Tag Archives: Chapter 7

What happens to general unsecured debt in Chapter 7?

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Examples of general unsecured debts include credit card debt and medical debt.  If you are thinking about filing for bankruptcy, you should know how these general unsecured debts are handled.

Secured debt usually is tied to your most important possessions, such as your home or your car. So it’s understandable that being able to keep these types of collateral will drive your bankruptcy decisions.  Likewise, your “priority” debts tend to involve your most aggressive creditors and often can’t be discharged in bankruptcy, so these also grab our attention. But it’s more likely that you owe more in general unsecured debt than in secured and priority debts combined.

What happens to general unsecured debt in a Chapter 7? It depends on 2 things: 1) “dischargeability,” and 2) asset distribution.

Dischargeability

Dischargeability refers to whether you are able to get a discharge of that debt in bankruptcy. The dischargeability of most general unsecured debt is not challenged. In the rare case that your discharge of general unsecured debt is challenged, you may have to pay back some or all of that particular debt. But this would depend on whether the creditor is able to show that the debt fits within some narrow grounds for non-dischargeability, such as fraud, misrepresentation, or other similar bad behavior on your part.

Asset Distribution

If everything you own is exempt, or protected, then your Chapter 7 trustee will not take any of it from you – this is called a “no asset” case. But if you have an “asset case,” where the trustee takes some of your assets for distribution to your creditors, your general unsecured creditors will not necessarily receive any of those assets. The trustee must first pay off any priority debts and must pay the trustee’s own fees and that of any other professionals who were hired. Only if any funds remain will the unsecured creditors get to share in the leftovers.

To summarize, in most Chapter 7 cases your general unsecured debts will be discharged, preventing those creditors from ever being able to pursue you for them. Also, these creditors will receive nothing from you, so long as all your assets are exempt. Relatively rarely, a creditor may challenge the discharge of its debt. And if you have an asset case, the trustee may pay a part or—very rarely—all of the “general unsecured debts,” but only if the priority debts and trustee fees do not exhaust all the funds being distributed.

 

Do you really need Ch. 13 to save your home?

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When does filing a Chapter 7 bankruptcy case help enough so that you don’t need a 3-to-5-year Chapter 13 case?

If you are behind on your mortgage payments but want to keep your home, you have likely heard that a Chapter 13 “payment plan” is what you need. And that IS a powerful package, with an impressive set of tools to deal with a wide variety of home-related problems—everything from the mortgages themselves to property taxes, income tax liens, and judgment liens.

But what if you need to discharge other debts to get a fresh start and you have managed to fall only a couple of months behind on your mortgage? Or what if you are not keeping the house, but just need a little more time to find another place to live?

Then you might not need a Chapter 13 case – you may be able to avoid the disadvantages it comes with. Some of these disadvantages are that it takes so much longer and generally costs more than Chapter 7. The extra time and cost can be well worthwhile when you need the great advantages of Chapter 13, but let’s look at ways that Chapter 7 can do enough for your home:

In a Chapter 7 case:

1. The “automatic stay”—the bankruptcy provision that stops virtually all actions by creditors against you or your property—applies to Chapter 7 just as it does to Chapter 13. So the filing of a Chapter 7 case STOPS a foreclosure in its tracks, just as quickly as a Chapter 13 filing. But if you are just trying to buy time to save money to rent an apartment, the tough question is HOW LONG that break in the mortgage company’s foreclosure efforts will last, and how much extra time it’ll buy you. An aggressive creditor could quickly ask the court for “relief from the stay”—permission to resume the foreclosure process—thus potentially getting you only a few extra weeks. Or in the other extreme, a mortgage creditor could just do nothing for the 3 months or so until your Chapter 7 case runs its course and the “automatic stay” expires with the completion of your case. So, Chapter 7 often does not come with much predictability about how much time you’d gain. On the other hand, your bankruptcy attorney may have experience in how fast certain mortgage lenders tend to ask for “relief from stay” under facts similar to yours.

