site and get to deducting.

If you owe tax, fix your withholding

The return to be filed this spring can tell you if you are withholding enough money to pay your taxes.

If there’s a big number on the bottom line of the return for last year, and this year looks similar, increase your withholding now.

What Goldilocks knew about taxes

And if you think you can’t pay taxes as you go and support the rest of your living expenses, you need to look hard at the big picture.

It’s generally a poor decision to short the feds so you can pay AmEx or Visa.

Amend old returns if you missed something

If you missed a deduction or otherwise overpaid your taxes in a previous year, you have only three years to amend that return and claim a refund.

Time running out to claim prior year tax breaks

Lower income families often miss the fact that they get a tax credit (that’s real money, not just a deduction) under the Earned Income Tax Credit.  Find out if you are eligible.

More

Discharging taxes in bankruptcy

The tax filing extension can be dangerous

Wiping out tax liens

Find The Right Cure for Your Debt Problems

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Get-out-of- debt advice and sales pitches abound.

Like this one.

But no one tells you that you need a diagnosis of your financial ills before prescribing the cure.

Is the stomach ache indigestion or appendicitis?

Is it temporary upset or a life threatening money pit?

The answer makes a big difference in how you treat it.

No single prescription

A doctor treating your illness wants to know your age, your medical history, other medical conditions along with your symptoms.

Same sort of questions arise if debt is what ails you.

  • Age
  • Dependents
  • Current income
  • Assets
  • Debt total

All of those factors interact to shape a treatment plan for debt.

If you are on the cusp of retirement, you don’t have time to tackle big debt by cutting out frills in the budget.

If you are young, single, suitably employed, the prescription may be different.

So don’t take to heart every buckle-down-and-pay scheme you find on the internet.

Too little, too late

Most get-out-of-debt advice is better suited for living economically after you’ve solved the debt problem.

Fewer lattes, more eating at home, less entertainment spending.

Compare bankruptcy with payment plans

That may work to get out of debt if you have time, discipline, and modest debt to start with.

But the starting point is comparing your income to your debt, in light of your fixed expenses.

How big is the problem?  To bring it down, do you require a pellet gun or a bazooka?

How precarious are things

The final question is how risky is the treatment?

Think of the endless lists of common side effects and serious complications listed with every medicine you take.

When the ailment is debt, the risk is living with no reserves.  A recent study found 40% of Americans couldn’t pay for a $400 emergency without borrowing.

Four hundred dollars isn’t much in this economy.  Yet a $400 expense would imperil a huge swath of our citizens.

It’s easy to fool yourself into thinking that you aren’t likely to face an emergency.  Yet, look at this list of pretty mundane things that require a $500  fix.

None of those are so far fetched that they couldn’t happen to any of us.

So living without a financial safety net in order to pay of big debt is big-time risky.

Here’s a further discussion of  my diagnostic of your debt alternatives:  when to hold and when to fold.

 

 

Who To Pay After Bankruptcy

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bills after bankruptcy

You’ve filed bankruptcy.

Your creditors are stayed.

A bankruptcy discharge is ahead.

You’re out from under unrelenting pressure to pay creditors.

But don’t let your sense of relief keep you from planning:  who should you pay now that you’re in bankruptcy?

Paying bills after filing bankruptcy

Two legal realities drive who needs to be paid going forward:

  1.   Not all debts are discharged in bankruptcy
  2.   Liens survive bankruptcy, unless there’s a court order otherwise.

Is this debt discharged?

The scope of the bankruptcy discharge is different in Chapter 7 and Chapter 13.

The list of exceptions to discharge that apply in Chapter 7 is longer.  Chapter 13 discharges more debts, but the discharge isn’t effective until the last plan payment is made.

Child and spousal support are not dischargeable in any chapter of bankruptcy.  To the extent not paid in the case, your obligation for delinquent and future support continues.

Student loans are the other blockbuster debts that survive a discharge in either 7 or 13.

Recent taxes are the third common debt excluded from the discharge.

Is the debt secured by a lien?

The discharge wipes out your personal liability for dischargeable debts.  But any lien associated with the debt survives as a charge on property you owned before filing.

So, you need to decide whether this is an asset 1) you want to keep, and 2) is the creditor likely to enforce the lien if you don’t pay?

