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Can an Individual Chapter 7 Case Ever Save Your Business?

Chapter 13 can be a great way to keep certain small businesses afloat, but how about Chapter 7? Can’t it ever be a simpler and cheaper way to do so?

In my last blog I said that Chapter 7 is “seldom the right option if you own a business that you want to keep operating.”  The reason I gave for this is that Chapter 7 is a “liquidating bankruptcy,” so the bankruptcy trustee could make you surrender any valuable components of your business. These comments deserve more of an explanation.

At the moment a Chapter 7 bankruptcy is filed, all of the assets of the debtor (the person on whose behalf the case is filed) are automatically transferred to a new legal entity called the bankruptcy “estate.” A trustee is assigned to oversee this estate, which in most cases means that the trustee focuses on whether or not there are any estate assets worth collecting and distributing to creditors. The debtor can protect, or “exempt,” certain categories and amounts of assets, which remain the debtor’s and can’t be taken by the trustee. The idea is that people filing bankruptcy should be allowed to keep a minimum threshold of assets upon which to base their fresh financial start. In the vast majority of consumer Chapter 7 cases, the debtor can “exempt from property of the estate” all of the assets, leaving nothing for the trustee to collect.  This is called a “no-asset” estate.

If you own a business, can you file a Chapter 7 case and still continue operating the business?  That breaks down into two questions.

The first question is whether you can exempt all of the value of the business from the property of the bankruptcy estate, with the business either as a “going concern” or broken up into its asset components.

Many very small businesses are operated by and are completely reliant for their survival on the services of its one or two owners.  IF so, they cannot be sold as a “going concern”—an operating business—separate from their owners. So when faced with this kind of situation, a Chapter 7 trustee must consider whether he or she can sell any of the various assets that make up the business, or whether instead the debtor can exempt all of these business assets.

The assets of a very small business can include tools and equipment, receivables (money owed by customers for goods or services previously provided), supplies, inventory, and cash on hand or in an account. Sometimes the business will have some value in a brand name or trademark, a below-market lease, or in some other unusual asset.  

Whether a business’ assets are exempt depends on the nature and value of those assets, and on the particular exemptions that apply to them. By way of examples, it is not unusual for a small business to own nothing more than a modest amount of business equipment, and in such cases the applicable state or federal “tool of trade” exemption may well cover all that equipment. So indeed, it is possible for a debtor who owns a business to have a no-asset Chapter 7 estate.

But that’s when we get to the second question: is the trustee willing to let the business continue operating in spite of its potential liability risks for the estate?

What’s this about “liability risks”? Remember that everything you own, including your business, immediately becomes part of the bankruptcy estate when your bankruptcy case is file. So in effect, your business becomes the trustee’s to operate. And that means that the estate becomes potentially liable for damages caused by the business. The classic example: a debtor who is a residential roofing subcontractor, drops a load of shingles on someone the day after filing a Chapter 7 case, and is then sued by the injured party. The bankruptcy estate, and arguably the trustee, may well be liable. That is why the Chapter 7 trustees’ mantra about an ongoing business is “shut it down.”

There may be exceptions. It depends on the trustee, the nature of the business, and whether the business has sufficient liability insurance. It is their judgment call, and so this is very much area where you want to be represented by an attorney who knows all of the trustees on the local Chapter 7 trustee panel and how they will respond to this issue.

 So, there’s no question that it is risky to file a Chapter 7 case when you want to continue operating a business. You need to be confident that the business assets are exempt from the bankruptcy estate, and that the trustee will not require the closing of the business to avoid any potential business liability.

And that’s without even getting into details such as your potential loss of control of the business to the trustee, and the potential loss of business’ ongoing income to the estate.

I might well have not stated it strongly enough when I said that Chapter 7 is “seldom the right option if you own a business that you want to keep operating.”  It would take a rare set of circumstances for Chapter 7 to be the best way to go.