2. Chapter 7 stops—at least briefly—not only mortgage foreclosures, but also prevents other potential liens from being placed against your house, including the IRS’s tax liens and judgment liens. But why would the few weeks or months that Chapter 7 gains make any difference with these kinds of creditors? In the right set of facts, it can make many thousands of dollars of difference.

• A timely filing of a Chapter 7 case can prevent you from having to pay a debt that would otherwise have become a lien against your house. For example, let’s say you have an older IRS debt that meets the necessary conditions for discharge, and you also have a little equity in your home but not more than your homestead exemption allows. If you waited until after the IRS recorded a tax lien for that debt against your house, that lien would continue being attached to your house even if you filed a bankruptcy and would eventually have to be paid. However, if your Chapter 7 filing happened before the IRS recorded a tax lien, the “automatic stay” would prevent that tax lien from being filed and the debt would be discharged.

• Or if instead let’s say you have a debt that is NOT going to be discharged in bankruptcy—say a more recent tax debt—but you also had some assets that you were going to have to surrender to the Chapter 7 trustee, what we call an “asset case.” If again you filed the bankruptcy case before the recording of the tax lien, your Chapter 7 trustee could well pay those taxes as a “priority” debt in front of any of your other debts, potentially leaving you with no tax debt at the completion of your case.

3. Chapter 7 allows you to concentrate on your house payments by getting rid of your other debts. If you’ve managed to keep current on those mortgage payments, but don’t know how long you will be able to do so, the relief you get from discharging your other debts improves your odds of staying current on your home long term. Or if you have missed only a few mortgage payments, AND can reliably make future ones, PLUS enough to catch up on your arrearage within year or less, then Chapter 7 would likely do enough for you. Most mortgage creditors will let you enter into an agreement –often called a “forbearance agreement”—to catch up the missed payments by paying a sufficient specific amount extra each month until you’re caught up, again, as long as that period of catch-up time is relatively short. Otherwise, you may well need a Chapter 13.

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Woman with Autism Gets Student Loans Discharged

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I wrote a post for the blog of fellow New Jersey attorney Matthew Stoloff, who represents clients in the areas of disability rights and special education rights.  That post appears on Mr. Stoloff’s blog here.  You can also read the full text of my post right as follows:

In the past, I have mentioned the difficulty of getting student loans discharged in bankruptcy. But I have yet to discuss why it is so difficult to get a bankruptcy court to discharge student loans.

In this post, I’ll examine the process through a recent case from Maryland where student loans were actually discharged in a bankruptcy and discuss why that case might be anomalous.

In a nutshell, the Bankruptcy Code states that student loans are not dischargeable unless the debtor can show that repayment of the debt will cause an “undue hardship” on the debtor and his or her dependents. The famous Brunner case set the test followed in most of the country, including New Jersey, for what constitutes an “undue hardship”:

1. Whether the debtor will be unable to maintain a minimal standard of living, based on current income and expenses, if forced to repay the student loans;

2. Whether additional circumstances exist indicating that this state of affairs is likely to persist for a significant part of the repayment period for the student loans; and

3. Whether the debtor has made a good faith effort to repay the student loans.

Pa. Higher Educ. Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 304-305 (3d Cir. 1995) (quoting In re Brunner, 831 F.2d at 396 (2nd Cir. 1987)).

In case you are thinking to yourself, “It’s an undue hardship for me to pay my student loans,” pause to consider the bankruptcy case, In re Brightful. There, Ms. Brightful filed for bankruptcy, asking the court to discharge her student loans. The bankruptcy court found that she had “glaring psychiatric problems” and was “emotionally unstable” to the point that she had attempted suicide twice. The court said she could not maintain a “minimal” standard of living and still pay her student loans.

But this was not enough – the court found that, under the Brunner case, Ms. Brightful must prove “a total incapacity…in the future to pay [her] debts for reasons not within [her] control.” So, the current inability to pay student loans is notthe standard. Instead, a discharge of student loans must be based on “the certainty of hopelessness… [emphasis added].”

Recently, a Maryland court considered whether a person on the autism spectrum could get her student loans discharged. See In re Todd. The debtor, Carol Todd, has a form of autism calledAsperger’s Syndrome, in addition to post-traumatic stress disorder (PTSD) and osteoporosis. Ms. Todd had a total of about $340,000 in student loan debt and sought to get these loans discharged.

