Emergency Rule of Court 1 temporarily prohibits evictions of all types in California. But that prohibition will end sometime. It has to because landlords are still facing mortgages regardless of whether tenants pay or not. If tenants don’t pay, the property may well be foreclosed.

California is considering a number of measures to avoid the potential onslaught of evictions. That includes a freshly amended, leadership-backed Senate measure that generally bars landlords from evicting tenants during a state of emergency, allows landlords and tenants to negotiate payment plans that could give renters years to repay and lets property owners claim future tax credits for unpaid rent.

One alternative seemingly not considered by most large law firms analyzing “Acts of God” or “Impossibility of Performance” defenses to rent payment for tenants, is that of bankruptcy. If you can get past your perceptions of stigma, you may recognize this as a viable and possibly preferred solution.

If you are a tenant, bankruptcy can offer you a respite not only from rent, but many other obligations as well as you reorganize your business affairs.

If you are a tenant

If you are a tenant, bankruptcy can offer you a respite not only from rent, but many other obligations as well as you reorganize your business affairs. By sheer happenstance, a new Subchapter V of Chapter 11 of the Bankruptcy Code was enacted Fall of 2019 to make reorganizations easier and less costly for smaller business enterprises. And, some bankruptcy courts have already considered the issue of “Acts of God” as landlords seek payment of rent as a condition to the tenant staying in the premises during reorganization. Tenants may well rather be in front of a bankruptcy judge than a state court judge who may have come from the ranks of district attorneys or a large law firm, and who may not fully understand or be sympathetic to excuses from paying rental obligations.

If you are a landlord

If you are a landlord, you may face the bankruptcy issue from two perspectives: either you may consider it as a method to avoid a non-judicial foreclosure from your lender; or you may have to deal with bankruptcy if your commercial tenant files for bankruptcy and wants more time to make up past rent through a multi-year reorganization plan.

Law Offices of Brian Irion is a debt relief agency that helps businesses and people under the Bankruptcy Code. We also help creditors dealing with debtors and trustees in bankruptcy!

The post As Eviction Controls Ease, Consider the Possibility of Bankruptcy appeared first on The Law Offices of Brian Irion | Bankruptcy Attorney, Business Law, Real Estate Law, Litigation.

Do you have a small business that is severely impacted by the COVID-19 Shelter In Place orders?
Have your PPP, EIDL or other SBA loans been held up or denied?
What will happen to your business when the stay on evictions is lifted?
Should you be using personal funds or retirement funds to support your business?
Are your negotiations with your landlord not going well?

If you are pondering these questions for your business you might consider whether a reorganization bankruptcy might help. Why?

Right now and for the short-term future, California has implemented a “no eviction” emergency order by way of an emergency rule of court that prohibits the issuances of summons for eviction of all types, residential or commercial. Other laws make it unlawful for landlords to begin a residential eviction during an emergency (Cal. Penal Code § 396(f)).

This safe harbor for tenants will not last forever. It can’t. Landlords continue to be pressured by their lenders to pay mortgages while at the same time tenants are not paying rent.  Large law firms are offering to throw matters into litigation, at your cost.

This safe harbor for tenants will not last forever. It can’t. Landlords continue to be pressured by their lenders to pay mortgages while at the same time tenants are not paying rent. Large law firms are offering to throw matters into litigation, at your cost. There has been talk recently, of raising the stay on evictions. When – not if – that happens, it is likely there will be an onslaught of eviction lawsuits, which under California law can be brought to conclusion in as little as two weeks to several months. Commercial tenants who might consider bankruptcy “down the road” will have missed a precious opportunity to plan ahead of time.

In Bankruptcy, Timing is Everything

The truth is that some businesses should be contemplating bankruptcy now. Bankruptcy planning, like tax planning, should occur in the months leading up to the filing, not on the eve of filing. A reorganization bankruptcy is a complex mechanism that comes with powerful tools to help the debtor in possession, but it is not something that should be thrown together last minute. With proper planning, a commercial enterprise might even avoid filing bankruptcy, but that sometimes depends on whether creditors view the potential bankruptcy as a credible threat. And frankly, a commercial tenant ought to consider whether it might be advantageous to be in front of a bankruptcy court rather than a state court arguing for excuse from performance on a lease or contract. State courts are often faced with a variety of cases including criminal and family disputes, whereas federal bankruptcy judges are experts in financial matters and how to get a reorganization accomplished successfully.

Law Offices of Brian Irion is a debt relief agency that helps businesses and people under the Bankruptcy Code. We highly recommend – and will require all possible debtors who are our clients to review – among other things – the disclosures required by 11 USC § 342, ,11 USC § 527, and 11 USC § 528.

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The media bombards you with ads from debt counseling agencies telling you to consolidate or reduce your debt without resorting to bankruptcy. The FTC warns people to be wary of many of these companies that promise to remove debt for pennies on the dollar. Most cannot and the consumers are the victims.

The US Department of Justice, the FTC and the majority of attorney generals found that less than 10% of consumers complete these programs successfully and most end up further in debt! NACBA (the National Association of Consumer Bankruptcy Attorneys) explains that the “debt relief agency” system is inherently flawed. Many of these debt relief agencies are fronts for credit card companies seeking to get borrowers to pay credit card debt by shifting debt to other creditors. This can be very dangerous for anyone who is financially troubled. Here’s why.

Credit card debt typically can be discharged in bankruptcy. Yet some credit counseling agencies recommend getting new loans secured by a home or other collateral to pay down the credit card debt. Or they negotiate a reduced payoff in return for securing the debt. But the new loan (or restructured loan) used to pay off the credit card debt is secured debt that invades otherwise exempt assets such as the homestead, which can provide an exemption protecting up to $150,000 for California homeowners. Alternatively, you are required to invade other exempt property such as a retirement plan. The credit card companies get all or most of their money paid back and the borrower is stuck with secured, rather than unsecured and dischargeable debt.

