What Happens to My Business

October 12th, 2012

Submitted by Attorney Tyler Martin

It is a very common occurrence for someone to contemplate filing bankruptcy and ask the question, “What happens to my business?”

 The answer to that question depends on the business and whether or not a separate/distinct entity was validly formed to conduct that business.  The bankruptcy code specifies that bankruptcy is available to a “person” as defined in 11 U.S.C. Section 101(41).  The term “person” includes individuals, partnerships, and corporations. 

Consider the following hypothetical:

A person named Bob has a sole proprietor window cleaning business (even if operating under a trade name) and falls on unfortunate hard times.  Bob’s business is a service oriented business that is ultimately dependant upon his performance of window cleaning services.  He has both personal debts and debts directly related to the operation of the window cleaning business.  He decides that the best way to resolve his debts is to seek protection under Chapter 7 of the bankruptcy code. 

By filing bankruptcy, Bob must be aware that not only are his personal assets subject to the bankruptcy, but so too are the assets used in the window cleaning business itself.  If personal assets or assets of the business are not protected under a specific exemption, Bob runs the risk of losing those items by filing bankruptcy.  Because Bob operated his business as a sole proprietorship, he is not now able to separate the bankruptcy filing from his business.  All of Bob’s personal assets and the assets of the business are made part of the bankruptcy.  If Bob has minimally valued assets that are used in the operation of the business, he may be able to claim a specific exemption that covers those items as tools of his trade (contingent upon their current use and dollar values).  This exemption is in addition to any other available exemption that Bob may be able to claim on his own personal assets.

If Bob can apply an exemption protecting all of the business assets, then even though he has filed bankruptcy he may be able to keep the business assets and carry on operating the business post-bankruptcy filing.

If you are in need of legal counsel and would like to speak with an experienced bankruptcy attorney, please call 800 899-2730  or visit our website at www.bankruptcylawyeraz.com or www.davismiles.com

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Business Consequences in Bankruptcy

September 24th, 2012

Submitted by Charles B. Sellers

It is a very common occurrence for someone to contemplate filing bankruptcy and ask the question, “What happens to my business?”

The answer to that question depends on the business and whether or not a separate/distinct entity was validly formed to conduct that business.  The bankruptcy code specifies that bankruptcy is available to a “person” as defined in 11 U.S.C. Section 101(41).  The term “person” includes individuals, partnerships, and corporations. 

Consider the following hypothetical:

A person named Bob has a sole proprietor window cleaning business (even if operating under a trade name) and falls on unfortunate hard times.  Bob’s business is a service oriented business that is ultimately dependant upon his performance of window cleaning services.  He has both personal debts and debts directly related to the operation of the window cleaning business.  He decides that the best way to resolve his debts is to seek protection under Chapter 7 of the bankruptcy code. 

By filing bankruptcy, Bob must be aware that not only are his personal assets subject to the bankruptcy, but so too are the assets used in the window cleaning business itself.  If personal assets or assets of the business are not protected under a specific exemption, Bob runs the risk of losing those items by filing bankruptcy.  Because Bob operated his business as a sole proprietorship, he is not now able to separate the bankruptcy filing from his business.  All of Bob’s personal assets and the assets of the business are made part of the bankruptcy.  If Bob has minimally valued assets that are used in the operation of the business, he may be able to claim a specific exemption that covers those items as tools of his trade (contingent upon their current use and dollar values).  This exemption is in addition to any other available exemption that Bob may be able to claim on his own personal assets.

If Bob can apply an exemption protecting all of the business assets, then even though he has filed bankruptcy he may be able to keep the business assets and carry on operating the business post-bankruptcy filing.

If you have questions about bankruptcy, we encourage you to attend one of our free seminars or contact us at 800-899-2730 for a free personalized consultation. For more information about our seminars please visit http://www.freearizonabankruptcyseminar.com/

 

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BANKRUPTCY and ATTORNEY FEES

September 10th, 2012

TEMPE AND MESA ARIZONA DIVORCE AND FAMILY LAW LAWYER DISCUSSES ATTORNEY FEES AND BANKRUPTCY ISSUES

Submitted by Attorney Douglas C. Gardner

The “American Rule” regarding attorneys’ fees is that generally each party will pay his or her own attorneys fees and costs.  There are, however, certain exceptions whereby the Court can order one party to pay all or some portion of the other party’s attorneys fees and costs.