Right away, we know this case is different because the judge quotes the Webster’s dictionary definitions of “undue” and “hardship,” adding that these terms do not suggest a standard that “no debtor can ever meet.” The court went on to describe how Ms. Todd was unable to function normally due to her diagnoses of Asperger’s, PTSD, and osteoporosis – but the court focused primarily on Asperger’s.

Despite her inability to function normally, Ms. Todd obtained 5 different higher education degrees and attended 5 different colleges, plus one online college. The court, however, was influenced by Ms. Todd’s belief that she did not earn her degrees, but that they were “negotiated” for her by the Department of Education, which she said helped her to obtain accommodations. In fact, the court questioned the academic rigor of the programs that she attended.

Following graduation, Ms. Todd worked as an adjunct professor teaching classes for several years, but she was not employed after that time.

In its analysis, the court determined that Ms. Todd’s situation met the “certainty of hopelessness” test due primarily to her autism/Asperger’s. Persuading the court was a doctor’s testimony showing that Ms. Todd could be a successful student, even be able to earn a Ph.D., but that she could not be a “productive” employee in the working world as we know it. In the court’s own words:

… Autism – or Asperger’s – is a permanent condition that will not permit [Ms. Todd] to function “normally” in almost any sense of the word. Because of Autism Ms. Todd has not been able, for the vast majority of her life, to gain or hold a job, let alone fashion a career, and there is no chance that state of affairs will ever change.

Reading the opinion I got the feeling that if only some basic supports were available to disabled, working adults, Carol Todd might have lost her student loan discharge case. But the court was convinced of Ms. Todd’s inability to successfully hold employment, mainly because of her autism, which, ironically, is the same condition that gave her the ability to focus on topics of interest for long enough to help her earn 5 college degrees.

Most bankruptcy student loan discharge cases are like the first case, In re Brightful – the courts apply a harsh standard to the most difficult of circumstances, usually determining that the student loans in question are not dischargeable.

But Carol Todd’s case is an outlier because the judge was willing to focus on the long-term disabling aspects of autism/Asperger’s while at the same time discounting the debtor’s obvious abilities (a metaphor for how our working world as a whole often treats disabled adults).

Will other bankruptcy courts follow the judge’s lead in In re Todd? Is it possible that in the future more people with disabilities who are unable to successfully hold employment will be able to get their student loans discharged more easily? Only time will tell.

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What’s involved with discharging my debts under chapter 7?

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Discharge of debts

The point of filing bankruptcy is to get relief from your debts. So, when and how DO those debts get discharged in a regular Chapter 7 bankruptcy?

Here’s what you need to know:

1.      You’ll receive a discharge of your debts, so long as you play by the rules. Under Section 727 of the Bankruptcy Code, the bankruptcy court “shall grant the debtor a discharge” except in relatively unusual circumstances:

  • If you’re not an individual:  Corporations and other kinds of business entities do not receive a discharge of debts, only human beings do.
  • If you have received a discharge in an earlier case too recently. You can’t get a new discharge of your debts in a Chapter 7 case if:
    • you already received a discharge of debts in an earlier Chapter 7 case filed no more than 8 years before your present case was filed, or
    • you already received a discharge of debts in an earlier Chapter 13 case filed no more than 6 years before your present case was filed (except under limited conditions).
  • If you hide or destroy assets, conceal or destroy records about your financial condition.
  • If in connection with your Chapter 7 case you make a false oath, a false claim, or withhold information or records about your property or financial affairs.

2.      ALL your debts will be discharged, UNLESS a particular debt fits one of the specific exceptions. Section 523 of the Code lists those “exceptions to discharge.” I’m not going to discuss those exceptions in detail here, but the main ones include:

  • most but not all taxes
  • debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases
  • debts not listed on the bankruptcy schedules on time (although there is a major exception to this)
  • money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship
  • child and spousal support
  • claims against you for intentional injury to another person or property
  • most but not all student loans
  • claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)                                                                                                                   

3.      A discharge from the bankruptcy court stops a creditor from ever attempting to collect on the debt. Under Section 524, the discharge order acts as a court injunction any act to collect a debt. If a creditor violates this injunction by trying to pursue a discharged debt, the bankruptcy court may hold the creditor in contempt of court and, depending on the seriousness of its illegal behavior, can require the creditor to pay sanctions.

