Filing Bankruptcy for Corporations
By Mark Markus | August 2, 2010
When, or if, to file bankruptcy for a corporation is the subject of major confusion among many corporate owners and officers. For purposes of this article, when I refer to a corporation, I also mean to include partnerships and LLCs.
There are only two bankruptcy choices for a corporation: Chapter 11 or Chapter 7.
Chapter 11 would be used if the goal is to continue operating the corporation’s business and reorganize the debts by proposing a repayment plan to creditors. Creditors get to vote for or against the plan. Sometimes less than 100% can be repaid, but there are a lot of complexities to Chapter 11, which is beyond the scope of this article.
Chapter 7 is a straight liquidation of assets of the corporation. The corporation must (if it has not already) stop doing business when the Chapter 7 case is filed. A Trustee is appointed to sell the corporate assets and disburse the proceeds in accordance with statute to creditors. It is very important to understand that corporations do NOT receive a discharge of debts in a Chapter 7 case.
I frequently get inquiries from owners of corporations asking about filing a Chapter 7 case for their corporation so they can discharge the corporation’s debts and move on . After I inform them that corporations don’t receive a discharge of debts, they ask me how they are going to deal with all that debt. When I ask if they mean themselves personally or the corporation, their eyes frequently glaze over in a source of some confusion.
The confusion apparently stems from the fact that many small business owners do not understand that a corporation is a separate legal entity (which is, presumably, why it was formed to begin with). Whether or not a corporation files bankruptcy has nothing to do with any personal obligation the owners or officers of the corporation may have. For example, if the owner of a corporation signed personal guarantees on certain corporate debts, or has personal tax liability for corporate tax obligations (such as employee payroll trust fund taxes), that obligation does not disappear unless and until those debts are paid. So unless there are enough assets available in the corporation to pay all those debts, the owner will still owe on those debts for which they are personally responsible regardless of what the corporation does.
So, in short, whether or not a corporation receives a discharge of debts is a big “who cares?” because it simply doesn’t affect anything. If a corporation is going out of business, it simply doesn’t matter whether the debts are discharged or not because the corporation’s creditors will just sue the corporation and recover against whatever assets of the corporation are available and that does not affect the principals of the corporation.
90% of the time, what these owners of corporation are really looking to do is file a bankruptcy for themselves (the owners) personally–not the corporation. In such cases, they should consult with a bankruptcy attorney about an individual bankruptcy case. However, there are times where filing a Chapter 7 case for a corporation is beneficial. In the case where the corporation has assets and wants to stop doing business, having an independent Trustee appointed to sell and disburse assets to creditors can eliminate that responsibility for the owner(s) of the corporation and release them from liability for not having properly disbursed corporate assets and winding up the corporation properly. In fact, corporate officers have a fiduciary duty to corporate creditors when the corporation becomes insolvent, so taking a step such as filing Chapter 7 can fulfill that duty.
Another benefit of filing a Chapter 7 for a corporation is that it puts all the corporation’s creditors on notice that the business is terminating and whatever assets may be available will be distributed through the bankruptcy, and that will be all. Thus, there would be no reason for the creditors to sue the corporation post-bankruptcy, whereas if a bankruptcy is not filed, the owner of the corporation may have to continually appear in court to inform the judgment creditors that the corporation is no longer operating and has no assets.
There are a lot more pros and cons to be discussed and any owner of a corporation in this situation should consult with a qualified bankruptcy attorney to have their situation fully evaluated.
For more information, please also visit http://www.bklaw.com/business_bankruptcy.html
Topics: Bankruptcy Law, business/corporate bankruptcy, chapter 11, chapter 7 | No Comments »
Failure to File Financial Management Course Form 23 in Bankruptcy
By Mark Markus | July 30, 2010
For bankruptcy cases filed after October 2005 individuals must, after filing their case, take a Financial Management Course and file Official Form 23 along with the certificate of completion to receive a discharge in any bankruptcy case. The financial management (sometimes also referred to as the debt management) course is different from the pre-filing credit counseling course which must be filed along with the initial bankruptcy petition. These courses must be taken from an institution approved by the Office of the United States Trustee.
Many debtors who file bankruptcy cases without the assistance of a bankruptcy attorney eventually receive a shocking notice in the mail which states: “Case closed without discharge. Debtor has not filed a Financial
Management Course Certificate proving compliance with the required instructional course requirement for discharge.” However, they’ve done everything else required of them except for taking the required financial management course and filing the required Form 23. All that time and work, and no discharge?
Fortunately, there is usually a solution if this happens in your case. Pursuant to 11 U.S.C. 350, and Federal Rule of Bankruptcy Procedure 5010 you can file a motion to reopen your case and, if granted, take and file the required financial management course certificate. The best way to accomplish this is to hire a bankruptcy attorney for this purpose to make sure the facts of your case are presented properly and maximize your chances to have the Motion granted and to get your discharge entered.
