When the sole proprietor of a just-closed business files a personal Chapter 7 bankruptcy case, the trustee may or may not have assets to liquidate and distribute to the creditors. If NOT, the case will more likely be finished faster. But if the trustee DOES collect some assets, the extra time may be worth it for the former business owner.  

If you’ve closed down your business and as a result are now personally liable on large debts that you cannot pay, you may well be wondering whether bankruptcy is your best option. Assuming that you qualify for a Chapter 7 “straight bankruptcy,” one important issue to consider is whether your case would likely be an “asset” or “no asset” one.  An “asset case” is one in which the Chapter 7 trustee collects assets from you to sell, and then distribute their proceeds to your creditors. A “no asset case” is one in which the trustee does not collect any assets from you because your assets are either protected by “exemptions” or are not worth the trustee’s efforts and expense to collect.

Generally a “no asset case” is simpler and quicker than an “asset case,” although not necessarily better. It’s simpler because it avoids the entire liquidation and distribution process. A simple “no asset case” can be completed about three months after it is filed (assuming other kinds of complication do not arise).  In contrast, it takes at least a number of additional months for a trustee to take possession of an asset, sell it in a fair and open manner with notice to all interested parties, give creditors the opportunity to file claims on the sale proceeds, object to any inappropriate claims, and then distribute the funds to the creditors.  Some assets—especially intangible ones such as a debtor’s disputed claims against a third party—can take several years for the trustee to negotiate and/or litigate in order to convert it into cash, with the bankruptcy case kept open throughout this time.

In spite of this seeming disadvantage, an “asset case” can be better for a former business owner in certain circumstances.

First, a business owner may decide to close down a business and file a bankruptcy quickly afterwards to hand over to the trustee the headaches of collecting and liquidating the remaining assets and paying the creditors in a fair and legally appropriate way. After fighting for a long time to try to save a business, the owner may well be emotionally spent and in no position to try to negotiate work-out terms with all the creditors. There is unlikely sufficient money available to pay an attorney to do this. And if there are relatively few assets compared to the amount of debts—the usual situation—it’s likely that after all that effort the former owner will still owe an impossible amount of debt.

And second, that former business owner may want his or her assets to go through the Chapter 7 liquidation process if the debts that the trustee will likely pay first are ones that the former business owner especially wants to be paid. The trustee pays creditors according to a legal list of priorities. Without going here into the details of that long priorities list, at the top of the list are child and spousal support arrearages. Also high on the list are certain employee wage, commission, and benefits claims, as well as certain tax claims. He or she may well feel a special responsibility to take care of the ex-spouse and children, former employees, and taxes. And the fact that he or she would likely continue being personally liable on these obligations after the bankruptcy is over undoubtedly adds some motivation.

A “no asset” personal Chapter 7 case can be a relatively quick and efficient way for a former sole proprietor to put the closed business legally into the past. While an “asset” case can take somewhat longer, it can help pay some of the special creditors you want to be paid anyway.

Using a Chapter 7 case to clean up after closing down your business will be easy or not depending largely on three factors: business assets, taxes, and other nondischargeable debts. These three will usually also determine if you should be in a Chapter 7 case or instead in a Chapter 13 one.

Once you’ve closed down your business and decided to file bankruptcy, you may have a strong gut feeling about choosing the Chapter 7 option. After what you’ve been through, you just want a fresh, clean start. If you’d put years of blood, sweat and tears into trying to get your business to succeed, and then finally had to throw in the towel after resisting doing so for so long, at this point you likely feel like it’s time to put all that behind you. The last thing you likely feel like doing is dragging things along for the next three to five years that a Chapter 13 case usually lasts.

And you may well be ABLE to file a Chapter 7 case. The “means test” largely determines whether, given your income and expenses, you can file a Chapter 7 case. In my last blog I told you that you can avoid the “means test” altogether if more than half of your debts are business debts instead of consumer debts. But even if that does not apply to you, the “means test” will still not likely stand in your way, especially if you just closed down your business recently. That’s because the period of income that counts for the “means test” is the six full calendar months before your bankruptcy case is filed. An about-to-fail business usually isn’t generating much income.