Photo credit:  Alan Cleaver

Debts in bankruptcy and how they’re treated

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Debt-is-Slavery-How-the-Things-You-Own-End-Up-Owning-You-v.2
One of the most practical questions you’re likely to have if you’re considering bankruptcy is what will happen to certain  debts:  Will you still owe money to certain creditors? What if you want to keep debts, like a vehicle loan or a mortgage? How are  special debts, such as income taxes and child support, handled?

One of the most basic principles of bankruptcy is that it treats all creditors in each legal category the same as all the other creditors in that category. There are three main categories of debts. Not everyone has debts in each of the three categories, but many people do. You should be able to start dividing your debts among the three categories. Then bankruptcy and how it deals with each of your creditors will begin to make more sense.

The three categories of debts are: Secured debt; general unsecured debt; and priority debt.

Secured debt

All debts are either secured by collateral or not. Whether a debt is secured is often straightforward, such as with a vehicle loan in which the vehicle’s title specifies your lender as the lienholder. The lien on that title, together with the documents you signed with the lender, gives that lender certain rights as to that collateral, such as the right to repossess it if you fail to make payments as agreed.

In the case of every secured debt, there is a legally prescribed way to attach the debt’s collateral to the debt. In the case of the vehicle loan, the lender and you have to jump through certain hoops for the lender to become a lienholder on the title. If those aren’t done right, the vehicle might not attach as collateral to your loan.

Debts can be fully secured or only partially secured. If you owe $10,000 on a vehicle worth only $8,000, the debt is only partially secured—secured as to $8,000, and unsecured as to the remaining $2,000.

Debts can be voluntarily or involuntarily secured. Examples of the latter are judgment liens on your home, IRS income tax liens on all your personal property, and a mechanic’s or repairman’s lien on a vehicle that’s been repaired and the repair bill not paid.

General unsecured debts

All debts that are not legally secured by collateral are unsecured. And “general” unsecured debts are those that don’t belong to any of the categories of “priority” debts, discussed below. General unsecured debt is a default category—it applies if a debt is unsecured and non-priority. This includes every imaginable type of debt or claim. Common ones include most credit cards, medical bills, personal loans with no collateral, bounced checks, most payday loans (although those sometimes have collateral), unpaid back rent and utilities, balances left over after a vehicle is repossessed, many personal loans, and uninsured or underinsured motor accident claims against you.

Sometimes debts that used to be secured can become unsecured, and vice versa. An example of the first: once you’ve surrendered all the collateral—such as a car on a car loan—any leftover debt is unsecured. And an example of the second: an unsecured medical bill can become secured after a lawsuit is filed against you and a judgment is entered that results in a judgment lien attached to your real estate.

Priority debts

Priority debts are special because the law treats them as better than general unsecured debts. There are specific levels of priority among all the priority debts.

It’s all about who gets paid first (which often means who gets paid at all), which comes up in two main ways:

First, most Chapter 7 cases don’t involve the trustee receiving any of your assets for distribution to your creditors (known as “no-asset cases”). But in those cases where there are non-exempt assets (known as “asset cases”), the priority creditors are paid in full before the general unsecured ones receive anything. And the higher priority creditors are paid in full before the lower priority ones.

Second, in a Chapter 13 case, your plan must show that you will pay all priority debts before the completion of your case and then you must actually do so before you are allowed to complete the plan.

The most common priority debts for consumers or small business owners are the following, in order starting from the highest priority:

• Child and spousal support—amounts owed as of the time of the filing of the bankruptcy case;

• The administrative costs of the bankruptcy case—trustee fees and costs, and in some cases attorney fees;

• Wages and other forms of compensation owed to employees—maximum of $10,000 per employee, for work done in the final 180 days before the bankruptcy filing or close of business, whichever was first; and

• Certain income taxes, and some other kinds of taxes—some are priority but others are general unsecured if they are old enough and meet some other conditions.