Another method debt consolidators use is to create a repayment plan with the creditors in a workout outside of bankrutpcy. This plan is similar to a Chapter 13 repayment plan, but may lack some significant safeguards and usually is more expensive. You pay the debt management planner a single check for two to five years and the company then redistributes your payment to the creditors, less a commission. Over the life of the plan, the debtor usually pays 30% to 60% of the credit card debt. The fee for this typically is based on your total debt rather than the repayment plan amount, and usually is higher than a Chapter 13 trustee’s fees, which are capped by statute. Moreover, if you default on your payment plan during this period rather than complete your plan, you again find yourself facing bankruptcy and have only delayed, but not eliminated the debt. On the other hand, if your total debt is relatively small so that there is no justification to spend the money on a Chapter 13 bankruptcy (or you cannot qualify for a Chapter 13 bankruptcy and face the more expensive Chapter 11 process,) this may be right for you. Still, be careful of the debt management planner you choose. Not all are alike.

If you want to consider financial counseling before seeing a lawyer about your financial troubles, the US Department of Justice has a list of qualified and approved, non-profit financial counseling agencies. And, since they are approved, you needn’t wonder about their competence or hidden agendas.

As to the credit counseling companies that advertise, here is a simple rule: if they play on your guilt or the shame of bankruptcy, or have large up-front fees, or counsel you to default on a debt, you probably don’t want to use them. They are not your fiduciary who must place your interests first (as a lawyer must), what you tell them is not confidential, and if they are advertising, they probably are for profit — which means they are not approved by the Department of Justice. They are not in your corner, but their own.

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According to the United States Supreme Court,

“The primary purpose of bankruptcy is to…relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.”

Williams v. United States Fidelity & Guaranty Co., 236 U.S. 549, 554 (1915)

Bankruptcy laws exist because unfortunate things can happen to anyone. In fact, over 7,800 bankruptcy petitions were filed in Northern California in 2019 alone.

If you’re thinking about filing for bankruptcy but are afraid, keep in mind that you are in good company. In the first 6 months of 2020 alone, Nieman Marcus, 24-hour Fitness, JC Penny, Gold’s Gym, J. Crew, Avianca Airlines, the Boy Scouts of America, Hertz, Lucky grocery stores and others have used the Code to adjust or relieve their debts.

Filing for bankruptcy may or may not be the best course of action for you, but you will not know your options until you review each possibility. Speak to an experienced and qualified attorney to see if you might benefit from bankruptcy, a workout outside of bankruptcy, or other course of action.

At some point or another, most of us will be affected by a bankruptcy.

This may happen when businesses attempt to collect on an overdue debt, or have collected one only to be sued for a preferential transfer by a debtor’s bankruptcy estate. It may also happen when a tenant files for bankruptcy, or when a landlord files for bankruptcy and we are renters. It may happen when a friend, relative or someone for whom we guaranteed a loan files for bankruptcy and we are called upon to honor the guarantee. Or, it may happen when we find ourselves unable to make ends meet due to unexpected events such as illness, job loss, or what in hindsight turns out to be a mistake in financial planning.

Bankruptcy is for everyone’s benefit.

The fact is that the bankruptcy laws are designed to help both debtors and creditors. For debtors, a bankruptcy discharge offers a fresh start to the honest but unfortunate, or simply a chance through the automatic stay to regroup and analyze how to handle financial problems. For creditors, the bankruptcy process offers an orderly liquidation or payment plan without the time, cost and uncertainty of costly traditional litigation, and it stops the race between creditors to be first to grab dwindling assets of an undercapitalized debtor.

Bankruptcy is not immoral.

When we hear the word “bankruptcy,” many may shrivel their noses and think of the debtor as a deadbeat or immoral. In most cases, nothing could be further from the truth.

Most debtors, whether business or individuals, have to grapple with emotions of failure even to consider taking the step of filing. Most individual debtors are filing for the first time, and have been beset by unexpected losses such as severe illness, job loss, personal identity theft or divorce. When one considers that the national divorce rates are about 3.5% every year, or that over 60 million Americans have lost their jobs or businesses due to Covid-19 in the past three months alone, it becomes a little easier for the rest of us to understand the potential debtor’s predicament.  Bankruptcy is provided for in the US Constitution.  It is as American as can be.

Similarly, a vast number of businesses fail in their first five years. The US Census Bureau does not track business failures, but the National Federation of Independent Businesses cites a study conducted by Wells Fargo Bank stating that nearly 50% of all start-up businesses close in the first five years.

In short, the words entrepreneurship and illness are not synonymous with deadbeat or immorality. Rather, failure is a byproduct of effort and should not be looked at with disdain. Better that we all jump into the bankruptcy process (whether as debtor or creditor) and get on with life and our businesses.

Not all bankruptcies are alike.

Many think of bankruptcy as economic death when instead it should be viewed as a fresh start. A bankruptcy case is more akin to a phoenix-esqe event in that individual debtors continue after bankruptcy free of most of their debts. And, many business bankruptcies also are not liquidation-style cases. Many bankruptcies are filed under Chapters 9 (municipal reorganization), 11 (business reorganization) or 13 (individual or sole proprietorship reorganization).

The Invisible Hand in bankruptcies.

In economist Adam Smith’s Wealth of Nations, he uses the phrase “invisible hand” metaphorically to demonstrate how each person acting in his own interest combines to promote the good of the community. The same is true in bankruptcy proceedings.

The debtor’s goals in filing for bankruptcy include getting an automatic stay in order to have some breathing room to reassess how to handle the situation. Another goal is to exempt as many assets as possible from the bankruptcy estate that is created by filing the petition, and which will be used to pay creditors. Next, the debtor wants to discharge as much indebtedness as possible, since the previous burden obviously was too high. Finally, by filing for bankruptcy and receiving a discharge, a debtor avoids “cancellation of debt” tax liability that often arises from how the IRS treats relief from indebtedness (26 USC §108). Sometimes not all of these goals can be achieved.

The creditor’s goals in a bankruptcy are to receive as much of the estate assets as possible, obtain relief from the automatic stay to obtain assets of the estate, find facts which would result in a denial of discharge to the debtor (such as hiding assets), or obtain a ruling that the debt owed to that creditor is not discharged at all, such as when the debt was incurred by willful and malicious acts, fraud, or is a domestic support obligation.