But usually the question is not whether you are able to file a Chapter 7 case, but rather whether doing so is really better for you than a Chapter 13 one.

Many factors can come into play, but the following three seem to come up all the time:

1. Business assets: There are two kinds of Chapter 7 cases: “no asset” and “asset.” In the former, the Chapter 7 trustee decides—usually quite quickly—that none of your assets (which technically belong to your “bankruptcy estate”) are worth taking and selling to pay creditors. Either all those assets are “exempt” from the reach of the trustee, or are not worth enough for the trustee to bother. But with a recently closed business, there are more likely to be assets that are not exempt and are worth the trustee’s effort to collect and liquidate. If you have such collectable business assets, you will want to discuss with your attorney where the anticipated proceeds of the Chapter 7 trustee’s sale of those assets would likely go, and whether that is in your best interest compared to what would happen to those assets in a Chapter 13 case.

2. Taxes: Just about every closed-business bankruptcy seems to involve tax debts. Although some taxes CAN be discharged in a Chapter 7 case, most cannot. Chapter 13 is often a better way to deal with taxes. This will depend on the precise kind of tax—personal income tax, employee withholding tax, sales tax—and on a series of other factors such as when the tax became due, whether a tax return was filed, if so when, and whether a tax lien was recorded.

3. Other nondischargeable debts: Bankruptcies involving former businesses seem to get more than the usual amount of creditor challenges to the discharge of debts. These challenges are usually based on allegations that the business owner acted in some fraudulent fashion against a former business partner, a business landlord. or some other major creditor.  Such litigation, often started or at least threatened before the bankruptcy is filed, can turn an otherwise simple bankruptcy case into a long and expensive battle, regardless whether your case is a Chapter 7 or 13. But depending on the nature of the anticipated allegations, Chapter 13 may give you certain legal and tactical advantages over Chapter 7.

I’ll expand on these three one at a time in my next three blogs. From them you will be able to get a much better idea whether your business bankruptcy case should be in a Chapter 7 or not, and if so whether it will likely be relatively simple or not.

Bankruptcy isn’t just for cleaning up after the death of a business. It can keep your business alive.

Bankruptcy saved General Motors. That business got out of a lot of it debt and restructured its operations, and ended up saving a lot of jobs. If you operate your own small business, bankruptcy may be able to save your job, too.

Let’s assume you have a very small, very simple business. One so simple that you did not form a corporation or any other kind of legal entity when you set up the business. And to keep this blog simple, assume you don’t have any partners.  You own and operate your business by yourself for yourself, in what the law calls a sole proprietorship.

There are advantages and disadvantages of operating your business this way. For better or worse you and your business are legally treated pretty much as a single unit—unlike a corporation which owns its own assets and has its own debts distinct from the owner(s). In the right circumstances, a sole proprietorship is a much easier type of business to deal with in a bankruptcy.

Chapter 7, “straight bankruptcy,” is seldom the right option if you own a business that you want to keep operating during and after the bankruptcy. Chapter 7 is also called “liquidating bankruptcy.” You can write off (“discharge”) your debts in return for liquidation—the surrender of your assets to the trustee to sell and distribute to your creditors. Except that in most Chapter 7 cases everything you own is protected–“exempt”—so that you lose nothing or very little. But if you own an ongoing business, although some of the assets of an ongoing business may be exempt, usually not all of them are.  So the Chapter 13 trustee could require you to give crucial parts of your business to him or her to liquidate.

Instead, a Chapter 13 case—ironically sometimes misnamed a “wage-earner plan”—is much better designed to enable you keep your personal and business assets. You get immediate relief from your creditors, and for a much longer period of time, usually along with a significant reduction in the amount of debt to be repaid.  So Chapter 13 helps both your immediate cash flow and the business’ long-term prospects. It is also an excellent way to address tax debts, often a major issue for struggling businesses. Overall, it is a relatively inexpensive tool that combines the discipline of a court-approved plan of payments to creditors with the flexibility of allowing you to continue operating your business.