Reading over and thinking about these categories of debts can give you a good sense of where your debts fall in the grand scheme of things if you were to file for bankruptcy.

 

Pre-Bankruptcy Tax Strategies

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taxes-646511_1280Get the maximum benefit from your bankruptcy against your taxes by following these sophisticated strategies.

Pre-bankruptcy planning to position a debtor in the best way for discharging or for otherwise favorably dealing with tax debts is one of the more complicated tasks handled by a bankruptcy attorney. Do NOT attempt these strategies, including the five mentioned here, without an attorney, indeed frankly without an attorney who focuses his or her law practice on bankruptcy. Elsewhere in this website I make clear that you cannot take anything in this website, including what I write in these blogs, as legal advice. That’s especially true in this very sophisticated area. Also, I could write a chapter in a book on each of these five strategies, so all I’m doing here is introducing you to them, to begin the discussion when you come in to see me.

1st:  Wait out the appropriate legal periods before the filing of your bankruptcy case.

As you may know from elsewhere in these blogs, most (but not all) forms of income tax become dischargeable after the passing of specific periods of time. Much of pre-bankruptcy tax strategy turns on figuring out precisely when each of your tax liabilities will become dischargeable, and then either waiting to file bankruptcy until all those liabilities are dischargeable, or, when under serious time pressure to file, at least when the maximum amount will be discharged as is possible under the circumstances.

2nd:  File past-due returns to start the clock running on those as soon as possible.

If you know you owe taxes for prior years and don’t have the money to pay them, your gut feeling may well be to avoid filing those tax returns in an attempt to “fly under the radar” as long as you can. But irrespective of any other rules, you cannot discharge a tax debt until two years after the pertinent tax return has been filed. Get good advice about how to deal with the IRS or other taxing authority during those two years so that you take appropriate steps to protect yourself and your assets. You deserve a rational basis for getting beyond your understandable fears about this.

3rd:  Try to stay in compliance with the new tax year(s) while you wait to file your bankruptcy case, by designating tax payments to the more recent tax years instead of older ones.

Because recent tax year tax liabilities cannot be discharged in a Chapter 7 case and must be paid in full as a priority debt in a Chapter 13 case, you want to try to stay current on your most recent tax debts. It’s also usually a necessary step in keeping the IRS and its ilk from taking aggressive action against you, thus allowing you to wait longer and discharge more taxes. With the IRS in particular you can and should explicitly designate which tax account any particular tax payments are to be applied to achieve this purpose.

4th:  Avoid tax fraud and evasion, and whenever possible, withholding taxes.

Simply put, you can’t ever discharge any taxes related to fraud, fraudulent tax returns, or tax evasion, so avoid these kinds of illegal behavior. If you have any doubt, talk to a knowledgeable tax accountant or attorney. Unpaid tax withholdings also cannot be discharged, so either try to avoid them from accruing, focus your resources on paying them off, or just recognize that they will either have to be paid after your Chapter 7 case or as a priority debt during your Chapter 13 case.

5th:  Be aware of tax liens.

Tax lien claims have to be paid in full in Chapter 13, with interest, and can survive a Chapter 7 discharge. So try to avoid having the taxing authority record a tax lien against you—admittedly sometimes easier said than done. Or if that is not possible, at least refrain from building up equity in possessions or real estate. That equity, although often exempt from the clutches of the bankruptcy trustee and most creditors, is still subject to a tax lien. So any built up equity just increases what you will have to pay to the taxing authority on debt you might otherwise been able to discharge completely.

How to keep an income tax refund in your Chapter 7 bankruptcy

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Can you keep your tax refund through a Chapter 7 bankruptcy?  Maybe.

Everything you own when your Chapter 7 is filed makes up your “bankruptcy estate.”  Usually, most or all of that “estate” stays in your possession and you can keep it because it’s exempt (protected).  The bankruptcy estate includes not only your tangible, physical possessions, but also intangible ones—assets you own that you can’t physically touch—such as money owed, but not yet paid, to you.  A tax refund can be an intangible asset that is part of your bankruptcy estate.  Whether you can keep the tax refund depends on whether it is exempt.