The U.S. Trustee’s goal in bankruptcy is to ensure the debtor acts honestly and equitably toward the creditors. This may occur by reviewing the petition, past tax returns, or examining the debtor throughout the case to evaluate which, if any, type of bankruptcy is best for all concerned.

The bankruptcy case trustee (different from the US Trustee’s office) has the goal of getting as many assets into and disbursed through bankruptcy estate, as the trustee makes a commission based on this throughput.

The effect of the automatic stay.

One of the effects of bankruptcy is the feared and revered “automatic stay” imposed by §362 of the Code. But exactly what does it do?

The automatic stay does stop the vast majority of creditor actions against a debtor. It operates as an injunction (with the power of the Court behind it) to stop:

• the commencement, continuation of lawsuits and administrative proceedings;
• efforts to enforce money judgments;
• any act to create, perfect or enforce most liens; and
• offsets of debts owing to debtor.

It does not, however, stop:

• criminal proceedings;
• professional or drivers’ license revocation proceedings;
• paternity, domestic support obligations;
• marriage dissolution cases (except for division of property that is estate property);
• domestic violence proceedings;
• interception of tax refunds under the Social Security Act;
• tax audits or notices of deficiency from the IRS;
• eviction proceedings of non-residential real property where the lease has expired of its own terms;
• continued withholding from earnings (Chapters 11, 13);
• acts to enforce against property that was the subject of a successful relief motion within the previous 2 years in prior case;
• continued eviction of residential property if judgment was entered before the bankruptcy petition was filed;
• acts to perfect or continue perfection of lien that relates back (such mechanics’ liens); and
• a number of other actions.

The penalty for violating the automatic stay can be severe, as a creditor’s violation affects not only it and the debtor, but all other participants in the bankruptcy.

What the bankruptcy estate is made of.

The filing of a bankruptcy petition creates a bankruptcy estate. In a consumer case, it is comprised of:

• all assets of the debtor, and of spouse’s interest in community property;
• all inheritances, bequests, devises, amounts received from divorce decrees or life insurance policies received within following 180 days;
• in a Chapter 11 and 13, the debtor’s earnings through the life of repayment plan; and
• all transfers avoided by the trustee such as fraudulent conveyances or preferential transfers;

minus

• exemptions allowed to be taken under applicable law.

What are California’s exemptions?

California has two sets of exemptions laws. You should consult with your attorney about which set of exemptions is right for you. Generally, however, one is permitted to be used by anyone and includes the statutory homestead exemption; the other is limited to bankruptcy debtors who elect to use the alternative “bankruptcy-like” exemptions.

Some of the hurdles a debtor must clear to get a discharge.

In order to receive a discharge, a debtor:

• must timely file tax returns before the petition is filed;
• must timely file schedules of assets, liabilities, cash flow, intention regarding unexpired contracts;
• must file wage stubs timely; and
• must participate in case and follow the bankruptcy court’s orders.

If the debtor is an individual with primarily consumer debts, he also:

• must take an approved credit counseling course w/i 180 days before filing the petition; and
• must take a financial management course or a discharge will not be granted.

In addition, in a Chapter 7 case where debtor is an individual with primarily consumer debts, the debtor must have current income that is less than median income of the state, or pass the “means” test. This means test is intended to identify whether the debtor has the ability to repay a significant portion of unsecured dischargeable debt. If the test is not passed, the case is “presumed abusive” under Chapter 7(meaning the debtor presumably has an ability to repay a significant amount of otherwise dischargeable debt) and the case normally will be converted to one under Chapter 13, in which case the debtor must commit disposable income in a 5-year plan to repay debts. If the debtor fails to complete the plan, the case may be converted or dismissed.

If the debtor’s unsecured debt exceeds $383,175 and secured debt exceeds $1,149,525, and he does not pass the means test, it is possible the debtor will have to file under Chapter 11 instead of 13, which has similar discharge provisions but is intended for larger, more complex situations.

What debts cannot be discharged?

A discharge generally operates to discharge the debtor from all debts arising before the petition was filed, except:

• most recent taxes due and unpaid;
• taxes due for fraudulent returns or unfiled returns;
• domestic support obligations;
• fines, penalties and forfeitures;
• student loans unless the court determines that requiring payment would impose and undue hardship;
• death, personal injury injuries caused by DUI or under illegal controlled substances;
• criminal restitution orders;
• divorce obligations ordered by family court;
• HOA fees or assessments due after the petition was filed;
• amounts owed under repayment to pension or profit sharing plans under ERISA;
• judgments for fraud or defalcation under securities laws; and

If a creditor establishes the following in proceedings in the bankruptcy court:

• debt for money, property or services obtained by false pretenses (for example credit card debts incurred just before the bankruptcy petition is filed);
• fraud while acting as a fiduciary; or
• willful and malicious injury,

These debts may be found non-dischargeable and may survive the bankruptcy process.

Provisions to discourage multiple filings.

Finally, there are provisions to discourage frequent resort to bankruptcy:

• A Chapter 7 debtor may not receive a discharge if one was received in a previous
• A Chapter 7 debtor may not receive a discharge if one was received in a previous Chapter 13 case filed within the past 6 years;
• A Chapter 13 debtor cannot receive a discharge if one was received in a Chapter 7 case filed within the past 4 years;
• A Chapter 13 debtor cannot receive a discharge if one was received in a previous Chapter 13 ase filed within the past 2 years; and
• No natural person may be a debtor whose prior case has been dismissed within the previous 180 days for willful failure to prosecute the prior case.

If this seems daunting, don’t be concerned. Once explained, it becomes clear.

The bankruptcy process in pictures.

Law Offices of Brian Irion is a debt relief agency under 11 USC § 528. We help people and businesses file for bankruptcy to reorganize or relieve debt. If this is the right choice for you or your business, you will know, and if not, you will know the options for yourself, your family, or your business.

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Bankruptcy is for everyone’s benefit

In economist Adam Smith’s book, Wealth of Nations, he uses the phrase “invisible hand” metaphorically to demonstrate how each person acting in his own interest combines to promote the good of the community. The same is true in bankruptcy proceedings.

For debtors, the bankruptcy process gives debtors a chance through the automatic stay to regroup and analyze how to handle financial problems.  A discharge under Chapter 7 or 13 (11 USC §727, § 1328), or a confirmed plan in a Chapter11 reorganization (11 USC §§ 1129, 1141) also offers a fresh start to the honest but unfortunate debtor.

