Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

What Small Business Needs From Government

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business challenges

 

This post was first published 10 years ago, in the midst of the Great Recession.  I continue to think about the real challenges of running a small business and the balance needed between simplicity for the business owner and protections for the public.  More below.

Senator McCain this morning on Meet the Press reprised the Republican view of the approach to stimulus:  tax cuts for small businesses.

I thought about the small businesses I had seen in the past couple of weeks.  Not one of them was paying income taxes, and their expenditure on payroll taxes was small, because they’d cut back on  employees.

For the very small business, I don’t see taxes as the culprit.

Everywhere you look you see the impact of credit cards on the economy.  Often it’s suit by American Express that brings a small business owner to my office.

Or the businessman makes a list of their credit card debt and the interest rates after the recent round of increases and realize that they can never pay off the debt at 28% interest.

Credit card merchant fees are a much bigger piece of the small business expense picture than are taxes for most of my clients.  Each merchant pays a percentage of each credit transaction to the card issuer.   7-Eleven store owners are petitioning  Congress for regulation of the fees charged merchants  by the card issuers .

I’m certainly not an economist and don’t have a Moran Plan for reinvigorating the economy, but the people I see in trouble aren’t there because of their tax burden.

Small business wish list

Ten years later, my wish list for entrepreneurs is greater simplicity on the administrative side of the business.

Perhaps fewer jurisdictions to deal with and regulations that the average Joe can understand and follow.  Less need for hired professionals to keep the business out of trouble.

Looking around in 2019, the regulatory changes we’re seeing don’t seem to be helping Mom and Pop businesses.

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Bankruptcy Changes Your Life, Only Not The Way You Think

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How will filing bankruptcy change my life?

My clients ask all the time.  They imagine the remainder of their life after bankruptcy with neither credit cards nor credit.  Outcasts in our economy.  Shunned by all.  Crippled by bankruptcy.

They can see a scarlet “B” tattooed on their foreheads to mark them forever as Bankrupts.

My short, irreverent answer to that question is that they will sleep better at night.

Other side effects of bankruptcy include a drop off in telephone calls from collectors and shrinkage of the amount of mail they get.

They get smarter; debt makes you dumb.

All true, but probably not the answer they expected from a bankruptcy lawyer.

Life after bankruptcy

At the superficial level, life continues only slightly changed after bankruptcy.

Your credit score probably goes up a bit, in the short run.  Credit is more expensive shortly after bankruptcy, becoming more available and more affordable as time goes on.  With time and a down payment, you can buy a house.

Credit heals

Your ability to borrow too much on student loans endures.

Most important, in my view, is that eliminating debt means that you can take responsibility for providing for your old age.  A frightening slice of Americans have nothing more than Social Security to support themselves as they age.  And age they will, even if they believe they will never “retire”.

An equal number of people couldn’t handle a $400 emergency without borrowing money.

You drive change

The more serious answer has to reflect what brought them to me to file bankruptcy in the first place.

When the driving force was gambling or some other irresponsible behavior, I tell them that I can dig them out of this hole with bankruptcy relief, but positive change for the future requires that they change their behavior.

When the current crisis is  created by events beyond their control, like job loss, divorce or illness, bankruptcy is likely to put their financial lives back on track.

For those in business,  failure is one of the risks that we take when we sign up to be entrepreneurs.  Bankruptcy clears the financial decks so we can go forward with life.

Life after bankruptcy can be what you make it.  Bankruptcy makes it possible;  you color in the details.

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What Bankruptcy’s Automatic Stay Doesn’t Stop

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bankruptcy stay exceptions

The automatic stay is the signature feature of American bankruptcy.

Just by filing a bankruptcy case, a federal court injunction instantly prohibits your creditors  from actions to collect a debt from you or your assets.

But, there’s a whole list of actions that aren’t included in the stay;  we forget that some kinds of lawsuits with a financial aspect get excluded from the stay.

How the stay works

The automatic stay applies in all bankruptcy cases (unless you’ve filed more than two bankruptcy cases in the last year).

Outside of bankruptcy, you have to prove that you are entitled to an injunction that stops some otherwise lawful action.  In bankruptcy the injunction is granted automatically, just because you filed.

The burden is then on creditors to take action to extract themselves from the stay.

The stay has its limits

The list of exceptions is long and many of the excluded actions are very specific and technical. See 11 U.S.C. 362(b).

But there are some biggies there too among the exceptions.

Here are the ones of most interest to the typical bankruptcy filer.

Family law issues

Actions to establish or modify support are not stayed.  Neither are proceedings involving custody, marital status or paternity.