Because an income tax refund usually comes from the overpayment of payroll withholding, the full amount of that refund has accrued by the time of your last payroll withholding of the tax year. So even though nobody knows the amount of your refund until your tax return is prepared a few weeks or months later, for bankruptcy purposes it is an asset of yours by January 1 of the next year.  If you file a Chapter 7 case after the beginning of the next year and before you have received your tax refund, it is part of your bankruptcy estate and the trustee can keep however much of it that’s not exempt. This is also true if you have received the refund and not done anything with it (like if you haven’t deposited the check).

You can avoid possibly having a non-exempt tax refund by filing your tax return, receiving the refund, and appropriately spending it before your Chapter 7 case is filed.  But first, you should seek advice from a bankruptcy attorney.  Your bankruptcy trustee will be interested in what money you receive and spend before bankruptcy, which can be a source of problems if it is not done carefully.

Whether or not your tax refund is exempt depends on how much it is and whether you have room to exempt it.  In some cases, using all or part of an exemption for your tax refund may reduce the availability of the exemption for other assets.  Even if the refund, or a portion of it, is not exempt, the Chapter 7 trustee might not claim it if he or she decides the amount is not enough to open an asset case.  That would be a case where the amount of refund is so small that the benefit of distributing it to the creditors is outweighed by the administrative cost involved.  This threshold amount can vary from one court and/or one trustee to another so be sure to discuss this with your attorney.  But if the trustee is collecting any of your other assets, then he or she will want every dollar of a non-exempt tax refunds.

There is a risk that you will not be able to claim an exemption if you don’t list the tax refund in your bankruptcy papers.  Be sure to always list any tax refund to which you may be entitled.

These same principles apply year-round.  By of July 1, you have had half a year of income-tax withholding deducted from your paychecks.  A bankruptcy filed on on or after July 1 should take that into account, even though some trustees don’t push this issue much until closer to the end of the year, when of the potential tax refunds has accrued.  Nevertheless, you should tell your bankruptcy attorney about income tax refunds expected in the next year, especially if you have a history of fairly large tax refunds.

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Can a Chapter 7 save your business?

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Chapter 13 can help keep certain small businesses afloat, but what about Chapter 7?  Can it be used to save a small business?

Generally, Chapter 7 is seldom a good option if you own a business that you want to keep operating.  This is because Chapter 7 is a liquidation in which the bankruptcy trustee could make you give up any valuable parts of your business.

Once a Chapter 7 bankruptcy is filed, all of the debtor’s assets are automatically transferred to a new legal entity called the “bankruptcy estate”.  A trustee is assigned to oversee this estate, which usually means that the trustee is looking for assets in the estate that are worth taking and giving to creditors.  The debtor can protect, or “exempt,” certain assets, which remain the debtor’s and cannot be taken by the trustee.  The reasoning behind exemptions is that bankruptcy filers should be allowed to keep a minimum amount assets to live on while obtaining a fresh start. In most consumer Chapter 7 cases, the debtor can exempt all their assets, leaving nothing for the trustee to take.  This type of bankruptcy is called a “no-asset” case.

Can you file a Chapter 7 and continue to operate a business?  The answer requires responses to two other questions:

First, can you exempt the entire value of the business from the bankruptcy estate?

Many small businesses are would not exist but for the services of one or two owners.  In that case, they could not be sold as a going concern separate from their owners.  When faced with this type of case, a Chapter 7 trustee must decide whether he or she can sell any of the various assets that make up the business, or whether the debtor can exempt all of its assets.

The assets of a small business can include tools and equipment, receivables (money owed by customers for goods or services already provided), supplies, inventory, and cash.  There may also be value in a brand name, a below-market lease, or some other unusual asset.

If all of a business’ assets can be exempted in bankruptcy, it is possible for the owner/debtor to have a no-asset Chapter 7 case.

The second question is whether the trustee is willing to allow the business to operate in spite of its potential liability risks for the estate?