For creditors, the bankruptcy process offers disclosure of the debtor’s actual financial situation, and an orderly liquidation or payment plan without the time, cost and uncertainty of costly traditional litigation, and it further stops the race between creditors to be first to grab dwindling assets of the debtor. In a successful Chapter 11 or 13 case, creditors stand to have a greater portion of the debt repaid than if the debtors’ nonexempt assets are just liquidated as occurs in out-of-bankruptcy enforcement of judgment procedures.

The US Trustee’s goal in bankruptcy is to ensure the debtor acts honestly and equitably toward the creditors. This may occur by reviewing the petition, past tax returns, or examining the debtor throughout the case to evaluate which, if any, type of bankruptcy is best for all concerned and if needs be, file a motion to convert a case to one under another chapter or seek to have it dismissed entirely.

The bankruptcy case trustee (different from the US Trustee’s office) has the goal of getting as many assets into and disbursed through bankruptcy estate, as the trustee makes a commission based on this throughput.

Overview

The Bankruptcy Code is found in Title 11 of the United States Code. It is divided into nine chapters, all but one of which is odd-numbered. Generally, Chapters 1, 3 and 5 apply to all bankruptcies (§103). Chapter 1 deals with global issues such as definitions (§101), the powers of the bankruptcy courts (§105), and limits on who may be a debtor in bankruptcy (§109). Chapter 3 addresses case administration for all bankruptcies such as how cases are commenced (§301, 303), who are the officers of the case, including the US Trustee (§307), the case trustee (§321), employment and compensation of professionals (§§327-330), the effect of the automatic stay and when it may be lifted or modified (§362), and how to deal with “executory contracts”, meaning those not fully performed save for payment of money (§365). Chapter 5 covers the claims process including allowance of claims, determination of secured status and the like (§§501-511), the debtor’s duties to list all assets and liabilities (§521), the definition of property of the estate (§541) and the trustee’s powers to compel turnover of estate property held by others or return of assets to the estate that had been disbursed to some creditors before the case was commenced (§§542-553).

The effect of the automatic stay

One of the effects of every type of bankruptcy (see below) is the “automatic stay” imposed by §362 of the Code. The automatic stay stops the vast majority of creditor actions against a debtor. It operates as an injunction to stop:

• the commencement, continuation of lawsuits, and administrative proceedings;
• efforts to enforce money judgments;
• garnishments and attachments in pre-judgment collection litigation
• any act to create, perfect or enforce most liens; and offset of debts owing to debtor.

It does not, however, stop:

• criminal proceedings;
• professional or drivers’ license revocation proceedings;
• paternity, domestic support obligations;
• marriage dissolution cases (except for division of property that is estate property);
• domestic violence proceedings;
• interception of tax refunds under the Social Security Act;
• tax audits or notices of deficiency from the IRS;
• eviction proceedings of non-residential real property where the lease has expired of its own terms;
• continued withholding from earnings (Chapters 11, 13);
• acts to enforce against property that was the subject of a successful relief motion within the previous 2 years in prior case;
• continued eviction of residential property if judgment was entered before the bankruptcy petition was filed;
• acts to perfect or continue perfection of lien that relates back (such mechanics’ liens).

What the bankruptcy estate is made of

The filing of a bankruptcy petition creates a bankruptcy estate. It generally is comprised of:

• all assets of the debtor, and of spouse’s interest in community property;
• all inheritances, bequests, devises, amounts received from divorce decrees or life insurance policies received within following 180 days;
• in a Chapter 13, the debtor’s earnings through the life of repayment plan;
• the proceeds, product, rents and profits of property of the estate
• all transfers avoided by the trustee such as fraudulent conveyances or preferential transfers;

minus

• exemptions allowed to be taken by individuals under applicable law once allowed.
• (§§541, 522, Cal. Civ. Proc. Code §703.010 et seq.; Fed. R. Bankr. Proc. 4003).

What are California’s exemptions?

Only individual debtors have exemptions. Corporate debtors do not. California has two sets of exemptions laws. One is permitted to be used by anyone and includes the statutory homestead exemption; the other is limited to bankruptcy debtors who elect to use the alternative “bankruptcy-like” exemptions (§522, Civ. Proc. Code §703.010 et seq.)

Generally speaking, for California bankruptcies, individual debtors may choose either the “standard” exemptions under the California Code of Civil Procedure, or “bankruptcy like” exemptions found in an alternate section Cal. Civ. Proc. Code § 703.140.

Different Types of Bankruptcies

Chapter 7 is known as a liquidation bankruptcy, and is the most common form of bankruptcy. According to the Northern District of California Bankruptcy Court, 21,941 Chapter 7 cases were filed in the Northern District of California in 2011, but that number had fallen to 4,527 filings in 2019. With the onslaught of layoffs and the current economic climate caused by COVID-19, these numbers are expected to jump dramatically by the third quarter of 2020. Business bankruptcies have already risen to levels not seen since 2009 and individual bankruptcies are expected to follow as unemployment claims rise and unemployment benefits are exhausted. In the San Francisco Bay Area alone, unemployment jumped by over 20,000 between February and March of 2020 and, as of October 2010  the Bureau of Labor Statistics reports that California’ unemployment rate now stands at 11.4%.

In a Chapter 7 case, an individual debtor gives up all non-exempt property to pay creditors and in return, receives a discharge from most debts.   Corporations do not have exemptions because they do not need to eat, clothe themselves or otherwise prepare for life after bankruptcy (§522, Cal. Civ. Proc. Code §703.020, §703.130 et seq.). Similarly, corporations do not receive a discharge under Chapter 7 because there is no need for the fresh start. The corporation is no longer engaged in business (§727).

