top Ad Widget

Collapse

Announcement

Collapse
No announcement yet.

Is Bankruptcy The Answer? ... Maybe

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

    Is Bankruptcy The Answer? ... Maybe

    Note: This is an informative article, it is not an endorsement of any one particular attorney.

    One thing I’ve learned in my 45 years practising bankruptcy law is that most individuals who wind up taking this course of action are good people who have found themselves in bad and unexpected circumstances, most often caused by things that were beyond their control.

    People get sick, get divorced, lose employment, and have accidents. Likewise, businesses can be adversely affected by events over which they have no meaningful control. Outbreaks of disease, oil shortages, breaks in the supply chain, changing technology, interruption of their workforce, and many other factors can all cause a business or individual to be unable to stay financially afloat.

    Which brings us the COVID-19 pandemic. It represents the epitome of unexpected circumstances and matters beyond our control. Indeed, in an effort to slow the spread of the virus, the state has shuttered all non-essential businesses, leading to unemployment levels not seen since the Great Depression.

    In these precarious times, individuals and businesses are finding themselves in dire financial circumstances they could not have foreseen, nor done anything to prevent. Given their predicament, some might be looking at bankruptcy as a possible recourse.

    In order to help honest but financially burdened individuals make a fresh financial start, Congress has passed a number of bankruptcy laws. Here are the key types:

    Chapter 7

    This is the type of bankruptcy proceeding that allows certain qualifying individuals to eliminate most of their unsecured debts (those without mortgages) and to make a fresh financial start.

    In order to qualify for Chapter 7, a person cannot have filed Chapter 7 bankruptcy within the prior eight years. The person filing, known as a debtor, must also pass a test which limits how much earned income the debtor had earned in the prior year. This is called the means test, and it varies based on the state in which the debtor resides, the number of dependents in the family, and whether there is any earned income generated by the debtor’s spouse.

    For example, for a Massachusetts resident, the limitation is $67,119 for a single person, $84,125 for a couple (combined gross income), and then increases in different amounts for additional dependents. These limitations became effective as of April 1, 2020 and are subject to periodic adjustment. Similarly, in Connecticut, the individual cutoff is $66,689, and $88,594 for a couple.

    In these precarious times, individuals and businesses are finding themselves in dire financial circumstances they could not have foreseen, nor done anything to prevent. Given their predicament, some might be looking at bankruptcy as a possible recourse.

    While most unsecured debts can be eliminated in Chapter 7, there are some types of debts that cannot, including income taxes owed from the past three years, alimony and child support, student loans, and debts incurred due to an accident while driving under the influence.

    One of the major benefits of Chapter 7 for an individual obtaining a discharge is that not only are the debts — such as most credit cards, personal loans, foreclosure and repossession deficiency balances, and medical bills — totally wiped out, they are eliminated without incurring any phantom income, on which both federal and state income taxes would be owed.

    Compare this to either making a direct settlement with a lender or credit-card company, or going through a non-judicial, multi-year debt-settlement plan, where anything that is settled with the creditors results in the person receiving a 1099 from the creditor and having to pay taxes on the forgiven portion of the debts. In Chapter 7, Congress has decreed that all discharged debts are tax-free, and therefore no hidden taxes are incurred.

    The key aspect of Chapter 7 is that the Bankruptcy Court is trying to help an honest debtor make a fresh financial start. In regard to secured debts — for example, those debts that are secured by a lien or mortgage, most often vehicle loans or a home mortgage — in Chapter 7, the debtor gets to select whether they wish to keep the item and continue making the payments or to surrender the item and wipe out any shortfall amount that might exist after the secured party sells the item after repossession or foreclosure sale.

    While a corporate entity can also elect to file Chapter 7 and have the Bankruptcy Court liquidate its assets and distribute the proceeds to its creditors, it does not get to carry on its business affairs after filing. Only an individual qualifies for a discharge, so a corporate entity must cease all business after it files Chapter 7.

    Chapter 13

    In this type of proceeding, an individual is given an option to repay all or a portion of the debt, if approved by the Bankruptcy Court and Chapter 13 trustee, through a plan of reorganization that generally lasts for a period of three to no more than five years. There is no need to pass the means test to qualify for Chapter 13, and, unlike the restrictions in Chapter 7 that allow it to include only unsecured debts, Chapter 13 can also affect secured debts.

    The most common application in Chapter 13 is to use it to stop a foreclosure sale of a debtor’s home or automobile, and it allows the debtor to pay the outstanding past-due amounts over the life of the plan, in addition to requiring the debtor to make the full current payment each month.

    For example, if a lender is owed $60,000 in back mortgage payments, requiring the borrower to pay it in full in order to prevent a foreclosure sale, in a Chapter 13, the debtor could propose to pay $1,000 per month for the 60 months of its Chapter 13 plan, plus pay the current mortgage amount each month so that debtor does not fall further behind.

    These are simplified examples, and the details of a Chapter 13 plan are more complex and would require you to consult with a qualified attorney for more specific advice.