Support can be collected from property that isn’t “property of the estate” without violating bankruptcy law.  And state issued licenses can be suspended for failure to pay support.  That’s subsection (b)(2).

Law enforcement

The stay doesn’t stop criminal prosecutions.  Nor does it stop the enforcement of actions grounded in the public health and safety; that’s called the government regulatory exemption.  More about that below.

Tax administration

Your state tax folks and the feds can legally demand the filing of a tax return; audit returns you’ve filed; and assess taxes they claim you owe.

Government can’t, however, record liens or levy assets to collect a tax you owed when you filed bankruptcy.

Private rights

A landlord under a lease that expired according to its terms before the bankruptcy case was filed can proceed to get possession of non residential property.

Civil contempt sanctions

Collection of court-ordered sanctions for misconduct in litigation is not prohibited by the stay.

The 9th Circuit Court of Appeals recently decided that the public’s interest in making parties to a lawsuit play by the rules outweighed the sanctioned party’s interest in getting complete protection from collection action.  The fact that the sanctions might be payable to the other party to the litigation didn’t change the state’s interest in enforcing its sanction for bad behavior in court.  The case is Dingley.

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Fearmongering and The Decision to File Bankruptcy

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fear-198932_1280

 

The unknown is often fearful.

My colleague Peter Orville wrote

It is natural to be afraid of doing something you’ve never done before, like filing for bankruptcy protection. This is especially true if you’ve heard stories about why you shouldn’t file bankruptcy.

Peter has it right.  Some trepidation is natural.

My beef is that the fear of bankruptcy is promoted by those with something to gain by demonizing bankruptcy.

Fearmongers hope to profit

The stories about why you shouldn’t file are plants.

Not growing plants, but like planted evidence:  something intended to trap, decoy, or lure, as criminals.

It’s the creditors, their cohorts, the credit scoring folks, and the debt settlement companies who want you to think that filing bankruptcy is the end of life as we know it.

You know why they do it?

Each of those sources profit if consumers are scared off from filing bankruptcy.

If they can keep you paying the debt, whether or not you can ever pay it off, or keep you scared enough to pay them to make it go away, they prosper.

No one sits in judgment 

My charge to clients is that bankruptcy is not painful.  Or at least, any pain  you experience is self inflicted.

You can make yourself (or allow yourself) to feel as miserable and worthless as you choose to do so.  No one associated with the courts, including trustees, is judgmental.

A debtor does not have to justify his choice of bankruptcy relief and does not have to prove he is “worthy” of a discharge.  Eligibility for a discharge, even after bankruptcy reform, is presumed.

I have a perverse admiration for clients who have endured the pain and despair of financial distress for as long as most of them have before seeking me out.

But life does not have to be that way;  bankruptcy is an honest and effective choice.

There is nothing to be afraid of.

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Bankruptcy No Place For DIY

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price tag public domainThe do- it- yourself spirit seems especially strong in bankruptcy courts these days.

Only it often comes with a big price tag.

Nearly 45% of the Central District CA Chapter 7 cases were filed by individuals doing it themselves.  The national rules committee drafted the new bankruptcy forms with the unrepresented in mind.

Why do people take such a momentous step as filing bankruptcy without an attorney?

They go it alone, without a lawyer, for three reasons:

  1. They assume they can’t afford a lawyer.
  2. They assume that there are no consequences for doing it badly.
  3. They assume it’s “just filing out forms”.
All of these assumptions are wrong.  But let’s look at the third assumption, that it’s “just filling out forms”.

What bankruptcy filing entails

Southern California bankruptcy lawyer Jay Fleischman outlined the steps in a bankruptcy case.  Each of those decisions is one a pro per ( a person representing themselves in court) has to make  to file their own bankruptcy case.

It’s a pretty daunting list.

You have to

  • decide if bankruptcy is the best choice;
  • choose a chapter;
  • list all your tangible and intangible assets and your property transfers
  • get the right credit counseling

An industry has sprung up to “serve” those bankruptcy filers who don’t want to do it entirely alone, but think they don’t need, or can’t afford a bankruptcy lawyer.  They’re called petition preparers.

Enter the petition preparer

It takes no training or competence to hang out a shingle as a petition preparer.  Anyone can call themselves a bankruptcy petition preparer.

A petition preparer is supposed to do nothing but type up the information provided by the debtor.  They are not supposed to explain the forms or the choices those forms require.  To do more than type is the unauthorized practice of law.