The “Means Test”: Where the debtor is an individual or a couple with primarily consumer (as opposed to business) debts, they may be precluded from being Chapter 7 debtors by the “means test”, a mechanism found in §707 and intended to prohibit high wage earners without significant secured debt from obtaining a discharge when they can repay a substantial portion of their debt. If they fail the means test, the debtors must file under Chapter 13 or Chapter 11. As of May 1, 2020, the “median” income in California (the baseline in the means test for determining ability to repay some debt) is as follows:

• 1 person | $60,360
• 2 people | $79,271
• 3 people | $88,235
• 4 people | $101,315
• Each additional person | *$9,000 per additional person

This is a baseline number, and not a complete “means test” calculation. Among other things, the Means Test does not apply to certain debtors or certain types of debt. Speak with an attorney qualified in this area.

Chapter 13 is the next most common form of bankruptcy, accounting for nearly 40% of all bankruptcy filings in the Northern District of California in 2019. Only an individual or married person can be a debtor under Chapter 13, often dubbed the “wage earner plan” bankruptcy (§§109, 1301). In addition, to be a debtor under Chapter 13, the debtor must not have more than $1,257,850 in secured debt and $419,275 in unsecured debt. 11 USC § 109(e). Generally, the debtor who qualifies for and must file a Chapter 13 case due to excessive income in the months leading up to bankruptcy must file and have approved by the Court a repayment plan that commits to paying all of the debtor’s “monthly disposable income” for a five year period, at the end of which, the debtor will receive a discharge. The estate property includes these post-petition earnings in addition to the normal definition of “estate property” under §541 (§1306). The detriment of a Chapter 13 plan to a Chapter 7 liquidation is the time and cost.  The usual benefit to debtors is the ability to reinstate a loan on a primary residence that has fallen into default and where the home is on the verge of being foreclosed. The easiest way to describe a Chapter 13 case is to compare it to a Chapter 11 reorganization case. Chapter 13 is a streamlined and simplified reorganization and partial repayment of debts.  In a Chapter 13 case, the debtor applies to the Court for confirmation of a plan, whereas in a Chapter 11, the debtor must usually also obtain approval from creditors.

With the possible exception of a bankruptcy by a municipality under Chapter 9, a Chapter 11 bankruptcy is easily the most complicated and nuanced of the bankruptcies. Typically dubbed a “reorganization” case, it can take on many forms and outcomes. Under a Chapter 11 case, the debtor remains in possession of the estate property and is called a “debtor in possession” or “DIP”. If it is an ongoing business, the debtor is authorized to continue operating the business (§1107-1108) unless ousted by the appointment of a trustee under §1104, usually for misconduct or mismanagement by the DIP. In addition to scheduling all of the assets, liabilities and ongoing executory contracts (such as leases, financing agreements, collective bargaining agreements and the like) (§521, Fed. R. Bankr. Proc 1007), a DIP must both (1) seek approval of the Court for “out of the ordinary” expenses such as employing professionals like lawyers and accountants, and (2) regularly report to the Court by filing monthly operating and income and expense reports. Additionally, DIPs have a limited time to propose a plan of reorganization, create and get approved a “disclosure statement” and lobby creditors to accept the plan (§§1121-1126, §1129). Creditors’ committees are often appointed under §§1102-1103 to represent unsecured creditors at large and these committees often seek representation, also at the expense of the estate. This continuous oversight adds to the ongoing cost of running any business and can overtax it to such an extent that some Chapter 11 cases are doomed in the first several months. Many Chapter 11 cases end up being converted to Chapter 7 liquidations when no feasible plan of reorganization can be created or approved before this additional burden becomes overwhelming. One may ask why, then, anyone would file a Chapter 11 case. The debtor’s goals in filing for bankruptcy include getting an automatic stay in order to have some breathing room to reassess how to handle the situation. For businesses in bankruptcy, this also permits the debtor a chance to renegotiate leases, alter borrowing relationships with lenders (sometimes to a lower interest rate or principal reduction), or sometimes reject onerous agreements with labor unions. This higher level of negotiating and maneuvering often escapes the normal unsecured creditor’s notice.

What debts cannot be discharged?

A discharge generally operates to discharge the debtor from all debts arising before the petition was filed, except:

• most recent taxes due and unpaid;
• taxes due for fraudulent returns or unfiled returns;
• domestic support obligations;
• fines, penalties and forfeitures;
• student loans unless the court determines that requiring payment would impose and undue hardship;
• death, personal injury injuries caused by DUI or under illegal controlled substances;
• criminal restitution orders;
• divorce obligations ordered by family court;
• HOA fees or assessments due after the petition was filed;
• amounts owed under repayment to pension or profit sharing plans under ERISA;
• judgments for fraud or defalcation under securities laws;

If a creditor establishes the following in proceedings in the bankruptcy court:

• debt for money, property or services obtained by false pretenses ( for example credit card debts incurred just before the bankruptcy petition is filed);
• fraud while acting as a fiduciary; or
• willful and malicious injury,

these debts may be found non-dischargeable and may survive the bankruptcy process (§§523, 727, 1141, 1328).

Provisions to discourage multiple filings

Finally, there are provisions to discourage frequent resort to bankruptcy:

• A Chapter 7 debtor may not receive a discharge if one was received in a previous Chapter 7 case filed within the past 8 years;
• A Chapter 7 debtor may not receive a discharge if one was received in a previous Chapter 13 case filed within the past 6 years;
• A Chapter 13 debtor cannot receive a discharge if one was received in a Chapter 7 case filed within the past 4 years;
• A Chapter 13 debtor cannot receive a discharge if one was received in a previous Chapter 13 case filed within the past 2 years; and
• No natural person may be a debtor whose prior case has been dismissed within the previous 180 days for willful failure to prosecute the prior case.

The post Overview of the Bankruptcy Process appeared first on The Law Offices of Brian Irion | Bankruptcy Attorney, Business Law, Real Estate Law, Litigation.

The decision whether to file for bankruptcy is often fraught with fear and shame. It doesn’t need to be. In fact, it shouldn’t be. Consider this: If Thomas Jefferson filed for bankruptcy protection (and he did), it might behoove you to toss out the moral guilt and consider your situation anew. Don’t buy in to the myth that “debtors” are “deadbeats.” That is simply propaganda from Wall Street financial institutions. If you’d like some perspective on this, Senator Bernie Sanders from Vermont wrote an insightful article in 2004 while he was a member of the House of Representatives, called the “Great Credit Card Scam.” I remember seeing it on Yahoo! then and believe it is faithfully reprinted here.