In the next few blogs I’ll explain some of the most important benefits of filing a business Chapter 13 case. But in the meantime, please understand that when you own ANY kind of business, solving your financial problems will be more complicated.  Sometimes only a little more complicated, other times much more so. Because we’re not just dealing with the size and timing of a paycheck, but rather with all the financial and practical aspects of running a business. Plus, issues of timing are often important in business bankruptcy cases, requiring more pre-bankruptcy planning to chart the best path for you. So, no matter how small your business, be sure to get competent legal advice, and do so as soon as possible. You have a lot at stake.


Not only do the majority of the wealthy think that they should be taxed more, so do a majority of Republicans. These are the surprising conclusions of two recent polls.

When the second-richest American, Warren Buffett, wrote an op-ed column in the New York Times a few months ago advocating increased taxes for himself and everybody else with an annual income over $1 million, that wasn’t such a big surprise. He has been pushing similar policies for quite a while. For that matter so has the # 1 richest American, Bill Gates.

But that column by Buffett generated such a firestorm of opposition that it would have been easy to think that he and Gates don’t have much support among their wealthy colleagues.  Not true, according to a survey of millionaires taken during October 2011 by the Spectrem Group, “the premier research and consulting firm in the wealth and retirement industry.” More than 67 percent of those millionaires surveyed said that the U.S. economic situation would be improved by increasing taxes on those with more than $1 million in annual income, pretty much what Buffett is advocating.

Well, OK, that’s surprising. But maybe they’re so rich they can easily afford to pay taxes. Or maybe those in the top 1% being made infamous by the Occupy Wall Street folks are not as greedy as they are being made out to be. Or maybe just not that anti-government. As Mark Cuban, another of the ultra-rich, has said straight out in his own blog a couple months ago: “Pay your taxes. It’s the most Patriotic thing you can do.”

Now Gates, Buffett, and Cuban may not exactly be representative of all wealthy Americans. And who knows how reliable that Spectrem Group survey is. But if true, it’s noteworthy that a full two-thirds of millionaires think that if their taxes were higher that would help our economy instead of hurt it.

But what about everyday Republicans? I would have thought that a very strong majority of Republicans would oppose “increasing the taxes paid by people who make more than one million dollars a year.” This was the wording of the question asked in a CNN/ORC poll taken in mid-October.  But instead about 56% of Republicans favored increased taxes for these high-earners, while 43% opposed them.

I don’t pretend to know what this means. It may be as simple as an attitude—even among Republicans–of “tax the other guy to plug the deficit.” There are only about 250,000 U.S. households with incomes of more than a million dollars, so they don’t get a lot of votes in a national poll. Whatever the cause for this willingness for a selective tax-increase among the Republican electorate, it seems to reveal a disconnect between them and their single-mindedly anti-tax representatives in Washington.

You can’t count that filing a bankruptcy will instantaneously stop every act against you by every one of your creditors. Or can you?

Isn’t one of the most important benefits of filing bankruptcy the fact that it puts a screeching halt to all collection efforts of your creditors against you and your property? Yes, and in fact in many cases it does exactly that. This benefit of filing bankruptcy is called the “automatic stay,” because at the moment of the filing of your case a legal injunction automatically goes into effect “staying,” or stopping, most actions by creditors against you. But exactly because the automatic stay is something we count on so much, we better know its exceptions.

Today I’m just going to list some of the most important exceptions. Then in the next couple blogs I will explain in practical terms these and other important aspects of the automatic stay.

So creditors CAN do the following in spite of your bankruptcy filing:

1) A district attorney or other governmental authority can begin or continue a criminal case against you, such as an indictment, a criminal trial, or a sentencing hearing. This includes not just felonies and misdemeanors, but also lesser matters like traffic infractions that you might not think of as “criminal.”

2) Your ex-spouse, or about-to-be ex-spouse, or somebody on his or her behalf, can start or continue a variety of divorce and family court proceedings. These include legal procedures to establish paternity of a child, determine or change the amount of child or spousal support to be paid, settle child custody or visitation issues, address domestic violence disputes, and even dissolve the marriage. (Although a marriage dissolution usually cannot include a determination about how assets or debts would be divided between the spouses.)