The wide spread harm that untrained preparers caused to their customers triggered special provisions in the 2005 bankruptcy “reform” law.  At least now they have to disclose their involvement in drafting the bankruptcy schedules.

Special local rules limit what a preparer can charge and require that they identify themselves on the cases they handle or, more often, mishandle.

Sometimes, to avoid exposure, they coach their clients to lie about their involvement in the case.

Just for the record:  lying in a bankruptcy case is never a good thing.

Exposed in public

So I get a  really mixed feeling when  a debtor appears at a 341 meeting in Oakland without a lawyer.

What happens when you go to court for bankruptcy

The trustees there ask the debtor to turn to Schedule C, read the code sections from the California Code of Civil Procedure  beside each asset they’ve claimed exempt and tell him how they chose that exemption.

The trustee usually gets a blank stare or some confused stammering.  The debtor has no idea how to answer.

Most people who have filed bankruptcy are scared to death about the first meeting of creditors anyway.  But this question from the trustee is designed to flush out the fact that either, the debtor had “help” with their petition that wasn’t disclosed, or that the preparer did more than they are legally allowed to.

The preparer obviously told the debtor what exemption choices there were, and selected exemptions for the client.

This scene is particularly painful, since badly done exemptions may cause unrecoverable damage to the debtor.

While it’s the petition preparer who has broken the law, it’s the debtor who may pay for the bad advice.

My advice:  confine your do-it-yourself inclinations to craft projects.  Get competent legal help before filing bankruptcy.

Without a lawyer you may find you can’t get out of bankruptcy, no matter the cost of remaining.

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Image courtesy of  Crisg and OpenClipArt

The One Person You Must Tell About Your Bankruptcy

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Spill the beans concept.Most people who file bankruptcy don’t want anyone else to know.

Some of my clients try to hide their break for financial freedom from friends and neighbors.

Others are worried about their boss finding out.

Occasionally, someone will try to keep it from their mate.

But trying to hide his bankruptcy nearly cost one client $103,000!

Because he hid his bankruptcy filing from his accountant.

It’s all about the tax

When my client got his bankruptcy discharge, stripping off the junior lien on his house, the mortgage lender dutifully sent him a form 1099.

The tax form correctly reported that $288,000 of debt had been forgiven in the last tax year.

And my client delivered the 1099 to his tax preparer, who in turn said,

That will be an extra $103,000 in tax, due and payable on April 15th.

Only, once the tax preparer got the news about the bankruptcy filing, it wasn’t so.

Debt forgiven in bankruptcy isn’t taxable

A discharge in bankruptcy is the first exception to the standard tax rule that debt that is forgiven is treated as if it were cash income.

When the discharge occurs by reason of a  bankruptcy case, the discharged debt is not taxable income.

Responsibility for connecting the dots on discharged debt falls to the debtor/taxpayer.  The creditor whose debt has become worthless is obligated only to report to the IRS that the debt has been forgiven, as a matter of law.

The 5 most common errors banks make on 1099’s

The creditor generates a 1099 form, without comment on the circumstances.

The taxpayer is charged with filing the form that says, in IRS speak, “yes, but….”

Yes, the debt was discharged;  but, no, the discharge didn’t increase my taxable income.

The “because” is the discharge in bankruptcy.

Accountant needs to know about discharge

Had my client told his tax preparer upfront about the bankruptcy, he could have avoided several hours of intense stress.

Retired and living with family, he probably doesn’t have $103,000 in net worth, much less that kind of money sitting around for Uncle Sam.

I’m an advocate for openness about bankruptcy.  It’s not shameful nor the mark of failure.

If everyone who had filed bankruptcy admitted it, those who are now struggling with the decision to file wouldn’t feel like they are the only ones  who ever chose bankruptcy rather than perpetual debt.

But regardless of whether you’re willing to share with others the fact you’ve filed bankruptcy and gotten a fresh start or not, share the facts with your CPA.

It will save you money.

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Image © Fotolia 

Should You Pay Your Creditors Rather Than File Bankruptcy?

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bankruptcy alternative

Is there an alternative to bankruptcy, my clients often ask. Can I realistically avoid filing bankruptcy?

A fellow bankruptcy lawyer outlined what it takes to get out of debt without bankruptcy.

  • make more money;
  • spend less on today’s expenses; and
  • use all your savings to pay off debt.

If you could do all three,  for long enough, and, your debt isn’t too large, it probably works.

I want to pose the question: even if that’s possible, is it smart?

Cost of paying off debt

What do you forgo in that scenario?

If it’s travel; lattes; and premium cable that go, I’m OK with that.