A friend once told me that “The best decisions are usually made on more complete information.” What you probably need now is a little more information.

Alternatives

Have you considered alternatives to bankruptcy? The first thing you should do is closely review your financial situation and determine what alternatives are available. Sometimes the financial stress you’re experiencing can be reduced or eliminated without filing for bankruptcy. For example, if you’re facing foreclosure on your home, you might arrange to refinance, sell it, negotiate an extension with your current lender or take other action. If you are a defendant in a lawsuit, there are many ways to resolve the suit for less than you might think and arrange for payment over time. There are as many alternatives as there are people with financial problems. And, if you do determine that bankruptcy is the best alternative, bankruptcy planning is just as important as tax or financial planning. Do it well before you file rather than after.

You probably should consider seeing a lawyer who is knowledgeable about debtor/creditor law. This would include for example, one who is experienced in bankruptcy law, collections, security interests and financing, and real estate. A great source of referrals is the National Association of Consumer Bankruptcy Attorneys.

Bankruptcy is Not a Moral Decision

There are myriad reasons for filing a business or personal bankruptcy, or taking other actions to reorganize or discharge debts. Among them are an unexpected judgment or lawsuit, job loss, a cancelled revolving line of credit with your bank, rising production costs, union contracts, an illness that resulted in huge medical bills, or as is the case for millions of homeowners, a variable rate mortgage that ratcheted up while the value of your home decreased, placing refinance out of reach.

Don’t Feel Guilty

Let’s also put this in perspective. In England, a debtor who couldn’t pay his debts could be thrown into prison – “debtor’s prison.” The U.S. Constitution grants Congress the power to establish bankruptcy laws. You shouldn’t feel guilty about using them. And, you’d be surprised who else already has.

You’re in Good Company

Consider some of the companies that have filed for bankruptcy protection. K-Mart, Pacific Gas & Electric Company, Dow Corning Company, Texaco, Napster, PanAm Airways, Inc., Converse, Delta Airlines and the Singer Company. Not to be outdone, the list of individuals who have filed for bankruptcy is just as impressive: Thomas Jefferson, Henry Ford, Ulysses Grant, Marvin Gaye, Merle Haggard and Walt Disney to name just a few. These companies and individuals made a decision to use the bankruptcy laws to their benefit. It was simply a calculated decision based on the best course of action and alternatives.

How Does Bankruptcy Work?

The overriding purpose of the Bankruptcy Code (the “Code”) is to give a fresh start to an honest but unfortunate debtor who cannot otherwise reasonably be expected to pay his debts. A corollary is that a valuable business that contributes to society should not have to be dissolved due to an unexpected or aberrational financial situation. Nearly everything in the Code reaffirms these global policies.

Corporate debtors normally will file for bankruptcy under Chapter 11 in which the estate attempts to reorganize while creditors are largely held in abeyance by the automatic stay. A corporation that files for protection under Chapter 7 (a liquidation) will not normally receive a discharge, because none is necessary after a liquidation.

The question is a little more involved for individuals. The first question is whether the individual debtor can reasonably be expected to pay his debts back. If so (under a recently implemented but somewhat arcane calculation called the “means” test), the typical debtor is required to file a bankruptcy under Chapter 13 (a “wage earner plan”) or Chapter 11 (a reorganization plan) in which future income may be used to help pay the debt. If it appears the debtor does not have the means to repay, a petition under Chapter 7 (liquidation) is often filed.

What is Involved?

In general, an individual who files for bankruptcy under Chapter 7 gives non-exempt assets to a trustee who pays the creditors in return for a discharge of the bankrupt’s listed pre-petition debts. Non-exempt assets include those in excess of what is reasonably necessary and reasonable to retain, including amounts for a car, tools of the trade and basic necessities of a reasonable life.

For policy reasons, some debts may not be dischargeable. Some examples are debts arising from:

• family support obligations such as child support or alimony;
• fines, penalties and forfeitures to governmental units;
• educational loans backed by governmental units unless not discharging the debt would work an undue hardship on the debtor;
• debts arising from injury or death caused by the debtor driving while intoxicated;
• criminal restitution judgments;
• HOA fees arising post-petition; and
• some loans from retirement plans.

Other debts may be held non-dischargeable if the bankruptcy court finds the debt was incurred by:

• willful and malicious conduct (you can’t punch someone and then hide behind bankruptcy laws);
• actual fraud or embezzlement; or
• false loan applications or other writings intended to deceive the prospective creditor (don’t charge up a credit card knowing you’re going to file for bankruptcy the next day).

Going through bankruptcy can be daunting, but with proper guidance it can be made easier. It can involve as little as attending some financial counseling classes, assembling lists of creditors, income, debts and assets, filing the petition and accompanying schedules, attending a meeting of creditors, then attending some more financial counseling classes and receiving a discharge. Some additional papers might be filed depending on additional facts such as whether you own your home or are leasing a car and whether you want to reaffirm these agreements.

If you’re thinking about filing your own case without using a lawyer, and you live within the boundaries of the Northern District of California, you should review the local Bankruptcy Court’s website and its webpage for “pro per” filers.

Among providing other legal services, The Law Offices of Brian Irion is a debt relief agency, providing assistance for debt relief, including possible bankrutpcy.

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• Where can I get basic information
• How much does bankruptcy cost?
• Do I need to pay the entire fee up front?
• Can I file without my spouse?
• How long does it take?
• Will this affect my credit score?
• Is information about my bankruptcy case publicly available?
• What if I don’t qualify for a Chapter 7 bankruptcy?
• Why should I declare bankruptcy instead of doing a debt repayment plan outside of bankruptcy?

Where can I get basic information?

The US Bankruptcy Court website has basic information.

How much does bankruptcy cost?

Asking this question is a little like asking how much it will cost to fix your car before the mechanic looks at it. So take this answer with that in mind. Also keep in mind that the attorneys’ fees are separate from things such as court filing fees (about $350) and debt counseling fees paid to third parties.