 

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Get a “Fresh Start” in Bankruptcy for Your Assets, Not Just Your Debts

Bankruptcy helps both sides of your balance sheet. Getting a financial fresh start means not just getting relieved of your debts, but also protecting your essential assets. You can preserve this crucial benefit of bankruptcy by not selling, using up, or borrowing against your protected assets BEFORE the filing of your bankruptcy case.

It is much more difficult to get your financial footing if you have nothing to stand on—if you don’t have at least basic housing, household goods, clothing, transportation, and, where appropriate, tools of trade, unemployment or disability benefits, and retirement savings.  

Bankruptcy usually protects most or all of your assets. On the one hand, Chapter 7 protects all “exempt” assets, so that a very high percentage of people who file under Chapter 7 lose nothing. And if you have assets which are worth more than the applicable exemptions, Chapter 13 usually protects those additional or higher-value assets as well.

But bankruptcy cannot protect what you’ve already squandered. It saddens me when just about every day new clients tell me how in the months or year or two before coming in to file bankruptcy they depleted their assets in a desperate attempt at avoiding bankruptcy. Most of the time, the assets they sold, spent, or borrowed against would have been completely protected had they filed bankruptcy while they still had them.

I recognize that it’s easy being a Monday morning quarterback—to say, after a client comes in needing to file bankruptcy, that they should not have used up assets in an effort to avoid filing. After all there undoubtedly are some people who were able avoid bankruptcy by selling their assets, and I don’t see them because they don’t need my services.

But I challenge you—if you are considering spending, selling, or borrowing against any of your assets, do you know whether that asset is one which would be protected in bankruptcy?

What concerns me are decisions with serious long-term consequences made without any legal advice about the alternatives. If a person in her 50s cashes in a substantial amount of a 401(k) retirement plan to pay creditors who would be written off, that can significantly harm the quality of her retirement lifetime.  Or if a husband and wife sell a free-and-clear vehicle that’s in good condition on the assumption that they’ll lose it once they file bankruptcy, only to be left with a single older vehicle that cannot reliably get them to work, that decision would lead to anything but a fresh start.

For a bunch of reasons, people tend to get legal advice when at the absolute end of their rope, well after these kinds of dangerous decisions have been made.  Let me help you avoid that. You have the capacity to get a better fresh start by getting the necessary advice on time in order to to preserve your assets.

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“If Only I’d Gone to See My Bankruptcy Attorney Sooner . . . “

Those are the words I hate to hear from a new client.

Bankruptcy attorneys are in the business because we truly want to help people. It’s an emotionally tough area of law, dealing all the time with clients who are financially hurting. Usually my client are also hurting in other ways, related to what caused or contributed to their financial problems—an illness or injury, the end of a marriage or of a business, the loss of a job or, these days for many people, the loss of an entire career. What makes my day—which it does virtually every day—is to give great news to a client, that they will now get relief from their debts, or that there is a feasible plan to save their home, or to deal with their child support arrearage or their income tax debt. Every day we see people transformed in front of our eyes as impossible burdens are lifted from their fatigued shoulders.

But of course the information I share with clients is not always good news, and the advice I give is not always what my clients want to hear. Tough choices have to be made, and some goals turn out to be unrealistic. That’s all part of life.

But the most frustrating situations for both me and my clients are when we find out that they have self-inflicted some of their own wounds. The easily-preventable-but-now-it’s-too-late bad decisions they’ve made, often just a few months or weeks earlier, without getting legal advice beforehand. The goal of my next few blogs is to help you avoid those.

Here’s a taste of some of what we will be covering.

1) Preferences:  If you pay a creditor any significant amount before filing a bankrutpcy—especially a relative you hope not to involve in that bankruptcy—the bankruptcy trustee may well be able to force that relative—through a lawsuit if necessary—to  pay to the trustee whatever amount you paid to that relative.