There is a court mandated filing fee for the Motion to Reopen for the purpose of filing official form 23 (presently $260) and attorney’s fees vary, but this is not the time to skimp and save. You have now discovered one of the reasons why you should have hired a bankruptcy attorney in the first place; now is the time to do so and obtain your discharge.
Topics: Bankruptcy Law, chapter 13, chapter 7, credit counseling, financial management course | No Comments »
Automatic Stay in Bankruptcy: BAP Clarifies Scope
By Brandon Moreno | July 23, 2010
One of the advantages of filing for bankruptcy is that it triggers something called an “automatic stay.” The stay takes effect immediately, and prohibits creditors from engaging in most debt-collection activities, such as demanding loan payments by phone or mail. The purpose of the stay is to ensure that the bankruptcy process can distribute a debtor’s assets to creditors in an orderly fashion, and to ensure that one creditor cannot take advantage of another by racing to capture scarce assets.
The basic concept of the automatic stay is well-settled in bankruptcy law. But the precise scope of the stay is a matter of some dispute, and bankruptcy courts have issued numerous opinions attempting to clarify the types of creditor activities that the stay does and does not allow.
The Bankruptcy Appellate Panel for the Ninth Circuit (BAP) recently added to this body of case law in In re Zotow, 2010 Bankr. Lexis 2178 (9th Cir. BAP 2010). The case involved a married couple whose assets included a home mortgage that required monthly payments of principal, interest, and approximately $185 in escrow items such as taxes and homeowners’ insurance. The couple fell behind on their payments and eventually filed for bankruptcy under Chapter 13. After receiving notice of the bankruptcy, the mortgage lender calculated a new escrow payment of approximately $300 per month. The lender then notified the couple in writing to explain the higher amount and its effect on the total monthly mortgage payment. The Chapter 13 trustee later made post-petition installment payments to the lender based on the new escrow amount.
The couple argued that the lender violated the automatic stay in two ways: (1) by increasing the required amount of the post-petition escrow deposits as a ruse to collect pre-bankruptcy escrow arrears, and then sending notice of this increase; and (2) by receiving the increased post-petition mortgage payments from the Chapter 13 trustee.
Before addressing these arguments, the court explained that a creditor communication generally violates an automatic stay where direct or circumstantial evidence shows that the communication was geared toward collection of a pre-bankruptcy debt, was accompanied by coercion or harassment, or otherwise put pressure on the debtor to pay. On the other hand, “mere requests for payment,” or statements providing information about a debt where the debtor has an interest in receiving the information to formulate a confirmable Chapter 13 plan, are generally permissible.
Applying these guidelines, the court rejected both of the couple’s arguments and held that the lender did not violate the automatic stay. The lender’s notice was permissible because it was not an invoice, merely set forth the facts of the debt, and was not accompanied by a payment coupon or envelope. The couple, moreover, had an interest in receiving the information in the notice to formulate an appropriate Chapter 13 plan, and neglected to challenge the higher escrow amount soon after receiving the notice.
The lender’s act of receiving the higher escrow payments was also acceptable under the stay because it did not involve any act to collect a pre-bankruptcy debt. Indeed, the lender did not act at all; the Chapter 13 trustee simply made the payments as required under a local rule for post-petition contract installment payments.
In re Zotow involves a fairly technical issue, but is an important case nevertheless. If you are contemplating bankruptcy, you should know your rights, and what creditors can and cannot do during the bankruptcy process. An experienced bankruptcy attorney can help you understand the types of relief you can expect from an automatic stay and take action to enforce the stay where necessary.
This is a guest post written by Brandon Moreno, Vice President of the Utah Bankruptcy Hotline. The Utah Bankruptcy Hotline maintains a network of unaffiliated Utah bankruptcy attorneys who provide debt relief and consumer bankruptcy counsel.
Topics: Bankruptcy Law, automatic stay, chapter 13 | No Comments »
Bankruptcy Consult: Importance of Providing Information to Attorney
By Mark Markus | July 13, 2010
Filing bankruptcy is a very important decision to make. Filing bankruptcy can be a powerful tool with great benefits, but if not handled properly can have disastrous consequences. Before any qualified bankruptcy attorney files a bankruptcy case for someone, they must have a comprehensive consultation with the potential client to evaluate and assess the relevant facts of that client’s situation to determine the various options, both inside and outside of bankruptcy.
In order for a bankruptcy attorney to make a proper assessment of a person’s eligibility to file bankruptcy (including which chapter to file under, if any) it is absolutely necessary for the attorney to have certain financial and other information about the party or parties considering bankruptcy. This includes information on current income and expenses, as well as information on what income was received in the 6 months prior, information on value of assets and, of course, the debts.