3) Specifically about child or spousal support, the person owed ongoing support can continue collecting it. If there is back support owed, then in spite of a Chapter 7 filing, the person who is owed the support can in most cases start or continue collecting it. This includes not only collection through wage withholdings and garnishment of bank accounts, but also through seizure of a tax refund and suspension of a driver’s license, an occupational or professional license, or even a hunting or other recreational license. In contrast, a Chapter 13 filing can stop these aggressive methods of collecting back support.

4) Taxing authorities can start or finish a tax audit, can send you a notice that you owe taxes, can demand you to file your tax returns, can assess your taxes and demand you to pay them, and in some situations can even file tax liens against you and your property.

Notice that each of these exceptions involves a special kind of creditor. As I said, the automatic stay stops actions against you by most creditors. But if you are involved in a court proceeding or collection efforts by the criminal or taxing authorities, or by an ex-spouse, be especially aware of these exceptions.

 The two richest people in America think they are under-taxed. Do they know what they are talking about?

I noticed on the latest list of the country’s wealthiest that Bill Gates and Warren Buffett are #1 and #2. They both have been publicly arguing in favor of increased taxes for themselves and their very rich colleagues. Whether this is good policy is a matter of intense political debate. It’s a particularly important one considering what the country just went through a couple of weeks ago with the exhausting debt-ceiling battle. A central part of its last-minute compromise was to hand over responsibility for finding $1.5 trillion cuts in federal spending to a 12-person super-committee of U.S. Senators and Representatives. And to do so by the day before Thanksgiving.

With this timing clearly in mind, Warren Buffett wrote an op-ed column in last Sunday’s New York Times titled “Stop Coddling the Super-Rich.”

He makes two primary arguments:

1. The rich currently pay less in taxes as a percent of their income than the middle class:

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

… .  It’s nice to have friends in high places.

… .

The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.

2. Refuting the “job-killing” argument of fiscal conservatives, Buffett says that he and his fellow investors aren’t affected by higher tax rates :

I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Buffett closes his piece by asking for an immediate higher income tax rate for those making more than $1 million, and an even higher rate for those making more than $10 million. He concludes:

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.


Usually not.  But in some limited situations the indirect consequences can be huge.

Considering what’s at stake, if you are either a legal or illegal immigrant considering filing bankruptcy, this is definitely an area where you need the advice of both a bankruptcy and an immigration attorney. It’s my job to give my clients advice, but sometimes the most important thing to tell them that they need the additional help of another professional. This is one of those situations.

When you go to meet with each attorney, here are some general principles that can guide your consultation with them:

1) Just as the bankruptcy documents don’t ask you anything about your citizenship status, your naturalization application will not directly ask anything about filing bankruptcy. Bankruptcy is a legally accepted method for dealing with your debt. In fact it may even help you avoid dealing with your financial circumstances in more desperate ways, ways which could jeaopardize your immigration prospects.

2) To become a lawful permanent resident or citizen, an immigrant must establish “good moral character.” It is conceivable, although not likely, that your bankruptcy filing could be seen as an issue of moral character. Immigration is considered on a case-by-case basis, so you need to talk with an immigration attorney thoroughly familiar with current practices.

3) If you have been convicted of one of a certain set of crimes, or if you reveal during your bankruptcy proceeding that you committed one of these crimes, these could adversely affect your immigration status. Certain crimes could even result in deportation. Examples include crimes of “moral turpitude” like using credit cards in other people’s names, writing fraudulent checks in more than one state, tax evasion, fraudulent transfers of assets, or providing false information to the federal government (for example, in bankruptcy petitions!).

4) Your citizenship application will ask if “you have ever failed to file a required federal, state or local tax return,” and whether you owe any overdue taxes. Bankruptcy can legally write off some taxes, but there may well be adverse immigration consequences for doing so. This is especially problematic if you have been working and getting paid “under the table,” and not having taxes withheld.

5) If you’re not legally in the U.S., you are definitely exposing yourself to the legal system by filing bankruptcy. False social security numbers—either on the bankruptcy documents themselves or even on prior credit applications—would likely lead to huge problems. In some parts of the country, U.S. Attorneys appear at the Meeting of Creditors to ask about these and other immigration related matters. You are under oath and may find yourself in a very sensitive and dangerous situation.