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Looking at Chapter 7 in Texas

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  • Looking at Chapter 7 in Texas

    Hi. I have been thinking about a the possibility of a chapter 7. I'm tired of the debt I have hanging over my head and don't know what to do. I have seen a couple lawyers and they all tell me something different and hoping anyone here has advice for me. But here are the details:

    I had a company that went out of business a few years ago in 2012. I signed a personal guarantee on a $600,000 business loan. Obviously there was no way I could continue payments on that business loan. My wife and I own a house with some positive equity (mortgage) and two cars (loans) and have two kids. All of my debt is business related (I also have a credit card I use daily for gas that is about $5,000). I was told I do not have to pass a means test by all the lawyers I spoke to because my debt is primarily business debt. I live in Texas and my only savings left is the money in my 401k. I now have a job that pays me $100k(before taxes) My wife also works and our combined income is now $200,000 gross. This business debt is the only loan that I am not current including another credit card with $48,000. Most of the lawyers agreed that I should have no problem filing a chapter 7 because its a business loan and I have no assets that could repay that except one.

    The one lawyer seemed to think our household income was too much and filing a chapter 7 was not in good faith and that I should try to settle with the bank through $50K in my 401K.

    My questions are:
    1. Can I file a personal chapter 7 to get rid of this business loan and let me restart my life w my family? The three other lawyers didn't think it was an issue, but it's the one who did that I was concerned with.
    2. I need a new car as mine is about to crap out on me. I was contemplating buying a new car. What is the threshold of buying a new car with warranty that wouldn't cause issues with the trustee?
    Last edited by Phintexas; 08-19-2016, 10:36 AM.

  • #2
    I would run and hide from a bankruptcy attorney that told me to deplete my 401(k) savings in order to "attempt' to settle with credit card companies. that is the worst advice someone could give you. Never "borrow" from your future to pay the present. The expression is more like "robbing your future to pay the present". You write that your debt is primarily business debt which is called a "non-consumer" bankruptcy. My bankruptcy was also non-consumer. In these cases, as you have already written, you do not need to pass the means test. With that said, I don't know what's wrong with this attorney, which you consulted, that insists that your Chapter 7 would not be in good faith.

    You can discharge your personal responsibility for all debt for which you have a personal guarantee or responsibility. If really depends on the organization of the business entity as to whether it will be completely dissolved by filing. (E.G. if it's a corporate entity, then the business debt will still belong to the business and the business would still owe the money where you, personally, will have your personal responsibility discharged.)

    I have and others have purchased vehicles right before filing. I believe that the national car ownership allowance is $517/month, so I wouldn't exceed that (or they will call it a luxury item).

    You will need a strong attorney that has done more than one non-consumer bankruptcy. Ask them about the non-consumer bankruptcies, 702(b) challenges (bad faith), and how they overcame any objections from the Trustee. That would give you a good feel for that particular attorney. You should be really comfortable with your attorney, and that last one (that says to withdraw from 401(k)) is the one that you avoid!

    Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
    Status: (Auto) Discharged and Closed! 5/10
    Visit My BKForum Blog: justbroke's Blog

    I am not an attorney. Any advice provided is not legal advice.


    • #3
      My first reaction was the same as Justbroke's, especially about the 401k part. But, I did some research about dismissal of non-consumer case and can now see why that attorney is worried and I can even see why in some reare circumstances it may make sense to use the 401k, if you have very substantial retirement assets.

      First, the dismissal question.

      It is clear that a non-consumer Chap 7 cannot be dismissed under section 707(b), which includes the means test, bad faith or abuse under totality of circumstances. But, there has been disagreement about 707(a), which does apply to non-consumer cases and allows the dismissal of a case "for cause". The issue is what constitutes cause for dismissal? Courts have applied the "bad faith" and "abuse" analysis used for 707(b) dismissals.

      Here's my Google search:

      The 4th link is an article on a law firm website that discusses the issues and related case law, but it appears to have been written before the 5th Circuit case, In Re Krueger: Texas is in the 5th circuit, so it is current law there (at least I didn't find any appeal to the Supreme Court). See Section II of the discussion beginning at the bottom of Page 7 that discusses other rulings on the issue.

      Here is the pertinent conclusion of the court:

      This circuit joins those courts that have held a debtor’s bad faith in the bankruptcy process can serve as the basis of a dismissal “for cause,” even if the bad faith conduct is arguably encompassed by other provisions of the Code.
      And its use of a Seventh Circuit case as part of it's discussion:
      Recently, the Seventh Circuit read § 707(a) broadly in finding that “unjustified refusal to pay one’s debts is a valid ground” for dismissal. See In re Schwartz, 799 F.3d 760, 764 (7th Cir. 2015).
      But, the court may not have ruled in the same way if the grounds for dismissal was that the debtor had enough income to pay a portion of the debt. In Kruger, and the cases cited in the court's opinion, the debtors all acted badly before and/or during their bankruptcy cases. It is the bad actions that led to dismissal, not an allegation that the case was filed in bad faith based on the fact that the debtor could pay a portion of his debt, which is a basis for dismissal of a consumer case under 707(b).

