Close Your Business But Protect Yourself

Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” can prevent you from harm when you decide to close down your business.


My blog post last week explained how to save your sole proprietorship business through a Chapter 13 case. But now let’s assume that you’ve instead made up your mind to close down that business. And let’s also assume that you need bankruptcy relief because of the unmanageable amount of debts you are personally liable for.

Many, many considerations come into play in deciding on your best course of action, but let’s focus here today on two main ones—assets and debts—as we consider three options: 1) a “no asset” Chapter 7 case, 2) an “asset” Chapter 7 one, and 3) a Chapter 13 case.

“No Asset” Chapter 7 Gets You a Fast Fresh Start

Once you decide that your business is not worth keeping alive, you may just want to clean up after it as quickly as possible. For that a “straight bankruptcy” may well be the best way to go.

If everything that you own—from both your business and you individually—falls within the allowed asset exemptions, then your case will more likely be relatively simple and quick. You will have a “no asset” case—one in which you keep everything you own and nothing goes to the Chapter 7 trustee to liquidate and distribute among your creditors.

A “no asset” Chapter 7 case is usually completed from start to finish in three or four months. And if none of your assets are within the reach of the trustee, there is nothing to liquidate and then distribute among your creditors. Because the liquidation and distribution process can take many additional months, avoiding that usually shortens and simplifies a Chapter 7 case greatly.

However, this assumes that all your debts can be handled appropriately in a Chapter 7 case. Specifically, the debts that you want to discharge (write off) would in fact be discharged. And those that would not be discharged are ones that you are able and willing to pay. The debts you want to pay may include secured debts like vehicle loans and mortgages; debts you are able and willing to pay—after discharging the rest of your debts—may include certain taxes, support payments, and maybe student loans.

Asset Chapter 7 Case as a Convenient Liquidation Procedure

If you do have some assets that are not exempt—not protected from the trustee—Chapter 7 may still be a good option. Assume that those unprotected assets are ones that you can do without—and maybe even are happy to be rid of, like assets from your former business that you no longer need. Letting the bankruptcy trustee collect and sell them and distribute the proceeds among the creditors instead of you going through that hassle may be a sensible, convenient, and fair way of putting your business behind you.

That may especially be true if you have some “priority” debts that the trustee would likely pay out of the proceeds of sale of your unprotected assets. For example, if you owed child or spousal support arrearage, or recent income taxes, those would likely be paid ahead of your other creditors. Your Chapter 7 trustee would be paying debts that you would have had to pay anyway, and is doing so out of the proceeds of sale of assets that you don’t need. Not a bad deal.

Chapter 13 for Flexibly Addressing Special Types of Debts

Chapter 7 does not deal well with certain important kinds of debts. However, Chapter 13 gives you a 3-to-5-year program to pay all or part of those debts while you are protected from your creditors.  

An example of an important kind of debt for owners of recently closed businesses is income taxes. Chapter 13 provides a way to potentially discharge (write-off) older taxes, pay off more recent taxes while being protected from the IRS and/or state taxing authority, and deal favorably with tax liens.

Chapter 13 can often also protect otherwise unprotected assets, for example the closed business’ assets that you now need as your tools or equipment for employment in the same field.

In the right circumstances Chapter 13 can save you thousands or even tens of thousands of dollars, while giving you protection from and a better way of dealing with important kinds of creditors. 

 

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Save Your Sole Proprietorship Business through Chapter 13

Chapter 13 can greatly reduce both your business and personal monthly debt service while you continued to run your business.

 

“Adjustment of Debts of an Individual with Regular Income”

That is the formal name given to Chapter 13 of Title 11—the U. S. Bankruptcy Code.

As the word “Individual” indicates, you must be a person to file a Chapter 13 case—a corporation cannot file one. (This also applies to a limited liability company (LLC) and other similar types of legal business entities.)

But if you have a business which you operate as a sole proprietorship, you and your business can file a Chapter 13 case together.

To explain, if you (or you and your spouse) own a business that is operated in your own name, then, unlike a corporation  that is treated as a legal “person” separate from you, your sole proprietorship business and you are treated as a single legal entity.

The assets of your sole proprietor business are simply considered your personal assets. The debts of your business are simply your debts.

This is true even if your business is operated not under your own individual name(s) but rather under an assumed business name, and you are doing business under that name. You are likely operating as a sole proprietorship if you have not gone through the formalities of creating a corporation, a limited liability company, or other such legal business entity.

Chapter 13 Help Your Sole Proprietorship Business in 5 Major Ways

1) Chapter 13 addresses both your business and personal financial problems in one legal and practical package.  You are personally liable on all debts of your sole proprietorship business, as well as, of course, your individual debts. So as long as you qualify for Chapter 13 otherwise, you can simultaneously resolve both your business and personal debts.

