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

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!

In the 9th Circuit (which includes California, Oregon, Arizona, Washington and Nevada, Idaho, Alaska, Hawaii and Guam) if your case was a Chapter 7 bankruptcy in which no assets were liquidated and sold by the Trustee, and you receive your discharge, there is no consequence for unintentionally failing to list a creditor.   Thus, if you get your discharge, you are discharged from ALL dischargeable debts regardless of whether they were listed or received notice of the bankruptcy.   The two main cases on this are In re Neilsen, 383 F.2d 922 (9th Cir. 2004) and In re Beezley, 994 F.2d 1433 (9th Cir. 1993).   (If the creditor in question has grounds to object to the discharge of the debt– for example, if the debt was incurred through fraud– they can still move to reopen the Chapter 7 case and litigate their nondischargeability claim if they received no notice of the original bankruptcy).

In a Chapter 11, Chapter 13 case or in a Chapter 7 case where assets are being distributed by the Trustee, the failure to list a creditor is more serious and can result in that debt not being discharged.

If your case is filed outside the 9th Circuit, you should consult with a bankruptcy attorney in your area regarding the law in your jurisdiction.

I think the real question most intend to ask is whether filing bankruptcy is prudent given the amount, and type, of debts they have. This can only be answered after a comprehensive analysis of a client’s complete financial situation.

For example, certain bankruptcies–such as a Chapter 13– can be filed when the only debt one has is secured debt, such as a mortgage, in order to allow time to catch up on payments.

For a Chapter 7 liquidation case, I have filed cases for debtors who have had as little as $5,000 of total unsecured debt to those with over $5,000,000. In the case of the young man who had $5,000 of debt, which is admittedly an unusual amount on which to file a bankruptcy case, the situation was such that it was in his best overall interest–after analyzing his entire situation–to file a bankruptcy case. He was relatively uneducated, had a part-time minimum wage job, and no credit to speak of (the debt was a judgment from a traffic accident). Filing bankruptcy enabled him to get rid of the debt, which he was going to have a very difficult time paying off, and it also enable him to clear off his credit record, obtain a fresh start, and commence rebuilding (or actually in his case, BUILDING) his credit. Several years later, he has several credit cards (on which he is current with payments), a wife, a house, a dog and enough income to survive.

I use that story–unusual though it may be–to point out that sometimes bankruptcy really is the best solution, regardless of how much debt there is. Now obviously if the man in that story had income of $75,000 a year, it would have been a ludicrous decision to file bankruptcy, but it is important to seek the advice of a qualified bankruptcy attorney and see if it is in your best interest to take advantage of the bankruptcy laws which are here to provide assistance in such situations.

1. Yes, debts that have been consolidated or are in a repayment program are dischargeable in bankruptcy, assuming that there are no independent grounds for objecting to the discharge. (see more on dischargeable debts)

2. When you enter into a debt consolidation program, you still owe the debts until they are paid in full (which presumably includes the fees to the consolidation agency). Thus, if you file a bankruptcy case, you must list any and all such debts. (See our recent related blog on picking and choosing which debts to include in bankruptcy.

3. Just because you have consolidated your multiple debts down into one payment does NOT mean that you don’t owe each of the individual creditors, unless they were paid off by a single consolidation loan that was taken out. What this usually means is that you are paying a company to make the payments to each of the creditors, while you make one single payment to the consolidation company, but you still owe each of the creditors until they are paid off.

First: There are numerous requirements to filing a bankruptcy case. One of them is that you must LIST ALL of your debts and ALL of your assets in your bankruptcy schedules.

Second: When you receive a discharge, you are discharged from any and all debts that are made dischargeable by the Bankruptcy Code (unless a creditor or other party successfully objects to the discharge).

Third: You can voluntarily repay any debt you want after the bankruptcy case is completed (in a Chapter 7 case, this is about 4 months after the case is filed, in Chapter 13, it’s 36-60+ months). See more on how the process works for each bankruptcy chapter.

Fourth: In a Chapter 7 case, you may, with the consent of the creditor and approval by the bankruptcy court, enter into a reaffirmation agreement. What this does is take the debt out of the bankruptcy and obligate you to the terms of the agreement (whatever they may be) despite the discharge you ultimately receive in the bankruptcy case. Reaffirmation agreements must be signed, executed, and filed with the court prior to the entry of discharge in your case.

The critical question to ask when trying to determine (or ask your attorney) whether you can discharge certain debts is: WHY do you want to do that (whatever “that” is)? In my experience, most debtors perceive that if they keep certain creditors off the bankruptcy, that they will magically be able to continue to have credit with them. Nothing could be further from the truth. In fact, with respect to credit card debt in particular, you have a much better chance of negotiating for a reaffirmation agreement with them (if that is your goal) to keep some credit on the card after your discharge is granted. Personally, I advise my clients strongly against doing that (because getting a new credit card after bankruptcy is about as difficult as finding mud after a rainstorm).

There is much more to say on this topic, such as how secured debts are handled in bankruptcy. If you have questions, you should schedule a consult with a bankruptcy attorney.

The following are some guidelines set forth by the Association of Independent Consumer Credit Counseling Agencies (AICCCA). If you find yourself fitting into more than one of these categories and you have more debt than you can afford to pay off within a short period of time (let’s say 6-12 months), then you should consider seeking advice on possibly filing a bankruptcy case:

• Living paycheck to paycheck — This is very dangerous since any slight reduction in income, or sudden increase in expenses, such as from a job loss, unexpected medical bills, can push you over the edge. Credit card payments are missed, the interest rates skyrocket and everything can fall apart very quickly.

• No savings cushion –This is a subset of the above. It’s important to have a cushion for unexpected expenses. In fact, you have to expect the unexpected. When was the last time you had an entire year with no unexpected expenses?

• More than 20% non-mortgage debt to income ratio — For those spending more than 20 percent of net income to satisfy non-mortgage debt, a drastic change in spending behaviors is needed.

• Making only minimum payments on credit cards — If you pay only the minimum amount due you are making virtually no principal reduction payments and, thus, no progress towards paying off the debt. All you’re doing is keeping your head barely above water and all it takes is a little wave to push you under.

• Not adequately insured — Some studies suggest that 50 percent of bankruptcies involve medical debt. Without adequate insurance, the high cost of medical, home or car expenses can ruin personal finances

For other types of bankruptcy, such as those precipitated by mortgage defaults, where you need time to catch up on the payments to prevent foreclosure, it is equally or more important to see a bankruptcy attorney sooner, rather than later, to allow sufficient time to prepare to file either a Chapter 13 or Chapter 11 case for you to save your home.