I require my potential clients to complete online forms providing this information so I can give them the best possible advice with as much accuracy as is possible these days. However, many people refuse to complete these forms because they simply do not want to provide the information (yet?) to me and simply want me to talk to them and tell them what they should do bankruptcy-wise. After having practiced exclusively bankruptcy law for nearly 20 years, I can tell you that without the hard numbers and information, this is impossible.
This is the equivalent of going to a doctor with a problem you need resolved, but you won’t let the doctor run any blood tests or get a medical history from you. There may be doctors who try to treat patients this way, but I certainly wouldn’t recommend it.
It is important to have reasonable expectations in whatever path you take in life, and seeing a bankruptcy attorney is no different. If you’re serious enough to seek the input of a bankruptcy attorney, then you should be prepared to put together the necessary information and documentation to enable that professional to best assess your options and assist you in resolving your issues to the extent able under the law.
Topics: Bankruptcy Law | 2 Comments »
Bankruptcy: Waiting Too Long to File Your Case
By Mark Markus | June 22, 2010
It is very common for people to wait too long to file a bankruptcy case, even after consulting with a bankruptcy attorney.
It seems to be human nature to procrastinate, particularly when faced with doing something as unappealing as filing a bankruptcy case. Lately, however, I have seen an increase in people waiting too long to file.
It is understandable: Filing bankruptcy is not free and it’s not a fun path to take. People often need to save up money to file, and there may be other reasons to wait to file. People also like to be hopeful that things are going to change and they won’t need to file. However, there can be consequences, sometimes dire, if you wait too long. I’ve had several such cases in the past few weeks.
One client had a consultation with me over a year ago, at which time I advised he should file a bankruptcy case, but should probably wait a couple of months to let more time go by since the last time charges were made on his credit cards (which is sometimes advisable to avoid possible objections). But eligibility to file bankruptcy, particularly chapter 7, depends on both your income for the 6 months prior to filing, as well as your current income when your case is filed.
So, this client who was more or less unemployed for over a year, received a job offer that paid a decent amount. He hadn’t started the job yet. One of his creditors finally filed a lawsuit and at that point he contacted me back about filing the Chapter 7 case. However, due to the new job, he no longer qualified for Chapter 7, and was looking at doing a substantial repayment plan in a Chapter 13 bankruptcy case instead. Now this, of course, is not a disaster, but it ended up costing him more in attorneys fees, plus about $30,000 in payments towards his credit cards,(which he could now afford, but if he had filed when I advised, he’d be able to save that money instead!
There are a lot more examples I could provide, but it is important to understand the consequences of waiting and be realistic in your assessment of those risks and to discuss them with your attorney. This, of course, assumes one has already had a consultation with an attorney. I could write a whole separate article for people who wait too long to even seek an initial consultation about their financial situation!
Topics: Bankruptcy Law, chapter 11, chapter 13, chapter 7 | No Comments »
Re-filing Chapter 7 Bankruptcy Case After Prior Dismissal
By Mark Markus | May 4, 2010
I was asked a question in a forum: If a chapter 7 bankruptcy case gets dismissed for “failing” the means test, under 707(b) of the bankruptcy code (11 U.S.C. 707(b)), is there any time limit on re-filing? The answer is, for most cases, “no.”
There are penalties for filing subsequent bankruptcy cases within one year after a prior case has been dismissed. The main penalty is that the automatic stay, which prevent creditors from commencing or continuing any legal action against the debtor, terminates 30 days after the petition is filed (and in cases of multiple dismissals, never goes into effect). However, this “penalty” is excluded from cases which are dismissed as a result of failing to “pass” the means test under 707(b) of the bankruptcy code (11 U.S.C. 707(b)).
A judge can still order a prohibition on re-filing a case for 180 days, but that is only usually done where there are harsh facts showing an abuse of the bankruptcy system.
Topics: Bankruptcy Law, chapter 7, means test | No Comments »
You Can Still Eliminate Credit Card Debts and Taxes in Chapter 7
By Mark Markus | February 17, 2010
Contrary to popular understanding, in most cases credit card debts are still dischargeable in bankruptcy without a repayment plan (in a Chapter 7 bankruptcy case). In many cases, tax debts can also be discharged. This is not new information, so why am I writing this? Because not a week goes by that I don’t get a prospective client in my office who tells me they thought that when the bankruptcy laws changed in 2005 (yes, 2005) it eliminated the ability to get rid of credit card debt in a Chapter 7 case (as opposed to a Chapter 13 repayment plan).
