Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Closing Up Shop

By

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.

More

Payroll tax trouble

Separating the business from the business owner

Myth of the corporate business card

Know who you are when the business files bankruptcy

By

 

While knowing who you are may be central to philosophy and mental health, you wouldn’t think it poses a difficult question in a business bankruptcy.

You wouldn’t think the word “you” would be so challenging.

Yet, small business owners find it hard to separate themselves from the business, even when that business is incorporated.

After all, the owner’s financial livelihood rises and falls with the success of the corporation’s business.

You and your corporate business

Twice in the past two days, I had occasion to point out to clients who own small corporations that when the bankruptcy trustee says “you”, the trustee is talking about you, the individual, not the business that you have been immersed in.

How to sign for your corporation and not be personally on the hook

But the distinction is important.

In the law, the corporation that owns the business is a separate legal “person” from the flesh and blood human being who owns the stock in the corporation and serves as its officer and director.

The debts of the corporation are not necessarily the debts of the shareholder. The corporation can file bankruptcy without the shareholder, and conversely, the shareholder can file bankruptcy without impacting the day to day operations of the corporation.

In analyzing a bankruptcy filing or answering questions from a bankruptcy lawyer or bankruptcy trustee, make sure you know who you are.

More about struggling businesses

Individual bankruptcy and business debts

Is it safe to file corporate bankruptcy

The unexpected benefits of incorporating

When your business needs to wind down

 

More on business bankruptcy on Bankruptcy in Brief.

Bankruptcy Discharge Slays IRS Form 1099

By

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

 

How Does Your Household Budget Measure Up?

By


stretching money

The expenses your paycheck has to cover go on and on.

Each dollar is stretched;  each expense clamors for attention.

Too often, the expenses go on long after the available money is gone.

What seem like immediate needs squeeze out those necessities that only come round occasionally but in big numbers:  car repair, medical incidents, college.

And when the “occasionals”  do come round, you’re caught short.

I generally see families to talk about bankruptcy when things have gotten so out of balance that better budgeting won’t fix the problem.

So, let’s take a tour of the cost of living so you can stay in balance, and we’ll never meet face to face in my law office.

What daily living costs

Consumer Credit Counselors  proposes a model allocation of your income among all of those categories on your household expense list.

The headings in blue are the big wedges of the pie;  below are all of the expenses to be paid from that percentage of your income.

 

MONTHLY EXPENSES

MONTHLY AMOUNT

HOUSING

 35%
Rent
First Mortgage
Second Mortgage
Association Dues
Property Taxes
Renters/Homeowners
Lot Rent
Home Maintenance
Electric/Gas/Oil/Propane
Water/Sewer/Garbage

TRANSPORTATION

 15%
Gasoline
Auto insurance
Maintenance – Oil/Lube/Tires
Auto Tags/Inspection
Bus Fares/Ride Shares/Parking

INSTALLMENT DEBT

 15%
Car Payment #1
Car Payment #2
 Student Loans
Tax installments

EVERYTHING ELSE

 25%

FOOD
Groceries
Meals Out
School Lunches
Food/Snacks at Work
Telephone/Cell Phone/Beeper
Cable TV/Internet

CLOTHING

INSURANCE
Medical
Life

HEALTHCARE
Drugs/Medication
Office Visits/Deductible
Dental
Optical

CHILDCARE
Daycare/Babysitter
Allowances/Kid’s Stuff
Diapers/Formula/Baby Supplies
Child Support
School – Tuition/Supplies
Church/Charities
Lawn/Pool Maintenance/Home Security
Personal Care – Shampoo/Toothpaste/Haircuts
Bank Service Charges/Postage
Work Tools/Clothes/Occupational Dues
Dry Cleaning/Laundry
Home Cleaning Supplies
Cigarettes/Tobacco
Hobbies/Clubs
Lottery/Casinos/Bingo
Gifts/Parties/Holidays/Cards
Vacations/Travel
Alcohol
Books/Newspapers/Magazines
Lawn/Pool Maintenance/Home Security
Movies/Sporting Events/Entertainment
Pet Care/Vet/Food/Medications

Savings/Reserve

 10%
Emergency reserves
Retirement
College

TOTAL

 

So, how do your monthly expenditures line up against this model allocation?

I was struck by how many of my standard expenditures are slated to come out of just 25% of my income.  That’s a long list.

Reshuffle the cards

Another way to look at your allocation of money comes from now-senator Elizabeth Warren’s book, All Your Worth:

  • 20% to savings;
  • 50% to must-haves; and
  • 30% allocated among your “wants”.

How does it work in your household?