2) Chapter 13 stops both business and personal creditors from suing you, placing liens on your assets, and shutting down your business. The “automatic stay” imposed by the filing of your Chapter 13 case stops ALL your creditors from pursuing you, including both business and personal ones. Your personal creditors are prevented from hurting your business, and your business creditors are prevented from taking your personal assets.

3) Chapter 13 enables you to keep whatever business assets you need to keep operating. If you do not file a bankruptcy, and one of either your business or personal creditors gets a judgment against you, it could try to seize your business assets.  Also, if you filed a Chapter 7 “straight bankruptcy,” under many circumstances you could not continue operating your business. However, Chapter 13 is specifically designed to allow you to keep what you need and continue operating your business.

4) Chapter 13 gives you the power to retain crucial business and personal collateral. If you are behind either on business or personal loans which are secured by either business or personal collateral, Chapter 13 will stop the repossession of the collateral. Then it will give you ways to keep collateral that you would otherwise lose, and often under much better payment terms. You will often be given the opportunity to lower the monthly payments, or at least be given more time to catch up on your late payments. In certain limited situations—such as some judgment liens and some second mortgages on your home—the liens can be gotten rid of altogether.

5) Chapter 13 can solve both business and personal tax problems. Business owners in financial trouble are generally also in tax trouble. Chapter 13 gives business owners time to pay tax debts that cannot be discharged (permanently written off), all the while keeping the IRS and other tax agencies at bay. Chapter 13 usually stops the accruing of additional penalties and interest, enabling the tax to be paid off much more quickly. Tax liens can be handled especially well. At the end of a successful Chapter 13 case you will have either discharged or paid off all your tax debts, and will be tax-free.

 

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Another Five Tremendous Tools to Save Your Home through Chapter 13

These additional 5 tools, especially in combination, can tackle and defeat your mortgage and other home-debt problems.

 

 In my last blog post, I gave you five huge ways that Chapter 13 can save your home. I’ll summarize those briefly here, and then give you and explain another five of them.

Here are the first five. Under Chapter 13 you can:

1. … stretch out payments for catching up on back mortgage payments, as much as five years.

2.   … cur or erase your other debt obligations so that you can afford your mortgage payments.

3. … prevent income tax liens, child and spousal support liens, and judgment liens from every attaching to your home.

4. … pay the debts that cannot be discharged (legally written off) in bankruptcy while being protected from those creditors putting liens on or enforcing liens against your home.

5. … get rid of debts owed to creditors which could otherwise put and enforce liens on your home.

And here are today’s additional five Chapter 13 benefits for your home:

6. … avoid paying all or some of your second (or third) mortgage.

This is the powerful “mortgage strip” that can save you hundreds of dollars a month and sometimes many tens of thousands of dollars over the time you live in your home.

If—and only if—the value of your home is no more than the balance of your first mortgage, your second mortgage can be treated as an unsecured creditor. If so, you can “strip” that second mortgage off the title of your home. This means you can stop making the monthly payments on it. The entire amount that you owe is added to your pool of other unsecured creditors, which are all paid only as much as you can afford to pay over the life of your three-to-five-year Chapter 13 case. And then at the end of the case whatever has not been paid is completely discharged at the end of the case.

Although property values have increased in the last couple of years, there are still millions of homes “under water”—owing more debt than they are worth—and many of these are worth less than their first mortgage.  If this applies to you, it may be reason enough to do a Chapter 13 case. You can usually end up paying only pennies on the dollar—or sometimes even nothing—on your second (or third) mortgage. This leaves your home both much easier to hang on to and much closer to not being “under water.”

7. … get more time to pay property tax arrearage, while protecting your home from both tax and mortgage foreclosure.

If you have fallen behind on your property taxes, this creates two problems. First, you risk losing your home to a property tax foreclosure by the county or whatever other governmental entity is collecting the tax. Second, since your mortgage lender requires you to keep current on your property taxes and considers you falling behind as an independent violation of your mortgage agreement, this gives your lender a separate reason for IT to foreclose on your home.

So Chapter 13 gives you time to catch on your property taxes while both protecting you from the property taxing entity itself and preventing your mortgage lender from using your unpaid property taxes as a separate reason for foreclosing on your home.

8. … prioritize paying many home-related debts—such as property taxes, support liens, utility and construction liens—that you need to and often wish you were able to pay.

Neither Chapter 7 nor Chapter 13 enables you to simply get rid of these special kinds of liens on your home. But Chapter 13 allows—indeed often requires—you to pay them in full ahead of most of your other creditors. This often benefits you because it allows you to focus your limited financial resources on paying those debts which will preserve and add equity to your home.