In Family Law or Divorce cases in Arizona, A.R.S. § 25-324 governs when the Court can order one party to pay any portion of the other party’s fees.  The Court must consider the reasonableness of the positions taken by the parties, and also the financial resources of each party.  Generally, the greater the disparity in financial resources and the greater the unreasonableness of one party, the more likely the Court will order an award or attorneys fees. 

A related issue that has arisen more often over the last few years with the terrible economy is when and whether these attorneys fees can be discharged in bankruptcy.  As a general rule, money owed to a spouse or former spouse (such as for property settlement issues) can be discharged in a Chapter 13 Bankruptcy, though spousal support and child support are not dischargeable in any bankruptcy. 

Attorneys fees fall in the grey area, and may be discharged in certain cases.  The argument is that since the Court considers the financial resources of the parties, that it can be considered to be support in nature.  The argument would be very strong if the primary issues litigated are child support and/or spousal support. 

The Bankruptcy Code, 11 U.S.C. §523(a)(5) states that a bankruptcy discharge does not discharge support obligations.  In re Catlow, 663 F.2d 960, 963 (9th Cir. 1981) recognizes that attorney’s fees awarded under Arizona law in a divorce action may be support obligations).  In re Bradshaw, No. BR-05-24647-PHX-CGC, 2007 Bankr. LEXIS 2892 at *4 (D. Ariz. Aug. 24, 2007) provides a similar analysis.  In re Jarski, 301 B.R. 342, 347 (D. Ariz. 2003) further discusses the issue.  Finally, Magee v. Magee, 206 Ariz. 589, 592, 81 P.3d 1048, 1051 (App. 2004) states that, in Arizona, as a matter of public policy, an award of attorney’s fees is “derived from and justified by the duty of support”.

If you are involved in a divorce case involving attorneys fees, bankruptcy, or other simple or complex issues and want experienced legal representation, please call 800-899-2730 and ask to speak with Douglas C. Gardner, or visit our website at www.yourarizonadivorcelawyer.com or www.bankruptcylawyeraz.com

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Small Business Owners and Bankruptcy

August 14th, 2012

Submitted by Attorney Pernell McGuire

In today’s economy more and more small business owners are being forced to seek protection from creditors by filing bankruptcy.  In many cases, the small business owner has tax liability for payroll taxes and wants to know how a bankruptcy can help them.  In certain circumstances, bankruptcy can help deal with payroll taxes by either eliminating them altogether or providing more favorable repayment terms then if the business owner is left to deal with the IRS on their own.  Payroll or employment taxes are comprised of two parts:

    1. the employer portion, and
    2. the employee portion.

Employer Portion of Payroll Taxes is Dischargeable – Sometimes.

The employer portion of the payroll tax is the tax which the employer owes directly to the IRS. The employer portion includes the employer’s obligation to match the employee’s 6.2% social security tax and the 1.45% Medicare tax.

For sole proprietors, the employer portion of the employment tax can be discharged in bankruptcy if:

  1. there are more than three years between the date the 941 tax return was last due, including extensions, and the date that the bankruptcy was filed;
  2. there are more than two years between the date the 941 tax return was filed and the date the bankruptcy case was filed; and
  3. the employer did not willfully evade payment of the tax.

Employee (Trust Fund) Portion of Payroll Taxes is Never Dischargeable.

The employer is required to withhold the employee portion aka “trust fund” portion from the employee’s pay check and remit it to the Internal Revenue Service (IRS).

The employee portion of the tax is referred to as a trust fund tax because the employer is collecting the employee paid portion of the payroll tax from the employee in the capacity of a trustee for the IRS.

The employee paid portion of the payroll tax includes the 6.2% Social Security tax and the 1.45% Medicare tax.