      There is no clear error in the bankruptcy court’s findings. Instead, the record is replete with evidence that Krueger filed bankruptcy for illegitimate purposes, misled the court and other parties, and engaged in bare-knuckle litigation practices, including lying under oath and threatening witnesses.
      The way the Krueger court cites the Schwartz case, does imply that maybe a case could be dismissed because of the debtor's ability to pay a significant portion of the debt. But, in that case, the debtors apparently went on a spending spree to avoid paying creditors. See the actual Krueger opinion for more on the Schwartz case. You could also search for the Schwartz opinion.

      It is hard to know how the Krueger ruling would be applied to your case. Maybe the attorney who said your filing would be in bad faith knows of cases where the local courts have applied Krueger in cases like yours. I wonder how much non-consumer Chap 7 experience he has in comparison to the other attorneys and whether the other attorneys looked as closely at your entire financial situation as he did. The level of review in an initial consultation seems to vary greatly.

      You may want to go back to the other attorneys and ask what Justbroke suggested:

      Ask them about the non-consumer bankruptcies, 702(b) challenges (bad faith), and how they overcame any objections from the Trustee.
      Being at risk of an objection to discharge is not a reason to not try to get a Chap 7 discharge. I would prefer an attorney who says, "we'll try" to one who says "absolutely not". But, it is important to understand each attorneys thinking. It doesn't do you much good to have an overly optimistic attorney or one who does not have the experience to be fully aware of the potential risks, which is what Justbroke's suggested questions will address. You could even specifically mention the Krueger case and ask how that ruling might affect your ability to defend an objection to discharge. You might teach them something they don't know, but should. I did that at one of my consultations with a relatively new bankruptcy attorney. She later emailed me and told me she looked further into the issue and thanked me. That was a much more clear cut issue with not nearly the consequences as yours.

      Now, on to the 401k issue. As a general rule, I agree that you should not raid exempt retirement assets to avoid a Chap 13. But, there could be very rare exceptions. There are some people with huge 401k's. My sister and her husband are good examples. My sister works in a volatile industry and, after a long period of unemployment, was miserable in the job she has been in for about six months that didn't pay well anyway. They were considering whether she should quit and risk another long period of unemployment. Her husband makes enough to support them both comfortably, but they don't save nearly as much when she is unemployed as when she is employed, even if underpaid. Their financial advisor told them that they have enough in 401ks that they could stop contributing now and have a very comfortable retirement. But, they plan to work at least another 10 to 15 years and continue contributing. I could see somebody in a similar situation deciding that it made more financial sense to settle debt using 401k funds. Of course, they should do a careful analysis of the costs of raiding the 401k (including taxes, penalties and whether the loss of growth) and balance that against the costs of Chap 13. And, if they decide the 401k is a better financial option, then they should only take the withdrawal after they have reached a binding agreement with enough creditors to make the settlement financially preferable to a Chap 13.

      The situation where raiding a 401k is a better financial decision than a Chap 13 will be very rare. But, when I think "why would an attorney suggest such a thing?" a very substantial 401k could be the reason. If a $50K settlement taken from a $2M 401k could really get rid of the $600k debt, it could be a good option. It doesn't sound like the remaining debt would be unmanageable if the business debt was gone.

      I can't stress enough that what I am talking about is fantasy for most people. But, without more information on Phentexas' situation, I don't dismiss it as a possibility. Would $50k substantially deplete the 401k or put a very small dent in it?

      Phintexas, after all of that, my advice is exactly the same as Justbroke's: Ask attorneys some specific questions about this issue, choose an attorney who you are comfortable has sufficient experience with non-consumer Chap 7s to get you the best results possible and go buy a reasonable car that can get you through a 5 year Chap 13 if it comes to that.

      If you file a Chap 7 and end up faced with a choice of dismissal or conversion to Chap 13 and you are lucky enough to be more than set for retirement, decide at that point whether settlement is a better financial choice than a 5 year Chap 13.

      P.S. A Chapter 13 is not the end of the world.
      LadyInTheRed is in the black!
      Filed Chap 13 April 2010. Discharged May 2015.
      $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!


      • #4
        Thanks LadyInTheRed ... I meant 11 USC 707(b) above and not 702(b). We do agree on all issues. There are some cases where you could "borrow" from your 401(k) if it's a relative small amount and you have sufficient retirement resources or are young.
        Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
        Status: (Auto) Discharged and Closed! 5/10
        Visit My BKForum Blog: justbroke's Blog

        I am not an attorney. Any advice provided is not legal advice.


        • #5
          LOL. justbroke, I didn't even notice your typo even though I quoted it. I always assumed you meant 707.
          LadyInTheRed is in the black!
          Filed Chap 13 April 2010. Discharged May 2015.
          $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!


          • #6
            LadyInTheRed justbroke Thank you both for your responses. My 401K is basically $50k. Just bad investments did me no favors there. And it sounds like you are saying the same things I have been hearing. There is no definitive answer on these non-consumer debt chapter 7 which is do I make too much to qualify for a chapter 7? I am lucky that Texas is a debtor friendly state which buys me some time on these options.

            Though chapter 13 wouldnt be the end of the world, a chapter 7 would let me finally put a close on this nightmare that I have been living in for the past 4 years A 13 would make me think about it for another 5 years like extending a prison sentence.

            From here I will spend time looking for Lawyers who have that experience in dealing with non-consumer debt bankruptcies. My problem is that most that I have come across mainly deal w personal debt The one guy who did costs 2x what the others quoted me. But he really seemed to know his stuff. I guess you get what you pay for.


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