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

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.

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!

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.

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

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

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 have been unemployed for nearly a year now and will be running out of unemployment benefits in about 3 months which will leave me with no income at all and I am single. The prospects of finding a job in my line of work anytime soon is looking pretty grim so I am seriously considering launching another business of my own but that will take at least a year. I make about $960 a month on unemployment and have no residual savings other than my 401k and own no real property. My personal property is limited to my 13 year old car, my clothes and some minor furnishings which really aren’t worth anything. My dischargeable debts amount to about $35,000 and are comprised of strictly credit cards and medical expenses. I have never filed bankruptcy before and have spent the last 10 years rebuilding my credit after paying off debts from a business I was forced to close, so it’s heartbreaking for me to have to seriously consider bankruptcy now.

Here’s what I would like to know.

1. With little income which is on the verge of disappearing can I file directly for a Chapter 7 or do I need to file Chapter 13 first and complete the means test?

Answer: The “means test” must be completed if you are over the median income in your State, given your household size, in order to determine what you are eligible for. The so-called “means test form” must be completed in any bankruptcy case. You can file Chapter 13 first, but from the above facts it sounds like you would qualify for a Chapter 7 case, but you need to have a comprehensive consult with a bankruptcy attorney in your area to make that determination.

The Ninth Circuit Court of Appeals ruled today, in the case of In re Egebjerg, that 401k loans are not a debt as defined in the bankruptcy code and as such, the amount of any loan repayment cannot be considered in calculating a debtor’s budget/ability to repay his/her debts.

The basic rationale is that since a 401k loan is repaying funds to the owner of the 401k, it is not an actual debt, and the funds used to repay it are not a necessary living expense.

There are tax consequences for failure to repay a 401k loan, and these may be able to be argued as an offset, but the loan repayment itself cannot be used to determine eligibility to file a chapter 7 case.

This has resulted in a great deal of confusion among clients, as well as unsuspecting bankruptcy attorneys who fail to advise their clients of this possibility.

Why can these banks freeze the funds in their accounts?  Well, it’s a rather complicated legal analysis, but here is the basic explanation:

When a Chapter 7 bankruptcy case is filed, EVERYTHING the debtor owns or has an interest in becomes property of the Chapter 7 Trustee.  That includes everything from your house to your underwear to money in your bank accounts.  The Trustee has a duty to liquidate any assets that are not protected by an exemption.   (to see which State’s exemption laws would apply in a given case, go to http://www.bklaw.com/exemptions.html) .

What Wells Fargo and Union Bank are supposedly doing is protecting (acting as a custodian for) the money that is in their bank accounts on the day the bankruptcy case is filed for the benefit of the Trustee until the Trustee decides to either take the money and pay it out to the creditors  (if it’s not exempt) or, more likely, “abandon” (return) the funds back to the debtor.    This only applies to the exact funds in the account on the date the bankruptcy case is filed.   It does not apply to funds deposited subsequently, but obviously this can be a major inconvenience if there’s a large amount in the bank account that gets frozen.   It can take anywhere from several days to several weeks to get the Trustee to authorize the banks to “unfreeze” the accounts, and sometimes it even requires a motion to be filed with the court to have the Judge order it.   If the funds are exempt, they will eventually be released, but those banks will freeze the funds.

An unrelated but similar problem can result if you owe money to the banks in which you have your money deposited.   In this circumstance, the banks can actually TAKE the funds in your accounts to satisfy the debts to them if you are delinquent on the payments.   This usually occurs before a bankruptcy case is filed, so it’s not really a bankruptcy issue, but I always advise my clients to switch bank accounts to an institution that they do not owe money to (and other than Wells Fargo or Union Bank, for the reasons stated above).