If you are surrendering real property or a car you can’t really afford, don’t pay because you don’t intend to retain the asset.  If it’s a tax lien that attaches only to your household goods, it’s probably safe to not pay.  The IRS isn’t interested in your dirty socks.

However, if it’s your home or the car that gets you to work every day, then you want to stay current or get current, lest the creditor enforce the lien.

More money, less information

One of the exceptionally frustrating things about filing bankruptcy is that even when you want to keep paying on your home or your car, the creditor doesn’t send a statement so you know when and how much to pay.

While I rail about the insanity of the situation, the creditor who stops sending statements is generally just playing it safe.  Send a statement and you can be accused of violating the automatic stay or the discharge injunction.

Ask the creditor to send statements.  Ask your bankruptcy attorney to get court permission for the sending of statements.

And even if the creditor doesn’t make it easy, be persistent.  You care about keeping your stuff far more than the creditor cares about your convenience.

Most banks terminate automatic payment arrangements or even access to online banking when you file.  Make sure that you are watching your accounts and monitor whether things you want paid are getting paid.

Make and keep a record of having paid;  creditors are notorious for misapplying or not applying payments.

Being “in bankruptcy”

If you filed Chapter 7, I gotta tell you :  there’s no “there there” in bankruptcy.  Chapter 7 is more like an event than like a place.

You file your case:  it affects those you owe when you file, and encompasses what you own at the moment when you file.

There are a couple more steps to take between filing and getting your discharge.  You must appear at the first meeting of creditors; cooperate with the trustee in your case; and complete debtor education.

The trustee may be the nominal owner of your assets until your exemptions become final.  But most Chapter 7 cases are no asset cases where the trustee never takes possession of a single asset.

And whatever you earn after the day on which you file is yours to spend however you choose.

For the vast majority of debtors, life is largely unaltered by filing.  You aren’t really “in” anything.

So, you are both free to, and expected to, continue to make payments on secured debts where you’re keeping the collateral.  If you need to reaffirm a car loan, one of the first questions the judge often asks is whether you are current on payments.  If you want the judge’s approval of the reaffirmation, your answer needs to be “yes”.

You likely want to keep making payments on support obligations and student loans.  If you have taxes that will survive the bankruptcy, nothing prevents you from making payments that chip away at the non dischargeable taxes.

Paying in Chapter 13

Who to pay in Chapter 13 is more complicated.  You start by reading and understanding the plan that you have filed in your case.

It will tell you whether you pay your mortgage directly yourself or pay it through the Chapter 13 trustee.

If you’re in doubt, ask your attorney.

Nothing good happens when you ignore your plan

I’ve encountered more than a couple of Chapter 13 debtors recently who didn’t understand how the mortgage was to be paid, going forward.  A couple of others assumed that in the absence of monthly statements, it was being taken care of.

Not so.

Unless, of course, your plan provides for stripping off a lien.  If a lien is stripped, at best that creditor is treated as a general unsecured creditor.

If in doubt, ask your attorney.

Your plan undoubtedly provides for payment by the trustee of any amounts you owe for taxes as of the filing of your case.  ‘

But your plan deals only with tax years that are complete when you file.  You are expected to pay directly and in full any taxes that come due in the year in which you file your case and years after.

Using taxes to pass the means test

Failure to stay current on taxes is grounds for dismissal of your Chapter 13 case, even if your payments to the trustee are fully current.

Pay yourself after bankruptcy

For me, one of the most compelling reasons to file bankruptcy, even when there is no crisis, is to free up money to provide for your old age.

You do expect to live to a ripe old age, don’t you?

To age in comfort and independence, it requires money.  And Social Security won’t do it:  the average Social Security check is under $1300/month.

Start immediately after filing setting aside money from each paycheck.  Save before you pay anyone else, not after.

Empowering retirement savings is the unsung benefits of bankruptcy.

The Most Powerful Debt Management Tool

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black box croppedThe most powerful debt management tool isn’t a software program.

It isn’t a website, nor a consulting firm.

It isn’t even a calculator.

The most powerful debt management tool is a letter opener.

  • letteropener_tobyotter_FlickrIf you don’t open the mail, you don’t really know where you stand with your creditors.
  • If you don’t open the mail, you don’t know that your lender has instituted foreclosure proceedings.
  • If you don’t open the mail, you don’t know that you’re overdrawn at the bank or over limit on your credit card.