Trust fund taxes are never dischargeable in Chapter 7 bankruptcy.  Thus, if the business owner files chapter 7, he or she will still have to deal with the IRS to resolve the tax liability.  In that case, interest and penalties on the outstanding tax liability will continue to accrue.  Under such circumstances, the business owner should strongly consider filing chapter 13 to deal with the tax liability.

Under Chapter 13, the business owner submits a plan to repay its tax (and other) debt over a there to five year period of time.  The tax debt must be repaid in full over the term of the plan.  However, the tax debt does not continue to accrue interest or penalties – only the tax existing as of the date of filing the bankruptcy must be repaid.  Further, the tax debt has priority over any other unsecured debt and thus, gets paid before any other unsecured debts.

There is no escape from trust fund recovery taxes. However, trust fund taxes will become uncollectible if the 10 year statute of limitations expires without the IRS filing suit, regardless of whether the taxpayer files bankruptcy or not.

Any business owner facing significant tax liability should consider visiting with an experienced bankruptcy attorney to determine whether bankruptcy can provide the necessary relief.

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Reaffirmation Agreement

July 26th, 2012

Submitted by Attorney Charles B. Sellers

When a person files personal bankruptcy, they do so with the expectation that many, if not most of the prior debts will be taken care of in that bankruptcy and are no longer a concern.  To the surprise of some, a person may still receive communication from their lender in the form of a document entitled “reaffirmation agreement”, even though they have already filed for bankruptcy protection.

A reaffirmation agreement is a contract between the person that has filed bankruptcy and the former creditor.  The purpose of the agreement is to confirm that the filer agrees to pay the debt (or renews the obligation) after the bankruptcy according to specified terms, even though that debt would otherwise be discharged by the filing.

Because a bankruptcy discharge is of such critical importance, the Bankruptcy Code requires that several conditions be satisfied in order for the agreement to valid, as outlined in Section 524(c) and (d).

Some of the important conditions that must be satisfied involve:

 1.  The agreement must be entered into between the parties before the discharge is granted and filed with the court,

 2.  The agreement must provide notice that it is subject to rescission at any time by the filer before the discharge is granted or within 60 days of the agreement being filed with the court, whichever is later,

 3.  If the person filing bankruptcy is represented by an attorney, a declaration by the attorney will state that the filer’s consent is informed, voluntary, and that it does not impose any undue hardship on the person filing or their dependents,

 or

4.  If the attorney does not sign and file a declaration (as there are certain circumstances where it is recommended that they do not) or if the filer is not represented by an attorney, then the agreement must receive court approval by the judge upon determining that the agreement does not impose an undue hardship on the filer or their dependents and is in the best interest of the filer.

 When a reaffirmation agreement is properly executed and validly filed with the court, it has the effect of excepting the reaffirmed debt from any issued discharge order by the bankruptcy court.

 For a full listing of all considerations that must be satisfied in order to effect a valid reaffirmation agreement, please contact a bankruptcy attorney.

If you have questions about bankruptcy, we encourage you to attend one of our free seminars or contact us at 800-899-2730 for a free personalized consultation. For more information about our seminars please visit http://www.freearizonabankruptcyseminar.com/

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Does Default Deter Bankruptcy?

June 15th, 2012

Submitted by Attorney James McGuire

Can I file bankruptcy if I am behind on my house payments?

Clients often wonder whether they can file bankruptcy if they are behind on their house payments.  The short answer is yes.  However, which type of bankruptcy is best in your situation needs to be discussed with your attorney.

For example, if your goal is to keep your home, a Chapter 13 bankruptcy may be the best fit for you.  In Chapter 13, you are allowed to resume (or continue) making the regular monthly payments, while making a Chapter 13 “plan payment”, a portion of which will be used to cure the arrearage on your home over a period of 3 to 5 years.  This works best when the reason you have fallen behind on your house payments was a temporary problem, and you are able to get back on track but need time to do so. 

If you do not want to keep the house, then Chapter 7 bankruptcy may be a better option.  You can surrender the home to the bank as part of the Chapter 7 bankruptcy and discharge the mortgage, including any arrearage. 