2) Surrendering a “cramdownable” vehicle:  If you really needed a vehicle but you owed on it more than it was worth and figured you couldn’t afford the payments anyway, so you either voluntarily surrendered it, or did not file a bankruptcy until after it was repossessed, you may well have been able to keep that vehicle in a Chapter 13 case with much lower payments and total amount paid

3) Squandering exempt assets:  Just about every day it seems clients tell me how they’ve borrowed against or cashed in retirement funds in a desperate effort to pay their debts, using precious assets that would have been completely protected in the bankruptcy case they later file, used to pay debts that would have simply been “discharged” (legally written off) in that bankruptcy.

4) Rushing to sell a home:  Bankruptcy provides some extraordinary tools for dealing with debts that have attached as liens against your home, such as judgments and 2nd mortgages. If you hurriedly sell your home to avoid involving it in your bankruptcy case, or some other reason, you could lose out on opportunities to save tens of thousands of dollars.

5) Allowing a judgment against you: If you are sued by a creditor, you may assume that the debt or claim from that lawsuit would be discharged in your anticipated bankruptcy case.  But in some cases, the judgment from that lawsuit can effectively result in exactly the opposite, a determination which results in the debt NOT being able to be written off in your bankruptcy case.  

As you look at this list, notice that the legally and financially wrong choice is often what seems to be 1) the morally right one, and 2) common-sense one. Doing what seems right and sensible can really backfire. In the next few blogs I explain these so they make sense to you, along with other avoidable mistakes.  But by now it should be clear—nothing takes the place of actual legal advice about your own unique situation from an experienced attorney. So, make your day and mine by coming in to see me. Avoid ever having to say “if only I had gone in sooner.”

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The “Occupy Wall Street” Protest Vents Anger that “A Few Prosper, Billions Suffer”

“How do we pick ourselves up when Wall St.’s stealing our bootstraps?”

“We are not leaving. Not while the richest 1% own 75% of the USA’s wealth. “

These were some of the hand-written signs at the ongoing “Occupy Wall Street” demonstration in front of and around the New York Stock Exchange as it entered its second week of daily protests. The stated mission of “Occupy Wall Street,”according to its website, is

“to flood into lower Manhattan, set up beds, kitchens, peaceful barricades and occupy Wall Street for a few months. Like our brothers and sisters in Egypt, Greece, Spain and Iceland, we plan to use the revolutionary Arab Spring tactic of mass occupation to restore democracy in America.

“Occupy Wall Street is a leaderless resistance movement with people of many colors, genders and political persuasions. The one thing we all have in common is that We Are The 99% that will no longer tolerate the greed and corruption of the 1%.”

On Saturday, September 24, about 80 people were arrested during the demonstration, mostly for blocking traffic and disorderly conduct, according to the police. The protestors vow to stay for months, camping on the streets and in the parks.

Does this demonstration signify a shift in the mood of the public? A few weeks ago, Great Britain was shocked by several nights of rioting and looking in London and several other cities. Is that going to happen here? During the current “Occupy Wall Street” events, or at some other venue in the future?

The U.S. has been going through a wrenching amount of pain from unemployment, reduced income, and home foreclosures, resulting in an overall massive downshift in expectations. Millions of families have lost large portions of their wealth, in residential real estate and retirement funds. This loss of wealth has been hugely disproportionately felt by Blacks and Hispanics, who in the last four years since the housing crash have lost jsut about all the wealth gains they had made in the previous quarter century.

The unemployment rate for 18-to-24 year olds in general, as of July 2011, was 18.1%, while for Hispanics it was 20.1%, and for Blacks 31.0%. From another, probably more revealing, perspective, “[t]his year, the share of young people [in this age group] who were employed in July was 48.8 percent, the lowest July rate on record for the series, which began in 1948,” according to the U.S. Bureau of Labor Statistics.

From my perspective in the trenches helping clients every day, I’m not at all surprised that some people are feeling like it’s time to “man the barricades.” Seems to me that the youth in particular have been rather quiet, staying in school longer to avoid the job market and to try to position themselves better for it–all the while racking up anxiety-producing levels of student loans. They are living much longer than expected with their parents, probably by the millions. Their frustrations will only increase if the economy does not find room for them.

The signs point to more demonstrations ahead.


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