This is NOT true. While it was clearly the intent of Congress to appease the credit card lobby and make it more difficult to eliminate credit card debt, the new bankruptcy laws which went into effect in 2005 made filing bankruptcy more complicated, but certainly did not eliminate the ability to do so.
Credit card debts are just as dischargeable as they were for at least 30 years prior to the recent law change. They are not dischargeable if incurred through fraud or other exceptions to discharge (see http://www.bklaw.com/discharge.html for more information on this), but otherwise you can still file a Chapter 7 case (or a chapter 13 or Chapter 11) and eliminate credit card debt.
Income taxes may also me discharged under certain circumstances. The law has not change on this in over 30 years. It is a very complicated analysis, and dischargeability can only be determined after analysis by a professional of ACTUAL internal transcripts from the taxing agency, but the basic rule is that if the taxes are older than 3 years from the date the return was last due to be filed, and the return was filed more than 2 years ago, and not assessed in the last 270 days, then they may be dischargeable. To see more on tax discharge in bankruptcy, visit http://www.bklaw.com/taxes_bankruptcy.html
The bottom line is, don’t believe rumors. Talk to a bankruptcy attorney about your options.
For more interesting bankruptcy myths, visit http://www.bklaw.com/bankruptcy_myths.html
Topics: Bankruptcy Law, chapter 7, credit card debt, new bankruptcy laws, taxes | No Comments »
How to Lose a Chapter 7 Discharge: Failure to Keep Adequate Records
By Mark Markus | February 5, 2010
A while back I wrote an article about the importance of keeping records and receipts, as they are necessary in a bankruptcy case (see http://bklaw.com/bankruptcy-blog/2008/11/receipts-and-documentation/). This requirement was recently revisited by the 9th Circuit Court of Appeals in In re Caneva, 550 F.3d 206 (9th Cir. 2008). In that case, the court held that a debtor filing bankruptcy would be denied his discharge because he failed to maintain or preserve adequate books and records from which the Trustee in bankruptcy (and creditors) could assess the debtor’s financial condition.
This is one of the prerequisites to obtaining a discharge in a Chapter 7 case. 11 U.S.C. 727(a)(3) states that one of the bases for denial of a discharge in a Chapter 7 case is where the debtor “has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all the circumstances of the case.”
The court in Caneva opined that this is particularly true where the debtor is self-employed or operating a business, but it is required in all cases.
Caneva
Topics: Bankruptcy Law, Discharge Issues, chapter 7 | No Comments »
Private Student Loans in Bankruptcy: Dischargeable?
By Mark Markus | December 29, 2009
My question of the week comes from a client who wanted to know if private student loans he owed on were discharged in a bankruptcy case he filed in 2002.
For bankruptcy cases filed PRIOR TO October 17, 2005, if the PROGRAM under which a student loan was issued, insured, administered was a FOR-profit, PRIVATE (non-government) entity, the loan/debt may have been discharged. However, if the program itself, such as LAL, GSL, etc. received nonprofit funding by participation of nonprofit entities, the loan is not dischargeable in bankruptcy.
To see a ninth circuit case which examines the private vs. government distinction on student loans in bankruptcy, see In re Pilcher
For bankruptcy cases filed after October 17, 2005, the only way a student loan is dischargeable is if the debtor can prove “undue hardship” as that term is interpreted by the courts in whatever district the case is filed in. It is a difficult standard to meet, and the vast majority of student loan debts are not dischargeable.
To see more on how the undue hardship test is applied in the ninth circuit, see http://www.bklaw.com/chapter7/student_loans.html
For cases filed prior to October 7, 1998, student loans were dischargeable if they were in repayment status for a certain period of time.
Topics: Student Loans | No Comments »
Congress Votes Against Bankruptcy Modification
By Mark Markus | December 11, 2009
Today the U.S. House of Representatives voted against legislation that would have allowed homeowners to modify their loans on a principal residence in a bankruptcy case (Chapter 13). This is at least the second time this amendment has come up for vote, and this time only 50 democrats voted in favor. Thus, the bankruptcy law remains unchanged on this issue. Loans against a principal residence cannot be modified in a bankruptcy case (except that in some circumstances–and only in some districts– a junior lien may be removed if and only if the value of the property is less than the amount owed to the 1st mortgage).
If you want to know how your Member of Congress voted today, go to http://clerk.house.gov/evs/2009/roll963.xml. If you want to compare your Representative’s vote today with that on H.R. 1106, go to http://clerk.house.gov/evs/2009/roll104.xml to see their earlier vote. Of course, there were a number of variables associated with today’s vote that were not a factor in the earlier vote, particularly given that Members also were being asked to vote against the banks by supporting the creation of a Consumer Financial Protection Agency (CFPA).
Topics: Bankruptcy Law, Legislation | No Comments »