Or, less threateningly, that the lender has transferred the servicing of your loan.

You don’t know anything about your situation except that you are in trouble, if you don’t open the mail.

Now, there is another step:  you need to read what’s in the envelope.

The envelope, please

I know confronting what you owe and your sense that there’s little you can do about it increases your stress.

But, the dunning letter or the lawsuit isn’t itself dangerous.

Creditors don’t lace their missives with ricin or anthrax.  They need you alive to pay them!  They hope, anyway.

What you’re trying to avoid by not opening the mail, or worse, tossing it out, is facing your situation.

What you don’t know can hurt

Ignoring what’s in the mail can make the situation worse.

The only situation in which we throw people in jail for not paying their ordinary bills is when they’ve gotten a court order requiring their appearance and they ignore it.

You’ve got to open up the mail to know if you are at risk.

My friend Jay Fleischman tells a marvelous story of a doctor and the doctor’s lawyers who didn’t open the mail nor read what was inside.  Instead of collecting money from Jay’s client, they ended up paying Jay’s client $20,000 for ignoring the court-ordered bankruptcy stay.

Fight or flee

Whether the solution to your debt problems is a payment plan or a bankruptcy filing, you need to know who you owe money to and where they get their mail.

All that’s contained in your mail.

So, open the mail, know whether there’s a situation that requires your attention.  Then if you want to put the opened mail in a shopping bag to bring to your bankruptcy attorney, that works.

Just don’t show up in my office, deep in debt, and not be able to tell me who to notify about your bankruptcy case.

More

How to weigh whether to file bankruptcy

How to interview a bankruptcy lawyer

The life-threatening cost of stress

Image of black box courtesy of Thierry Ehrmann and Flickr.

Image of letter opener courtesy of tobyotter and Flickr.

Who Owns Your Business When You File Bankruptcy?

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business bankruptcy

The bankruptcy trustee’s question was straightforward (if inartful) yet the business owner nearly blew the answer.

The trustee asked:  are you the sole owner of your business?

When my client hesitated, she followed up:  are you a sole proprietor?

Focusing on the fact that he was the only person with an interest in the business, he said yes.

Wait a minute, was my response. That’s not so.

It took several minutes of sworn testimony at the first meeting of creditors to sort the matter out.

Who owns the corporate business

We were once again experiencing the phenomenon of the shape-shifting business owner.  The businessman had, in his mind, morphed into a sole proprietor rather than a stockholder.

The debtor was the sole owner of the corporation that owned and operated the failed business.

He was correct that no one else had an interest.  He skipped over the part that it was another legal entity, his corporation, that actually owned the assets and owed the debts of the business.

He owned the corporation that owned the business.

Why it matters

A sole proprietor owns a business as a personal asset.  In law, he owns the assets of the business and is liable for its debts.

A sole proprietorship has no legal existence separate from the owner.  The proprietorship may adopt a fictitious business name, but behind that dba is the individual who owns and operates the business.

So, if my client were a sole proprietor, the inventory of the business would have been an asset of the bankruptcy estate created when he filed bankruptcy.  The business bank accounts would fall to the control of the trustee.

When a corporation is created, it becomes a legal entity distinct from the individuals who own the shares in the corporation.  The corporation can have its own debts and its own funds that don’t belong directly to the shareholders.

That’s why business people incorporate:  to create a legal “person” that can take risks without exposing the shareholder’s other assets to that risk.

When my client filed his Chapter 7 case, his stock in the corporation was an asset of the bankruptcy estate, but not the business itself.  The business was owned and operated by the corporation.

Since the corporation had tons of debts, the stock that the bankruptcy trustee could administer had no net value.  That’s because, equity holders get money when a corporation liquidates only after creditors of the corporation have been paid off.

The takeaway

The first meeting of creditors in a bankruptcy case is the trustee’s opportunity to gather more information about what the debtor owns and owes.

Once you focus on what the trustee needs to get from the meeting, it’s easier to answer correctly and avoid the confusion that happened in my case.

When confusion ensues, it’s important to sort it out on the spot.

And that’s how I earned my keep in this case.

More

Rules for testifying at a bankruptcy hearing

How corporate officers can avoid personal liability

When a business needs to wind down

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