Most simple chapter 7 for individuals with primarily consumer debts and no special issues will run between $1,500 and $3,500 depending on issues such as whether the debtor(s) can assemble the needed documents in one attempt, whether they have debts they want to reaffirm past the bankruptcy case (such as a car loan), and other facts. Things can become a little more complex (and expensive) if the debtors have any questionable recent transactions.

A Chapter 13 case usually costs a little more, since it involves creating a repayment plan that must be approved by the court, in addition to the documents required in a Chapter 7. While every case will be different, the office of the US Trustee has adopted a fee schedule presumed to be reasonable.

Chapter 11 reorganization cases (usually reserved for businesses) typically are more involved and ongoing fees are scrutinized by the US Trustee’s office and the Court for reasonableness before the attorney can be paid for post-petition services.

 Can I file without my spouse?

You have the right to file for bankruptcy without your spouse joining you. In many cases, however, it is not advisable. First, if you file, all of the community property is still property of the bankruptcy estate. Next, your discharge, if you receive one, will act as an injunction against efforts by creditors against you and it will include efforts to reach the community property. In California, however, spouses’ separate property can be held liable for a number of debts incurred by the other, namely debts incurred for basic necessities of life. This has been interpreted to include food, shelter, and medical expenses. So, if you receive a discharge, but your spouse has separate property and the debt relates to necessities of life, your spouse may still be sued even after you receive your discharge.

How long does it take?

A Chapter 7 case with no complications can often be finished within about four months of filing. A Chapter 13 repayment plan is not finished until the plan has been performed, and that can take three to five years. A Chapter 11 plan can be completed as quickly as 6 months or can take several years.

Will this affect my credit score?

Credit reporting is governed in part by the federal Fair Credit Reporting Act. Under section 605(a) of this law (15 USC §1681c), consumer reporting agencies are generally prohibited from including a bankruptcy in a credit report after 10 years. However, this is not substantially different than the timeline permitted to report a negative inference for bad debt outside of bankruptcy – 7 years. And, some lenders may actually be more willing to lend to people who have just been through a bankruptcy, because the debtor has just been discharged of other debts and because the debtor cannot get another discharge for a number of years.

Is information about my bankruptcy case publicly available?

Your petition, schedules and other filed documents are part of your bankruptcy case, and are publicly available to anyone who desires to review court records. Certain information such as your social security number, however, will remain private.

What if I don’t qualify for a Chapter 7 bankruptcy?

Changes were made to the bankruptcy code in 2005 that limit the number of people who can file for Chapter 7 relief to those whose income when matched to their secured debts does not result in significant monthly disposable income. This is “means test.” If you don’t qualify to file a case under Chapter 7, you may qualify to file bankruptcy under Chapter 13 or Chapter 11, or you may be best served by doing an out of bankruptcy workout. These alternatives typically cost more and take longer, but may achieve your goals nonetheless.

Why should I declare bankruptcy instead of doing a debt repayment plan outside of bankruptcy?

Good question. Sometimes, bankruptcy is not the best alternative. Workouts outside of bankruptcy may be best when much of your debt would be non-dischargeable (such as repayment plans with the IRS), or the automatic stay would not apply to a particular claim such as ongoing alimony payments.

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When a debtor cannot file for bankruptcy under Chapter 7, either because he cannot pass the means test, because of a too recent prior bankruptcy, or other reason, he usually will file for protection under Chapter 13 of the Bankruptcy code.

Chapter 13 is somewhat like Chapter 7 in that the filing of the petition results in the imposition of an automatic stay and the property of the estate is used to pay creditors.  However, there are several significant differences between Chapter 7 and Chapter 13.

First, the property of the bankruptcy estate includes not only the debtor’s assets but also all earnings of the debtor for the duration of the case or until it is converted to a case under a different chapter.  Second, the debtor must propose a plan, similar to a plan of reorganization under Chapter 11. 

This plan, which must be confirmed by the Court at a hearing, must contain several elements:

It must:

• Pay all priority claims in full unless the claimant agrees to a different treatment.  Priority claims include such things as administrative expenses of the case, trustee fees, filing fees, domestic support obligations, recent tax obligations, and allowed claims for death or personal injury occasioned by the debtor’s operation of a motor vehicle while under the influence.  For a full list of “priority claims”, see 11 USC 507;
• As to secured claims, provide either that the debtor surrender the collateral, or the secured claim is paid in full and the creditor retains the security interest until then or until discharge;
•  Provide for payments on unsecured claims that equal or exceed what each creditor would receive if the bankruptcy had proceeded under Chapter 7; and
•  Be proposed “in good faith”.

In addition, the debtor must demonstrate he can make all payments required under the plan, has paid all domestic support obligations since filing for bankruptcy, and has filed all tax returns that are due.

Finally, if the Chapter 13 trustee or an unsecured creditor objects to confirmation of the plan, the Court may only confirm the plan if the unsecured claim is paid in full, or the debtor devotes all disposable income during the life of the plan to paying unsecured creditors’ claims.  “Projected disposable income” is generally described as all of the debtor’s income less amounts reasonably necessary for the maintenance and support of the debtor and his dependents or household.  If the debtor’s household income exceeds the median in that state, the calculation of what is “reasonably necessary for the maintenance and support” is calculated by a special “means test” formula created in 2005 by Congress.

The length of the plan can be less than three years if it pays all unsecured claims before then, or is three years if the debtor’s household income is less than the median income for households of that size in the state where the debtor lives, or five years if the debtor’s income is greater than the median income in that state for a household that size.

These myriad requirements often result in a debtor’s first proposed plan being objected to or not confirmable.

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A primary difference between a Chapter 7 liquidation and a Chapter 11 reorganization is that the Chapter 11 estate is generally managed by the debtor (called a “debtor in possession” — “DIP”) instead of a trustee.  A second primary difference is that the DIP is given a chance to reorganize his, her or its affairs.

A chapter 11 bankruptcy is an extremely potent tool in the hands of the debtor. The filing of the chapter 11 case imposes the automatic stay under 11 U.S.C. §362(a). This completely stops all actions on the part of any creditor to attempt to collect on existing debts or to even improve the creditor’s position or security of their debt.