Increasingly, we are seeing banks reluctant to immediately foreclose on homes that clients wish to surrender in Chapter 7.  With more frequency, banks are now reaching out to these clients to see if they would like to pursue home modifications or other strategies to help them stay in their home.  If it works out, great, if not, you can ignore such offers and discharge the mortgage with the surrender of the home.

If you are behind on your mortgage and considering bankruptcy, it is a good idea to talk to a bankruptcy attorney that can assess your individual goals and situation.

If you have questions about bankruptcy, we encourage you to attend one of our free seminars or contact us at 800-899-2730 for a free personalized consultation. For more information about our seminars please visit http://www.freearizonabankruptcyseminar.com/.

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Chapter 11- Not Just for Corporations Anymore

June 1st, 2012

In the past, Chapter 11 of the Bankruptcy Code has been used primarily by corporations hoping to reorganize and stay in business.  However, with the real estate market downturn, more individuals have taken advantage of Chapter 11 to reorganize and retain their investment property and other property.

Most individuals are familiar with Chapter 7 of the Bankruptcy Code.  Fewer are familiar with Chapter 13.  These two chapters of the Code are used most often by individuals seeking to file bankruptcy.  For example, during the last twelve months, there were approximately 1.5 million individual bankruptcy filings.  Of this amount, 71% were filed under chapter 7, while 28.8% were filed under chapter 13.  The remaining cases, 1,958, to be exact, were filed under chapter 11, representing a little more than 1/10th of 1% of all filings.  Over the last 10 years, however, Chapter 11 filings have been on the rise.  In 2000, only 711 individuals filed under chapter 11, so the 2011 figure represents an almost 300% increase!

With almost 2,000 individual filings under chapter 11 last year, there must be some benefit for individuals under this chapter of the bankruptcy code.  To understand the possible advantages to a chapter 11 filing it’s important to have a basic understanding of how chapter 7 and chapter 13 work. 

Under chapter 7, the person who files bankruptcy (the debtor) files a petition and schedules listing out all of their assets and debts.  The Court appoints a bankruptcy trustee who takes the debtor’s non-exempt assets and sells them for the benefit of the creditors.  Assets are determined to be exempt under either state or federal law.  In exchange for turning over their property, the debtor receives relief from their debts, called a discharge.  A debtor who has a large amount of non-exempt assets will normally not elect to file under chapter 7.  In addition, individuals with large incomes normally do not qualify under the “means test,” a new test established by Congress in 2005.

For those individuals who do not want to file, or who do not qualify for filing, under chapter 7, they may proceed under chapter 13.  Under this chapter, debtors, in most cases, retain their non-exempt property.  However, to keep their property the debtors are required to repay all of their “disposable income” over a three to five year period of time. After all of their payments are made, the debtors are entitled to receive a discharge of their debts.  As stated above, most debtors who do not elect to file under chapter 7, or who do not qualify, will file for chapter 13.  However, there are some debtors who do not qualify for filing under chapter 13 because they have too much debt.  The current debt limitations for filing chapter 13 are $360,475 in unsecured debt and $1,081,400 in secured debt.  In addition, debtors in chapter 13 are in most cases not permitted to modify mortgages on investment property or other long term debt in chapter 13.

For these debtors, chapter 11 is an excellent alternative to simply surrendering everything to the bank or a trustee in chapter 7.  In extreme cases, a debtor who has significant income and debt may not qualify for chapter 7 or chapter 13, leaving chapter 11 as the only option.  Under chapter 11, the individual debtors file bankruptcy and become “debtors in possession.”  This basically means that they remain in control of all of “their” assets.  However, the assets are not really “theirs” any longer.  Rather, the property is now what is known as “property of the estate.”  The “estate” is comprised of all of the debtor’s rights in any property existing at the time of the bankruptcy filing.  In addition, other property, such as the debtor’s future earnings also become property of the estate.  The bankruptcy code permits the debtor to remain in possession of this property, and imposes on the debtor a fiduciary duty to use this property for the benefit of the estate’s creditors by formulating a plan of reorganization.

