Northern California Bankruptcy Lawyer

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The Soap Box

All You Need To Know About Bankruptcy Stay & Pending Litigation

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bankruptcy during litigationWhen a trial date looms, bankruptcy may look better and better to  a defendant.

Bankruptcy can be the emergency exit from a bad situation that is about to get worse.

That’s because every bankruptcy case comes with an  automatic stay .  That’s  a federal court injunction automatically entered when a bankruptcy case is filed, protecting the debtor and his property.

What does that mean, really, when the stay is imposed while litigation is underway?

Stay halts suit against debtor

The stay stops all parties from continuing the lawsuit in any way against the person who has filed bankruptcy.

The stay is in force, whether or not anyone has received notice of the bankruptcy.

Debtor’s counsel usually wants to notify all parties of the filing, long ahead of any notice of the bankruptcy case that may go out from the bankruptcy court clerk.  Some courts have a form used to provide notice to the court of the stay.

If someone goes ahead with actions against the debtor in violation of the stay, those acts are void or voidable.   (In the 9th Circuit, it’s “void”) .  So if a foreclosure sale takes place after the stay is imposed, the sale is void and of no legal effect.

Deliberate actions in violation of the stay expose the actor to damages, including punitive damages and attorneys fees.

The debtor’s damages include attorneys fees to stop the violation and collect those fees and damages.

Stay in Chapter 13 protects co debtors 

If the lawsuit involves a consumer debt, anyone who is jointly liable with the debtor is protected by the stay when the debtor chooses Chapter 13.

A consumer debt is defined as  “debt incurred by an individual primarily for a personal, family, or household purpose.” § 101(8)

Even though the co debtor didn’t file bankruptcy themselves, they get this protection because it’s seen as protecting the debtor as well.

The co debtor stay can be lifted by a motion for relief from the stay if the Chapter 13 plan doesn’t propose to pay the debt in full.

Suit may continue against others

Other defendants in business cases often hope that the bankruptcy of one of the defendants will stop the suit all together.

Sometimes, a filing has that effect for a while, as the trial court and the parties try to sort out what to do next.  But the injunction created by the bankruptcy court actually protects only the debtor.

The suit in a non bankruptcy court may proceed against other defendants.  The debtor may be required to appear as a non party witness in the suit as it resumes, but absent relief from the stay, the debtor is shielded.

Most courts hold that non bankruptcy actions can continue against corporations or other artificial entities owned by the debtor, even though a successful case against the debtor’s corporation may impair the value of the debtor’s asset and therefore impact the debtor’s bankruptcy case.

Trying multi-party actions including the debtor

Strategically, those suing the debtor may want to avoid going forward with the suit, with the debtor’s chair at the defendant’s table empty.  After all, one of the first things we learned in law school was to fill up all the chairs with those potentially liable.

Two options are available.  Litigants can seek to remove the suit to bankruptcy court under 28 U.S.C. 1441 and try the claim in bankruptcy court or the district court.

Alternatively, litigants can seek relief from the automatic stay to try the case against the debtor and his codefendants, under the condition that any judgment obtained at trial be returned to bankruptcy court for enforcement.

Dischargeability not an exception to the stay

Even creditors whose claims are not dischargeable in bankruptcy must respect the automatic stay.  There is no exception just because you know, or hope, that your claim will survive the bankruptcy.

There is a long list of actions not within the scope of the stay, found in subsection b of 362, headed by carve-outs for criminal matters; family law actions for paternity and status; tax assessments (but not collection).

Discharge provides permanent injunction

 The automatic stay terminates when property is no longer “property of the estate”.  The protection of the debtor and his assets, current and future, is replaced by the discharge injunction.

So, unless the claim you are prosecuting before bankruptcy against the debtor is non dischargeable, you are not free to resume suit against the debtor once the discharge is entered.

How to proceed

Most state court judges have been conditioned to hold hard when there is a suggestion of bankruptcy.  Restarting a pending suit against remaining defendants is often facilitated by seeking an order granting relief from the automatic stay, or a “comfort order” that there is no stay that prevents continuation of litigation.

More

Chapter 13 rescues debtor

What to do when you’re sued

When bankruptcy is the right choice

 

Image courtesy of Geralt and Pixabay

Can You Get A Car Loan After Bankruptcy?

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car loan after bankruptcy

Wheels are essential for most of us to get to work.

And whatever you’re driving when you file bankruptcy will need to be replaced at some point.

So, how are you going to finance that next car if you’ve just filed bankruptcy and face 7-10 years with the bankruptcy on your credit report?

The credit industry tries to fan that worry;  after all, they want you to keep paying on impossible debt rather than get a fresh start.

They want you to believe that no credit is available for eons to those who have filed bankruptcy.

Hogwash.

Bankruptcy improves your credit score

Under the credit scoring system used by Fair Isaacs, your credit score improves after bankruptcy.  Upon entry of the discharge, your debt to income ratio improves dramatically.

When you sit down to pay your bills after bankruptcy, there are fewer creditors clamoring for a piece of your paycheck.

Now, granted, that’s just one element of the score.  But it makes the point that credit scores are not all about whether you paid your bills as agreed.

The negative impact of a bankruptcy fades over time, time that is far shorter than the 10 years that it may appear on your credit record.

People in bankruptcy get car loans

The most compelling evidence that credit for a car is available after bankruptcy is the fact that many debtors currently in Chapter 13  get loans to replace old cars.  They haven’t even gotten the discharge of their debts yet.

They pay a significantly higher interest rate for loans during bankruptcy.

But they are living proof that car loans are available.

The take away?  Bankruptcy affects the price you pay for credit but doesn’t usually bar you from credit.

Consider getting a replacement car before bankruptcy

I often send clients planning on filing bankruptcy who are driving cars on their last legs out to shop for a new car.

And lots of them report back that they got a loan even with all the nasty debt still on their credit report.

The auto industry can be counted on to see that you can get a loan to buy their product!

My only admonition to them is to tell the truth on the loan application.  To do otherwise creates problems far bigger than an unreliable car.

If you get a car loan on the eve of bankruptcy, you are also signing up to keep paying that loan through and after the bankruptcy.

Join a credit union

Credit unions are different than banks in lots of ways, but the most important one is that they are in business to make loans to their members.

Become a member.

Do your banking at the credit union.

Start creating a solid, post bankruptcy credit.  If your present car is paid off, start making a monthly “payment” to your  “replace the car” fund.

After all, you don’t have to finance all of the purchase price of the car.  Be ready to make a meaningful downpayment, making the size of the loan you need smaller.

Your budget will appreciate a smaller monthly car payment when the time comes to get a new car.

More

Reaffirming a car loan

Paring down a car loan in Chapter 13

Life after bankruptcy

 

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.

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

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How corporate officers can avoid personal liability

When a business needs to wind down

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