    Chapter 11

    A Chapter 11 reorganization can be filed by an individual who owns a business and operates as a ‘DBA,’ but due to its complexity and expense, it is most often filed by a corporate entity.

    The idea of a Chapter 11 is to grant the business a ‘time out’ and give it some element of time to figure out a plan of reorganization to allow it to continue in business. Under 11 USC 362(d), all lawsuits and claims against the debtor’s business are enjoined from proceeding, and the debtor gets time to meet with its creditors and to seek to formulate a formal plan of reorganization.

    That plan may propose to pay unsecured creditors a percentage on the dollar, which must be found to be a greater percentage than the creditors would receive in an immediate liquidation of the business and its assets. In some cases, mortgage debts can be reduced to the actual value of the assets that secure the mortgage, so that if the debtor owes a lender $750,000 on a building that can be proven to be worth only $500,000, the debtor can seek to ‘cram down’ the mortgage to a reduced amount of $500,000, and the additional $250,000 gets treated as an unsecured debt, and paid at the same percentage on the dollar as the other unsecured debts.

    This is a very simplified version of a Chapter 11, as there are many other requirements that must be fulfilled by a Chapter 11 debtor, and the cases are necessarily complex and sometimes expensive. However, the overall savings to the debtor can be substantial, and they are often the key to a business’ survival.

    The court in a Chapter 11 is seeking to be fair to both the debtor and its creditors, as well as preserving the jobs of the employees of a business.

    Non-bankruptcy Alternatives

    There are sometimes options for a business to consider without the need to file a formal insolvency proceeding. They require a skilled and knowledgeable attorney to know how to handle these matters, and they include utilization under Massachusetts state law of an assignment for the benefit of creditors, trust mortgage, or sometimes just using a skilled negotiator to try to convince creditors to accept an informal settlement of their debt, rather than forcing the debtor to use funds to pay for a formal bankruptcy proceeding when those same funds could be paid toward a voluntary settlement with the creditors.

    In reality, these voluntary settlements are often difficult to finalize because you need to negotiate with multiple parties, who sometimes will not agree to the same terms. In a Chapter 11, the creditors are legally required to accept whatever settlement is approved by the bankruptcy judge, after a plan is voted on and approved by the Bankruptcy Court.

    It is important that you not let your pride prevent you from finding the best and most effective solution for your personal or business cash-flow problems. You cannot make an informed decision until you know and understand all of your options, as well as the positives and negatives of each option.

    During this pandemic, many fraudulent parties are preying on people, so make sure to do your homework to get the name of a qualified person to advise you or your business. Contact the Hampden County Bar Assoc. Lawyer Referral Service, call your accountant or do a Google search to find an experienced person to help you or your business.

    Working together, we can all find ways to get through these uncharted waters.

    By Michael B. Katz, Esq.
    For Many Impacted by the Pandemic, It Might Be a Viable Option By Michael B. Katz, Esq. One thing I’ve learned in my 45 years practicing bankruptcy law is that […]
    www.BankruptcyForum.com

    #2
    Helpful article - I’m sure we’re going to get lots of requests for information.
    Filed Chapter 13 - 07/20/12
    Discharged 8/2/16

    Comment


      #3
      Thank you for this article. I filed Chapter 7 last week, and I feel like the weight of the world has been lifted from my shoulders. I still have some issues, and working on a resolution. I’m an older person, and hopefully I have many years left to enjoy life without worrying about bills.

      Comment


        #4
        Originally posted by RockSteady View Post
        I’m an older person, and hopefully I have many years left to enjoy life without worrying about bills.
        I resemble that remark. My wife and I are looking forward to a retirement with no debt thanks to the Chapter 13 I just finished earlier this year. We're already at retirement age, but two small business failures wiped us clean out, so we figure another 10 years of working before we can afford to actually hang up our spurs and do some traveling.
        Latent car nut.

        Comment


          #5
          I’m lucky I’ll be able to work three more years until retirement age. I’m totally exhausted.

          Comment


          • lillymarlene
            lillymarlene commented
            Editing a comment
            RockSteady, I agree. I had been working 2 part time jobs, warehouse and cashier. It's been exhausting. Recently I've been "furloughed" because of a positive COV19 test. I hate the thoughts of going back, but I can't make it with just my social security.

          #6
          Originally posted by shipo View Post
          I resemble that remark. My wife and I are looking forward to a retirement with no debt thanks to the Chapter 13 I just finished earlier this year. We're already at retirement age, but two small business failures wiped us clean out, so we figure another 10 years of working before we can afford to actually hang up our spurs and do some traveling.
          I resemble that remark, too! I am an "older" filer, filing CH 7. I am too old to start over and make a better career for myself, but too young to retire (and no money to retire). The BK will allow me to breathe and plan my next steps.

          Comment


            #7
            Originally posted by Ekop785 View Post

            I resemble that remark, too! I am an "older" filer, filing CH 7. I am too old to start over and make a better career for myself, but too young to retire (and no money to retire). The BK will allow me to breathe and plan my next steps.
            I had that mindset when I entered my Chapter 13 at the age of 58, and then my job got "off-shored" to India. I was fortunate in that my company didn't call my name during that round of layoffs, and got shifted to another team; then that job got off-shored as well. I was pretty sure my number was going to come up this time around, and it did, sort of.