After the filing of the chapter 11 case, the DIP remains in exclusive control of all of the properties and their other assets and generally has the power to operate an ongoing business under § 1108 of the Code. Once a chapter 11 case is filed, there is a period of between three and six months  during which no party, except the debtors, can effectively take any action whatsoever, and the DIP is given the exclusive right to propose a plan of reorganization.  11 USC § 1121.

The debtor in possession also has a number of other “super-powers” in a Chapter 11 case, including the right to reject unfulfilled leases and other contracts (called “executory contracts”) under 11 USC § 365, or assume them and assign them to other entities if that would be more beneficial to the debtor’s efforts to reorganize.  The DIP can also take other actions to modify existing contracts, partially or completely strip liens that secure the debtor’s property(ies) and in some cases avoid liens that otherwise would bind a debtor outside of bankruptcy. 

The public policy behind the bankruptcy law strongly favors debtors and is designed to allow debtors to reorganize. During this period of time, the debtors will take a variety of actions to minimize their exposure to the parties in litigation and to maintain control of the properties to the extent they may be able to profit from doing so. To the extent parties hold secured debt, through the bankruptcy process, some of that debt may be determined to be unsecured, and “peeled off” of the property. Thus, in bankruptcy, debt of lenders/sellers that may be secured under California law may be deemed unsecured claims. Judgment creditors who have secured their claims may have the secured status stripped off. To the extent a claim is determined to be unsecured, the claim would only require payment in the amount that the claim would be paid in a chapter 7 case.

Similarly, to the extent debtors can demonstrate that any property is reasonably necessary for the effective reorganization , the debtor may be able to retain control over that property for as long as two years after the case is filed, without payment to a lender. To the extent the debtor will incorporate a property into the debtor’s reorganization, the debtor can “impair” the claim of a creditor whose debt is secured by the property. As one example, the debtor may be able to have the court greatly reduce the interest rate, as necessary for the reorganization of the debtor.

The bankruptcy prevents lenders from taking action against the debtor during this time. However, it does not prevent the debtor taking action against creditors.

The ultimate goal in a Chapter 11 is to emerge from bankruptcy without debts, judgments, security interests or ongoing contractual obligations (such as leases or employee agreements) that may have placed the debtor into bankruptcy in the first place. Aside from reducing the status of various claims as described above, the debtor must come up with and get approved a plan of reorganization.

Requirements of a Plan

In order to confirm a Chapter 11 plan, there are a number of requirements. Among them are:

1. Similar claims must be treated similarly and putting one creditor in another class separate from other similarly situated creditors may be prohibited where the primary purpose is to get a confirmable plan (In re Barakat [9th Cir. 1996] 99 F.3d 1520, 1525). But, some claims can be subordinated under certain circumstances, which can  make the subordinated claim different from general unsecured claims. In re US Financial Inc. 648 F.2d 515, 523 (9th Cir. 1980).
2. The plan must be in good faith and feasible, meaning among other things able to be carried out in a reasonable period of time, and must have “adequate means” for implementation (e.g., based in reality on projected sales prices, income, etc.) 11 USC § 1123(a)(5).
3. Unsecured claims have to be paid within five years in an individual case. 11 USC § 1129(a)(15).
4. Unsecured creditors must get at least as much in plan payments as they would in a Chapter 7 liquidation.
5. Individual debtors must devote their monthly disposable income (as measured by a Chapter 13 means test) unless they are to be paid in full by other methods such as by sale of assets. 11 USC § 1129(a)(15).
6. The plan can be formed other than just from disposable income, such as a liquidating plan in which payments are funded by the sale of assets.
7. If a plan is to pay any class of creditors less than the full amount, the class is “impaired” and at least one “impaired class” must approve the plan.
8. Administrative claimants must have their fees approved, and must be paid at the commencement of the plan unless lesser treatment is agreed to by the claimants. 11 USC § 1129(a)(9).
9. The debtor must continue to file taxes, report to the OUST, and pay US Trustee fees for the life of the plan or until the case is converted or dismissed. 28 USC § 1930; 11 USC § 1106.

While these hurdles can appear daunting, the Chapter 11 debtor’s ability to have the court modify contracts, subordinate claims or strip liens, and other powers can assist in creating an environment where creditors become more willing to negotiate in a bankruptcy case than they would have been outside a bankruptcy.

The post Chapter 11 Summary appeared first on The Law Offices of Brian Irion | Bankruptcy Attorney, Business Law, Real Estate Law, Litigation.

While bankruptcy planning is permitted, changes made to the bankruptcy code in 2005 have constrained efforts to convert non-exempt assets into a homestead exemption.  New section 522(o) provides that the value of an interest in a homestead exemption is reduced to the extent the homestead exemption is attributable to non-exempt property that the debtor disposed of in the 10-year period before the case was filed with the intent to hinder, delay or defraud a creditor. 

In other words, if a debtor sells a car that could have been exempted to help with a down payment on a house and then files for bankruptcy and claims a homestead exemption in the amount of the downpayment, the value of the car will not reduce the amount homestead exemption.  But if the car could not have been exempted and the debtor used the proceeds from its sale to buy a home and claimed the homestead exemption to avoid, delay or defraud creditors, the homestead exemption might be reduced in bankruptcy to the extent the value of the car helped create equity in the house.

In In re Stanton, 457 B.R. 80 (Bankr. D. Nev. 2011) the Bankruptcy Court for the District of Nevada analyzed the effect of the addition of 11 USC §522(o).  The court stated Congress added §522(o) “to curb the transmutation of non-exempt assets into exempt homesteads to delay, hinder or defraud creditors.”  It then outlined the four elements a creditor must prove: (a) an increase in the value of the debtor’s homestead; (b) that the increase was “attributable” to the disposition of nonexempt assets; (c) that the disposition of the nonexempt assets was made with the intent to hinder, delay, or defraud a creditor; and (d) that the disposition occurred during the ten-year period ending on the date the debtor’s bankruptcy petition was filed.  Id. at p. 91.  In that case, the court concluded the debtor transferred funds from a nonexempt account to pay a note secured by her residence thereby increasing her equity by some $89,000, with the intent to hinder her sister – a creditor – from collecting on the the debt. The homestead was reduced by this amount.

If you are thinking about filing for bankruptcy but have concerns about what assets you can protect, seek competent bankruptcy advice before you act.

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