 

 

How One Family Settled Huge Debt For Pennies

By

debt settlement
When he started the Chapter 13 trek, he owed $370,000 in personal loans and credit cards.

As he completes his plan, he will have settled that debt for three cents on the dollar.

No tax is due on the forgiven debt and no listed creditor can legally come back to try to collect the difference.

And that’s why I love Chapter 13 bankruptcy.

Chapter 13 in the real world

I’ve talked here lots about how Chapter 13 is structured, how plan payments are calculated, and all the nifty things Chapter 13 can do for those with bills they can’t pay.  It’s sometimes dry and dense, but you see how it works.

But here’s how it worked for one real family now completing their plan.

They confirmed a Chapter 13 that resolved their debt for 3% of what they owed when they filed.

They got five years to pay that 3%, interest free.

The payments through their plan cured any pre bankruptcy arrears on their house, in full and without interest or penalty.

They were protected from the taxing authorities while they cured delinquent property taxes.

And in our insane real estate market in the Bay Area, their home appreciated about 50%.  Appreciation that is theirs, rather than their creditors’.

Plan payment driven by asset value

Not all unsecured creditors are as lucky as the creditors in this case, who got something on their claims, even if it was only three cents.

Because the couple had some stock and other assets that weren’t exempt, their plan had to guarantee unsecured creditors a share of the $11,500 value of those non exempt assets.

Based on their income and the infamous means test, general unsecured creditors wouldn’t have gotten anything.

So, the take-away is that just what you have to pay in Chapter 13 is decided by the interaction of the kind of debts you have; the income that the law says is available to pay those debts; and the value of your non exempt assets.

But seen from the top of this mountain, Chapter 13 is powerful.  And the view of life after bankruptcy is stunning.

More

Life after bankruptcy

How Chapter 13 plan payments are calculated

Little known alternative to bankruptcy

 

The Flat Wrong 1099

By

credit-squeeze-transparentWhen her soon-to-be-ex filed bankruptcy, my client got a 1099-C for the joint credit card.

The form claimed that the debt was cancelled.

Therefore, she had additional income equal to the card balance.

Only, none of the statements on the 1099 were true.

The debt wasn’t discharged as to the non filing spouse.  One spouse’s discharge does not discharge the personal liability of anyone else.

Further, the liability of the soon-to-be-ex wasn’t even discharged yet since it was the beginning of a 3 year Chapter 13.

The discharge doesn’t come until all the plan payments are made.

What to do?

Cancelled debt and taxes

Tax law requires the holder of a debt that is forgiven to report the forgiveness to the IRS.

The forgiveness can be voluntary, as in, we compromised the debt and now you owe less.

Or, it can be by operation of law:  you filed bankruptcy and discharged the debt.

Either way, the tax man sees the amount of money that you no longer owe as if it were cash income.

And, if it’s income, then you owe tax on the income.

No tax in bankruptcy

If my client was the spouse who had filed bankruptcy, she would properly have gotten a 1099-C, at the end of the case.  When the debt was truly gone.

But she wouldn’t have owed tax on the discharged debt, because bankruptcy is an exception to the rule.

Debt forgiven in any chapter of bankruptcy does not trigger cancellation of debt income.  Therefore, no tax.

Tax treatment of cancelled debt is one of the sterling features of bankruptcy that make it superior to debt settlement.

Attacking the erroneous 1099

Strike first, is my thought, when the 1099 is wrong.

The credit card company issued the defective 1099. Write the issuer and request an amended 1099.

The deadline for sending out 1099’s is about six weeks earlier than the deadline for submitting the 1099’s to the IRS.

Jump on the problem right away and attempt to correct the situation before it gets to the IRS.

When the IRS gets bad information

If you couldn’t head off a submission to the IRS that was wrong, tackle the problem in your tax return.

You can’t just file the return as if the IRS didn’t think you had this  extra “income”.  You have to address the error and overcome it.

The IRS has a form for claiming an exception to the cancellation of debt income rule:  Form 982.

Attach your explanation of why the 1099 is wrong to the 982.  There isn’t a box, or an “other” category on the form where you can provide further information, so you’ll have to attach your explanation to the form.

If not resolved at the issuer level, my client will have to point out that she hasn’t been relieved of the debt, since she hasn’t filed the bankruptcy AND that her spouse hasn’t yet been relieved of the debt yet either, as there is no discharge.

Wash, rinse and repeat

I’ve spoken as though the IRS was the sole taxing authority involved.

If you live in a state with an income tax, you must repeat the drill described for the IRS with your state tax agency.

Personal liability required

Probably the most common error in issuing 1099’s is the matter of personal liability.  If the debt cancelled was non-recourse, the borrower had no personal liability in the first place.