9. … get rid of judgment liens, so that they no longer attach to your home.  

If a creditor sues you and you don’t respond by the deadline to do so, the creditor will get a judgment—a court determination that you owe whatever the creditor’s lawsuit says you owe. Most of the time that judgment creates a judgment lien against your home. Depending on a number of factors like the value of your home, the amount of your mortgage(s) and other liens, the amount of the judgment lien, and the amount of the homestead exemption that you are entitled to, bankruptcy will allow you to “void”—get rid of—that judgment lien. This is very important because otherwise even if the underlying debt is discharged, the judgment lien would survive the bankruptcy, causing you to still have to pay the debt eventually, in part or in full.   

If you qualify for judgment lien “avoidance” it can also be done under a Chapter 7 case, but it is often better in a Chapter 13 case when used in combination with these other tools.

10. .. sell your house without the pressure of a foreclosure sale, either just a short time after filing the Chapter 13 case, or sometimes even three, four years later.

If you are close to selling your home, or have just started the process but want to sell as soon as you can, Chapter 7 usually buys you very little time in avoiding a pending foreclosure. It gives you very little leverage or flexibility. In these situations, Chapter 13 will usually buy you more time to sell while preventing foreclosure. And, especially if you have some equity in your home, it will give you more payment flexibility.

Or if you want to sell your home a few years from now, Chapter 13 can give you some very valuable flexibility in catching up on a mortgage arrearage. You may be planning on downsizing once your children finish high school or you reach some other important life event. Or you may want to wait until property values increase over the next couple years. Under Chapter 13 you can often put off catching up on some or all of your mortgage arrearage until that anticipated sale date, making it more financially feasible to keep your home in the meantime.

 

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Five Tremendous Tools to Save Your Home through Chapter 13

Powerful Chapter 13 gives you tools to solve your mortgage and other home lien problems from a number of different angles. 

 

The Limits of Chapter 7 “Straight Bankruptcy”

In my last blog I described how a Chapter 7 case can under certain circumstances help you enough to save your home. Or in other situations it can at least help you delay a foreclosure for as long as you need.  But Chapter 7 can only give limited help, maybe enough if you aren’t too far behind on your mortgage circumstances, or you don’t have other kinds of lienholders causing problems.

The Extraordinary Tools of Chapter 13

Chapter 13, on the other hand, provides you a range of much more powerful and flexible tools for solving many, many debt issues so that you can keep your home.

Here are the first five of ten significant ways that Chapter 13 can save your home (with the other five to come in my next blog).

Under Chapter 13 case you can:

1.  stretch out the amount of time for catching up on back mortgage payments for as long as 5 years. This is in contrast to the one year or so that most mortgage lenders will give you to catch up if you do a Chapter 7 case instead. This longer period can greatly lower your monthly catch-up payments, making more likely that you would succeed in actually catching up and keeping your home. Very importantly, throughout this catch-up period your home is protected from foreclosure as long as you stay with the payment plan, one that you propose. Within limits you can later modify that plan if your circumstances change.

2. slash your other debt obligations so that you can afford your mortgage payments. The mortgage debt—especially your first mortgage—can’t be significantly changed under Chapter 13. So you are usually required to pay your full monthly mortgage payment, and to catch up any arrearage, but to accomplish this you are allowed to pay to most of your other debts.

3.  permanently prevent income tax liens, and child and spousal support liens, and such from attaching to your home. The “automatic stay” preventing such liens under Chapter 7 last usually only about 3 months, and there’s no mechanism for dealing with these kinds of debts. Instead under Chapter 13, these liens are prevented throughout the three-to-five-year length of the case.

4.  have the time to pay debts that can’t be discharged (legally written off) in bankruptcy, all the while being protected from those creditors attacking your home. So even if a tax or support lien is already in place before you file, you are given the opportunity to pay the debt while under the protection of the bankruptcy laws. That undercuts the leverage of those liens against your home. Then by the end of your case, the debts are paid and those liens are released.

5.  discharge (write off) debts owed to creditors which could otherwise attack your home. For example, certain (generally older) income taxes can be discharged, leaving you owing nothing. But had you not filed the Chapter 13 case, or delayed doing so, a tax lien could have been recorded, which would have required you to pay some or all of the balance to free your home from that lien. Even most standard debts can turn into judgment liens against your house once you are sued and a judgment is entered. Depending on the facts, a judgment liens may or may not be able to be gotten rid of in bankruptcy.  If instead you file a Chapter 13 case to prevent these liens from happening, at the end of your case the debt is gone, and no such liens attach to your home.

See my next blog post for the other five house-saving tools of Chapter 13.

 

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