But, what if the things you do without are emergency reserves; health insurance; and retirement savings?  I think that continuing to live on the financial edge is a poor choice.

One small glitch, car trouble, ill health, or fewer hours at work, and your fine and honorable plan to pay comes unraveled.

Make good decisions about your future

Whether your financial difficulty was caused by bad luck or bad choices, don’t make a bad decision, driven by pride, to compound the trouble by living without a safety net.

Studies prove being in debt makes you stupid

Too many of my clients arrive in my office with the conviction that they incurred this debt and, by damn, they want to repay it.

At some level, I applaud that desire. But what are the likely consequences of repaying that debt if it means making no provision for financial stability now and in the future?

Have you just traded one sort of bad situation for another?

Part of reforming your financial situation involves looking beyond this month’s bills to the needs of the next decade and beyond.

Lots of folks got into credit card debt focusing on their ability to make the monthly minimums, rather than on their ultimate ability to pay the debt off.  They forget that minimum payments on most credit cards are set to keep you in debt for several decades.

Particularly in times of profound economic uncertainty, consider the merits of a fresh start and a make a plan for financial self sufficiency.

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What Mythbusters Star Says About Money Troubles

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mortar-board-32277_1280_optLook at the big picture.

That was the point Adam Savage of the TV show Mythbusters made as the speaker at my son’s graduation as a mechanical engineer.

He was talking about using engineering skills after college.

But, it struck me as equally applicable  to my audience of the indebted as it was to his audience of newly fledged engineers.

For engineers, Savage hoped that they would look beyond the technical challenges of any task at hand to see where they, and the gadget they were making, fit in the larger world.

Your technical skills don’t exist in a vacuum, he said.  Or shouldn’t.

For debtors, I want clients to look at their financial life on a canvas larger than just this month’s payments.  Looking at the bigger picture, years and decades, even,  is there any meaningful chance of paying off your debt and achieving economic stability?

Look at only the short term and you miss the sweep of your life. [Read more…]

Debt Limits Increase For Chapter 13 Bankruptcy

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bankruptcy debt limitsNew debt limits for Chapter 13 become effective on April Fool’s Day, 2019.

The new numbers are effective for cases filed April 1, 2019 and will control for the next 3 years.

And those limits are:

Unsecured debt = $ 419,175

Secured debt = $$1,257,850

The current limits effective through March 31, 2019 are

 unsecured debt = $394,725

 secured debt = $1,184,200

In the Bay Area, that will mean more families will be eligible to file Chapter 13.

Why Chapter 13 rocks

Chapter 13 bankruptcy allows individuals to strip off worthless liens, cure home loan defaults, and pay recent taxes over time, without interest.

In Chapter 13, the person filing keeps ownership and control of their assets.  They create a plan to repay creditors, in whole, or more usually, in part from future income.

Why 13 is best

While in 13, they are protected by the automatic stay from collection actions. They have access to the bankruptcy court to enforce that protection.  The bankruptcy judge is also available to resolve disputes about the allowance of claims or mortgage accounting.

Is debt secured or unsecured

The debt limits apply to debts that are liquidated and not contingent.

Secured debts are those for which the creditor has collateral.  The most common secured debts are mortgages, home equity lines of credit, and car loans.

Tax liens and judgment liens also fall into the secured debt pile, but only to the extent that the lien attaches to value in your possessions.

More about secured debts in bankruptcy .

Unsecured debts are those where there is no collateral or where the lien is greater than the available collateral.

In my Bankruptcy Alphabet, U is for Unsecured.

A great recent decision by the 9th Circuit determined that you don’t have to count liens that have passed through a previous bankruptcy as unsecured.

There are no debt limits in Chapter 7 or Chapter 11.

Exemptions expand

The value of items protected by exemptions under the bankruptcy code also increases April 1.

This means little to Californians since the federal bankruptcy exemptions aren’t available in California.

Instead, we have the Code of Civil Procedure 703.140 series of exemptions which mimic the federal exemptions.  The dollar amounts of the §703 exemptions are found here.

The Federal Register published the Bankruptcy Code changes of other dollar amounts found in the Code, such as the cap on priority employee wage claims, preference safe harbors, and luxury goods purchases.

Enjoy the increases. They are with us for another three years.

 Image courtesy of geehall2.

Closing Up Shop

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What can you/should you do when it becomes obvious that your start up business should wind down?

The hardest part of being in business is recognizing when the business has no future.  Yet the overwhelming majority of new businesses fail within 5 years.

So you’re not alone.