Recall that everything you own immediately becomes part of the bankruptcy estate once your case is filed.  One result of this is that your business becomes the trustee’s to operate.  Thus, the estate is potentially liable for damages caused by the business.  The trustee may also be liable for such damages.  That is why many Chapter 7 trustees’ want to shut down ongoing businesses where the owner is in an active bankruptcy.  The exceptions to this depend on the trustee, the nature of the business, and whether it has sufficient liability insurance.

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How bankruptcy can help save your small business

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Bankruptcy isn’t just for winding up after the end of a business.  It can help keep your business around for longer.

Bankruptcy saves a lot of companies.  Companies can get out of a lot of debt, restructure their operations, and save a lot of jobs.  If you own and run a small business, bankruptcy may be able to save your job, too.

Let’s assume you have a small, simple business.  One so simple that you did not form a corporation or any other kind of legal entity when you set it up.  And let’s assume that you don’t have any partners – that is, you have a sole proprietorship.

In a sole proprietorship, you and your small business are treated as a single unit—unlike a corporation, which is legally separate from you and which owns its own assets and has its own debts.  In the right circumstances, a sole proprietorship can be easier to handle in a bankruptcy.

A Chapter 7 liquidation is seldom a good option if you own a business that you want to keep operating during and after the bankruptcy.  You can discharge your debts in return for liquidation—the surrender of your assets to the trustee to sell and distribute to your creditors. Except that in most Chapter 7 cases everything you own is protected–“exempt”—so that you lose nothing or very little. But if you own an ongoing business, you are likely to have some non-exempt assets.  So the Chapter 7 trustee could take some important parts of your business to sell off or otherwise shut down.

Instead, a Chapter 13 case— sometimes called a “wage-earner plan”—is much better designed to enable you keep your personal and business assets.  You get immediate relief from your creditors under the automatic stay, and for a much longer period of time, usually with a significant reduction in the amount of debt to be repaid.  So Chapter 13 can help both your immediate cash flow and your long-term prospects.  It is also a good way to address tax debt, which is often an issue for struggling businesses.  Overall, it can be a relatively inexpensive tool that combines the discipline of a court-approved payment plan with the flexibility of continuing the operation of your business.

Please understand that when you own ANY kind of business, solving your financial problems will be more complicated.  This is because you are  not dealing merely with the size and timing of a paycheck, but instead with all the financial and practical aspects of running a business.  In addition,  timing issues are often more important in business bankruptcy cases and they require more pre-bankruptcy planning to plot out the best path for you.  So, no matter how small your business, be sure to get thorough legal advice as soon as possible.

Photo by Ruben Schade.

Slight median income changes coming Nov. 1

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In New Jersey, it will be a little easier or a little harder to qualify for a Chapter 7 as of November 1, 2011. Whether it’ll be easier or harder for you depends on your family size.

The bankruptcy system looks to the U.S. Census to calculate each state’s median income, as applied to family size. If your income is below your state’s median income for your family size, then in most situations you would be eligible for a Chapter 7. But if your income is above the median and you still want to file a Chapter 7 case, then you have to fill out a long and rather complicated form detailing your allowed expenses to determine whether or not your filing of a Chapter 7 would be “abusive.” So if you want to file a Chapter 7 bankruptcy, it’s a lot easier if you’re below the median.

On November 1, new median income amounts become applicable. In New Jersey, for a household of 1, the median income level will rise slightly from $59,060 to $60,322.  For a household of 2, it will drop from $70, 680 to $67, 503.  The new figures for all states can be seen here. Remember, if the median income goes up, that makes it a little more likely that your income will fall below that median, and you’ll have smoother sailing qualifying for Chapter 7.  New Jersey has some of the highest median income levels in the U.S.

So, if your income is close to the applicable median amount, and the median is increasing for your family size in your state on November 1, then you have a better chance at falling under the median if you file on or after that date.

Please understand that the meaning of “income” in the bankruptcy context is different from conventional meanings of that word. Bankruptcy “income” is calculated using a six-calendar-month look-back period that is doubled and then divided by 12 for an average monthly income. It includes all sources of income from all family members other than social security and does not only include taxable income.

Because of this and many other complicated issues, you should consult with a bankruptcy attorney about median income questions.

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