Cancellation of a non recourse debt doesn’t alter the borrower’s balance sheet.  The borrower wasn’t personally liable before cancellation, so there’s no cancellation of debt income to address.  More on the fictional 1099.

As I said, see above and wash, rinse and repeat.

More on tax

Discharging taxes in bankruptcy

Tax liens after bankruptcy

When tax debt is a life sentence

 

Is Your Choice Of Bankruptcy Chapters Really Dictated By Your Stuff?

By

Through my Twitter feed came a link to the pro’s and con’s of filing bankruptcy from the business section of the Chicago Tribune.

Good chance to see how non lawyers see my world, I thought.

Bankruptcy was all about protecting “stuff”, said the writer, and the choice of chapters is driven by the kind of “stuff” you had.

Chapter 13 is for people who have equity in their property;  Chapter 7 is for people who have little and can’t meet their basic expenses, the article went on.

I could quibble about the dichotomy that’s set up that Chapter 7 filers have nothing and Chapter 13 filers have more. (Often, it’s the other way around).

I  further contest  the implied suggestion that the Chapter 7 discharge is broader than Chapter 13.  (It’s not.  In fact, the Chapter 7 discharge is a bit narrower.  It’s just quicker.)

But my real beef is the characterization that bankruptcy is about your stuff and how to keep it.

Not so, in my view.

Bankruptcy is about people, not possessions

Bankruptcy is all about protecting lives.  Sometimes it’s about giving up “stuff” and getting back your life.

Your old age is strongest reason to file bankruptcy

It’s about not paying forever for bad luck or bad choices.  It’s about freeing up money to provide for your future.  It’s  about freeing up mental energy to do something beyond juggle too-little money, subject to too many creditor claims.

Considering bankruptcy is a chance to evaluate what’s really important and what’s possible.

Sometimes, stepping back tells you the house is worth struggling for.  Sometimes, in the big picture, the house is really a dead weight on the important parts of your life.

Bankruptcy is about starting over, or reorganizing.  It’s about recognizing reality and doing something about it.  It’s about being an activist to take back your financial life.

Stuff be damned.

More

Hold or fold?  is bankruptcy the right choice?

Life after bankruptcy

 

@cathymoran

Image courtesy of mojmir_ch.

Bouncing Back From Bankruptcy: The To-Do List

By

You’ve hurdled the debt chasm and finished your bankruptcy case.

There’s a fresh  start ahead.

But where do you start on that fresh start?

Consider this to-do list for bouncing back from bankruptcy.

Keep on keeping on

Whether your bankruptcy case was a Chapter 7, over and done in months, or a Chapter 13 reorganization lasting years, you’ve probably been funneling money at old debt problems for a long while.

Use that discipline you honed through tough times to set aside a like amount for yourself now that you’re out of debt.

You’ve shown that you can do it.  Keep doing it, but for yourself and your family.

  • Create an emergency fund, so you don’t have to resort to credit cards or payday loans when there’s an unexpected or infrequent expense.
  • Up your retirement game.  We live longer and that’s no fun if you’re barely getting by.

Know what debts survived your bankruptcy

Not all debts get wiped out in bankruptcy.  Figure out what remains to be paid, if anything, in your case.

Debts that survive a bankruptcy discharge

A creditor with a debt that survives the bankruptcy retains legal rights to enforce that debt.

So make a list of the surviving debts and make a plan for payment.  If you can’t retire the debt as fast as the creditor insists, consider filing Chapter 13 to impose a 3-5 year repayment plan on the troublesome creditor.

Figure out where your money goes now

Take a look at the fixed expenses in your life.  Usually that’s housing and transportation.

Can you afford the mortgage payment or the car payment that stretches out into your future?

Look at your monthly expenses that are more easily trimmed.

  • what are you spending on cable, internet, and cell phones?
  • are you overpaying for insurance on your car or your home?
  • do you rely on fast food or prepared meals that you could fix at home?
  • are you having more taxes withheld than required to pay what you’ll owe?

Clean up your credit report

I’d like to say that credit reports are only important if you want to get back into debt.

That’s what credit reports were created to do:  help lenders decide who gets credit and at what price.

But the unfortunate truth today is that credit reports impact rental housing; insurance rates; and even job prospects.

So, make sure the debt discharged in your bankruptcy shows as having a zero balance. Here’s how.

Avoiding another financial crisis

Most bankruptcies are triggered by things over which you have little control:

  • job loss;
  • ill health;
  • divorce.

You may not be able to insure that none of those things happen again.

But with forethought and savings, you can absorb many financial blows and survive.