Shutting down an insolvent business presents a tough challenge: honoring the legal rights of creditors while minimizing the damage to the founders and employees.

Not to mention the emotional hit.

Separating the owner from the business

Unless you are a sole proprietor, you and your business are two separate legal entities.

Whether your business operates as a corporation or an LLC, it has its own rights and obligations.  Those rights and obligations  may be different from yours as the shareholder.

For the purposes of this discussion, we’re going to assume the business is a corporation. If you operated as an LLC, the issues are essentially the same as those of a corporation.

  • The board of directors of an insolvent corporation owes its duty of loyalty to the creditors, not the owners.
  • Creditor claims get paid before the shareholder’s ownership claims.
  • Shareholders can be creditors as well as owners.
  • Management can legally pay some creditors and not others.

Keep these precepts in mind once you see the business needs to close.

Bankruptcy or not

There is no clear or universal answer to whether a failed business should file a Chapter 7.

A corporation does not get a discharge in a Chapter 7 case; only a Chapter 11 reorganization erases the debts of a corporation.  And a Chapter 11 is worth the significant time and expense only if the business has a future, or some valuable asset salable only if the business continues until the sale.

So the only purpose a business bankruptcy serves is to liquidate the business assets and satisfy creditors as far as possible.  The unpaid debts will remain enforceable against the corporation for as long as the law allows.

Companies can go out of business without filing bankruptcy: they liquidate their assets and cease operations. Creditors have a right to recover their claims from the assets of the corporation.

If there are no assets, the corporation cannot be further harmed by lawsuits that try to collect from the corporation: a judgment against a company without assets is worthless.

Closing without bankruptcy

It’s perfectly legal and rational to simply close the doors and cease business without involving the courts.

The danger to management in this approach is the tendency of some creditors to assume that the business’s failure to pay means that there is some sort of skullduggery afoot.  Those creditors don’t recognize the legal distinction between the corporation that runs the business and the people who work for and own the corporation.

It becomes easy and reflexive for such creditors to sue the officers as well as the corporation to collect the debt.  The corporation may have no remaining assets but the officers have both assets and future earnings at stake.

While the claim against the individuals may be invalid, the individual has to appear and defend in the lawsuit, or a judgment will be entered against him.

And sometimes, the individuals are liable because the individual guaranteed the debt or even the individual opened the account before the corporation was formed.

Why doing it yourself can work

Personally managing the wind up has advantages, if you are willing to devote the time and energy to the process.

Management can usually get a better price for assets since they know the market, know the asset, and are motivated to get highest recovery.

Outside of bankruptcy, you control who gets paid with the available funds.
You can act swiftly to limit exposure of management or investors by paying first debts guaranteed by insiders, subletting leased space, returning leased equipment, etc.

Creditors are protected from having to give back preferential payments to the bankruptcy trustee.

Assets can be sold to insiders so long as the price is fair.

All desireable outcomes, if it’s possible.

DIY isn’t all roses

But…
Handling the shut down yourself has some down side:

  • May prevent management from accepting new employment
  • May require cooperation from creditors and lessors
  • May increase likelihood that disgruntled creditor will sue individuals too

Bankruptcy is simple

In Chapter 7, the bankruptcy trustee becomes responsible for liquidating assets, returning equipment, and dealing with creditors, freeing management to turn to other endeavors

The trustee has powers under Bankruptcy Code to sell leases despite anti assignment provisions and to avoid levies and writs of attachment, recovering value for creditors that isn’t possible outside of bankruptcy.

Filing bankruptcy seems to reduce the instance of creditors suing individual managers for corporate debt.

The automatic stay prevents aggressive creditors from diverting cash that could be used to pay taxes, employees, and guaranteed debts or recovering property needed for wind up.

But….
If the bankruptcy trustee winds up the business:

  • Trustee unlikely to get top dollar for saleable assets.
  • Insiders may be prohibited from buying technology, intellectual property or projects in development
  • Trustee’s fees and expenses are paid off the top
  • Trustee can recover preferences to trade creditors and to insiders and challenge pre petition transfers of assets if legally fraudulent
  • Bankruptcy process frequently slow and inexact
  • Claims are paid according to priorities in the Bankruptcy Code

Try some of each

The choice of how to wind up doesn’t have to be an either/or decision.

Management can liquidate assets as far as feasible, and file bankruptcy thereafter to let the trustee mop up.

Step back and look at the issues of timing, asset value, and creditor claims.

If the answers seem complex, consult a bankruptcy lawyer for help weighing the alternatives.

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643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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