            My boss, also deemed redundant, and I were given a "pie in the sky" project nobody thought was possible with current technology; we found out later the plan was to wait for us to fail and then to fire us both. Well, not only did we not fail, we succeeded to the extent our company started getting press about the work we'd done, and that triggered more investment in our group and promotions for both of us. Was learning a totally new skill in my early 60s easy? No freakin' way. I invested evenings and weekends for over a year trying to bone up on the technology, but that investment paid off. I am now turning down requests to interview for new jobs on a weekly basis, sometimes a daily basis. I never figured I'd be a hot commodity in my mid-60s.
            Latent car nut.

            Comment


              #8
              @shipo...your update just made my day!! Congratulations to you and your boss! Power to those who are 60+ 😊
              Last edited by sophieanne; 04-13-2021, 11:25 AM.
              Filed Chapter 13 - 07/20/12
              Discharged 8/2/16

              Comment


                #9
                Thanks sophieanne!
                Latent car nut.

                Comment


                  #10
                  And sort of an epilogue to what I wrote above, I have been turning down 99% of the requests for interview coming my way, however, over the last five months there have been three opportunities which have piqued my interest. Today I had my third interview with a company, and got contacted by their HR department almost immediately thereafter. It sounds like they not only want to hire me, but they want me to start yesterday, if not sooner.

                  Then she started haggling about money and I held my ground (my minimum is about 10% above their maximum); two hours later she scheduled an interview this coming Monday for me and one of the board members of the company. This should be interesting.
                  Latent car nut.

                  Comment


                    #11
                    shipo - and just when I thought Friday couldn’t get any better… I read your note. That is so darn exciting… I hope whatever you want works out for you... being in the drivers seat is the best place to be! I can hardly wait to hear how things work out. Good luck😊
                    Filed Chapter 13 - 07/20/12
                    Discharged 8/2/16

                    Comment


                      #12
                      Another older Chapter 13 here. Well, I was 53, but my husband was 60. When it's over I'll be 58 so I have several work years left, but not enough to get a great retirement savings. My husband will be 65 and about 1 yr out from retirement which he plans to do if he is financially ready or not. But he has a good pension (which I hope stays that way since I know people who have lost or had pensions reduced) plus some social security.

                      But I rather be 58 and 65 without the lingering debt even if we don't have the proverbial pot to *iss in. We will have what we need and I am thankful we can pull through that debt monster. And I try not to dwell on the fact if he retires our income might be close to what our actual take home (minus BK payment) is now. Taking it one day at a time. If he can still work a year after full retirement age I think that would help immensely to get some home repairs/upgrades (nothing purely cosmetic, but needed) so everything should be in decent condition. For example I rather buy a furnace when we are working than after retirement.
                      I am not an expert. I just share my experiences in the Wonderful Wacky World of Chapter 13! Filed 3-30-18 Confirmed 7-11-18 Discharged 6-8-22

                      Comment


                        #13
                        An epilogue to my epilogue???

                        Geez this new opportunity moved fast, I accepted an offer this evening and start on 10-May. The good is a rather substantial bump in income, lots more opportunity to innovate and teach, and then to go back on the road and work in both a pre and post sales technical role. Once the COVID travel restrictions start lifting it looks like I could be on the road upwards of 26 weeks per year, Monday through Thursday (I love to travel so that's a good thing).

                        The only real negative here is we're going to need to move away from the horse farm we've called home for the last 8 years; the family here has become, well, "family"; the 7 grand kids running around this place are almost like our own grand kids; many of them don't even remember back to the time before we moved here. Hopefully in this crazy real estate market we can find a place local so we can still hang out here.
                        Latent car nut.

                        Comment


                          #14
                          @shipo..I’m so glad you posted this!! I was ready to send you a PM this morning to see how your meeting with the board member went. Congratulations 🎉..I’m very happy and excited for you. It sounds like it’s where you want to be; other than leaving your current home. It sounds like the perfect opportunity.
                          Filed Chapter 13 - 07/20/12
                          Discharged 8/2/16

                          Comment


                            #15
                            Originally posted by sophieanne View Post
                            @shipo..I’m so glad you posted this!! I was ready to send you a PM this morning to see how your meeting with the board member went. Congratulations 🎉..I’m very happy and excited for you. It sounds like it’s where you want to be; other than leaving your current home. It sounds like the perfect opportunity.
                            Thanks sophieanne, in the immortal words of the late great jazz pianist Fats Waller, "One never knows, do one?"

                            Last night we told the farm family my new job would preclude me from doing my obligatory work in the barn three days per week and of our plans to move by July. Today they called and asked if we'd stay for a slight bump in rent in lieu of the barn work. We instantly said, "Yes!"

                            So, best of all worlds, my time is freed up to make the most of this new job, and by staying here we can make some serious bank which will go a long way toward a new house in a year or two.
                            Latent car nut.

                            Comment

                            bottom Ad Widget

                            Collapse
                            Working...
                            X