More

What’s life really like after bankruptcy

Resetting how you think about money and life style

Your mortgage after bankruptcy

Your discharge comes with rights: enforce them

 

Behind On Your Car Payment? How To Keep The Car & Pay Less

By

car repossessionIf you are one of the  7 million Americans living in fear that your car will be repossessed, consider how Chapter 13 bankruptcy can save your wheels.

Losing your car can accelerate a torrent of nasty financial consequences.

No car, no way to work.

No work, no income.

So, what can a Chapter 13 bankruptcy do to put you back on the road?

Stop repossession

All chapters of bankruptcy impose an injunction on creditor efforts to collect debts, or enforce liens, automatically when you file.   That automatic stay applies whether or not the creditor knows about it.

So, file bankruptcy and any collection actions taken without court permission are void and legally ineffective.  If they pick up your car after you’ve filed, you can compel its return.

The only exception to the stay applying automatically is if you’ve had two bankruptcy cases dismissed in the past 12 months.  More on multiple dismissals.

Spread out car payments

Chapter 13 allows you to put forward a plan to restructure your car loan.  The remaining payoff balance on your car loan can be spread over 60 months.

Unless your car loan is very new, or the original term very long, that probably lowers what you pay each month through the plan.

Reduce interest rate

You can adjust the interest rate on a car loan paid through the plan to the current day, market rate.  As I write, that interest rate in California is between 4 and 5%.

This power to lower the interest rate is central to a successful readjustment of a high interest car loan.  It’s of little help if your loan is less that today’s market rate.

But Chapter 13 in the states of the 9th Circuit has another trick up its sleeve.

Strip out loan add ons

Part of a Chapter 13 plan can be cutting the car loan down to the portion of the loan that financed the car itself;  you can knock out any part of the loan that paid off an underwater trade-in, or a service contract, or gap insurance.

The 9th Circuit said in Penrod that these additions to the amount financed were not protected by the 2005 bankruptcy amendments that gave special consideration to car lenders.

So, you can pare down the car loan that has to be repaid to just the amount of the loan balance used to buy the car itself, and not all the extras.

Deal with other debts

You don’t just file bankruptcy on one debt; bankruptcy includes all your debts.

Some may be absolutely dischargeable, perhaps without paying anything on them.

Some liens can be wiped out.  Back payments on home loans can be caught up in Chapter 13.

Chances are that there’s more going on in your financial life than just the trouble with  your car loan.

An experienced bankruptcy lawyer can help you look at the big picture and propose a solution to keep you trucking.

More

Your car in Chapter 7 bankruptcy

Is bankruptcy the right choice for you

Interviewing a bankruptcy lawyer

 

 

 

The Difference Between Good Bankruptcy Lawyer and Great Bankruptcy Lawyer

By

question-markFinding the right bankruptcy lawyer may be the difference between a successful bankruptcy and a nightmare.

Choosing a lawyer you can talk to is critical.

You’ll be disclosing lots of information normally held confidential.

But there’s more.

It’s not just a lawyer you can tell your secrets to.

You need to find a lawyer willing to answer your questions, over and over, if necessary, until you understand the choices that you must make in filing bankruptcy.

Until you understand the issues and the consequences, you can’t play your position on the bankruptcy team.

Choices after deciding to file

Some things a client doesn’t have to truly understand to file bankruptcy: how the means test works, or doesn’t work, is one of them.

The debtor need only validate some of the information in the form.

But other bankruptcy issues require the client to make choices and perhaps confront risks.

Is the loan repayment to your parents a recoverable preference?

Does the recent use of your credit card make you susceptible to the charge of incurring debt by fraud?

Are you at risk of a UST challenge to your Chapter 7 case as an abuse?

Decisions surrounding these issues are, in the end, the client’s decision. The factors are complex, and in this day of “new” bankruptcy law, sometimes uncertain.

The client needs to feel absolutely comfortable asking their counsel to explain the issue, assess the risks, and explore alternatives with them.

The lawyer needs to be capable of explaining without jargon or presumption.

The bankruptcy problem your lawyer can’t handle

So I would add to the list of qualities in superior bankruptcy counsel: openness to the layman’s questions.

Great bankruptcy lawyers are willing to restate and reanalyze the options until the client understands.  You need to feel comfortable saying you don’t understand and asking that the lawyer try another way to say it.

A lawyer who is not capable of making you a partner in the conduct of the case may end up excluding you from considerations that rightfully belong to you, the client.

More

Questions to ask a prospective bankruptcy lawyer

What should bankruptcy cost

Can you afford the bankruptcy alternatives

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

Categories