As part of the process, the debtor is provided 120 days from the filing to date in which it is the only person or entity who may submit a plan of reorganization.  This period is called the exclusivity period.  This period provides the debtor with a short “breathing spell” from its unsecured creditors so that it can evaluate its financial condition and submit a plan.  The bankruptcy code provides the debtor with the ability to “cram down” and “strip” a mortgage and repay what is owed based upon the value of the real property, the debtor wishes to retain.

For example, if a debtor owns a commercial building that is worth $500,000, with a first position lien owed to the Bank of $700,000, and a second position lien owed to the seller of the building for $200,000, the debtor may propose a plan that “crams down” the Bank by repaying it the sum of $500,000 as a secured debt, with the difference becoming an unsecured debt of $200,000.  The plan could further provide to “strip” the second position lien from the property and treat it entirely as an unsecured debt.  The debtor’s plan can be approved provided that it complies with the other provisions of the bankruptcy code, including paying the secured creditor a market rate of interest, paying into the plan all of the debtor’s disposable income for a five year period, and securing the vote of at least one creditor class in favor of the plan.

While obviously not for everyone, Chapter 11 provides high income, high debt individuals who own property they want to keep a less well known, but excellent alternative to either chapter 7 or 13.  Just a few of the advantages of Chapter 11 over Chapter 7 or 13 is that it allows debtors to keep their property, restructure long term debts and obtain a breathing spell from creditors to enable them to reorganize.  Individuals with high income, debts, or investment property, should consult with an experienced bankruptcy attorney who is familiar with all chapters of the bankruptcy code to best determine their available options.

 

If you have questions about bankruptcy, we encourage you to attend one of our free seminars or contact us at 800-899-2730 for a free personalized consultation. For more information about our seminars please visit http://www.freearizonabankruptcyseminar.com/.

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Where You Bank Matters….Even More So If You Bank with Wells Fargo

November 11th, 2011

Written by attorney, Carlene Simmons

Many clients are curious during an initial consultation as to why we ask where they bank, but to an experienced bankruptcy attorney this is a vital question when paired with the question “do you owe them any money?” In the typical timeline leading up to a bankruptcy filing our clients discontinue all payments to unsecured creditors. When a client discontinues payments on credit lines to the bank where their money is kept on deposit, the bank will often make a setoff where they begin taking automatic withdrawals from available funds to cover the missed payments. This is done without notice and often leads to catastrophic overdrafts and returned checks. The client then finds himself in a situation where that “fresh start” just became more difficult to obtain.

We often counsel clients who have their accounts with Wells Fargo to move their accounts to another institution before filing bankruptcy. Wells Fargo has built a reputation for freezing personal and joint bank accounts, even accounts where the joint owner did not file for bankruptcy protection, once they receive notice of a bankruptcy. This causes enormous stress and unnecessary headaches for clients who were only seeking relief from financial burdens that had become out of control.

These are just two example of how receiving advice from an experienced bankruptcy attorney can help you to get the relief that you need.

If you have questions about bankruptcy, we encourage you to attend one of our free seminars or contact us at 800-899-2730 for a free personalized consultation. For more information about our seminars please visit http://www.freearizonabankruptcyseminar.com/.

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Qualifying for Chapter 7 Bankruptcy to get harder November 1, 2011

October 24th, 2011

Many people are aware that sweeping changes were made to the bankruptcy code in 2005. One of the biggest was the institution of the “means test” to determine eligibility to file for Chapter 7 bankruptcy protection. The “means test” was intended to push individuals with higher incomes toward a chapter 13 bankruptcy, where individuals repay a portion of their debts through a 3 to 5 year chapter 13 plan payment. This long repayment does not exist in Chapter 7 cases.

In order to help determine who was eligible for Chapter 7 and who had to file Chapter 13, an income based test was introduced. (It should be noted that the means test is very complicated and has many nuances so it is best to speak with an attorney about your specific situation.) As a first step, the gross household income and the number of individuals in the household are looked at and compared to “median family income” numbers for the area in which you live. If your household income is below the median income for the same size household, you are generally eligible to file Chapter 7.

One of the things Congress built into the bankruptcy code in 2005 is a periodic update to the “median family income” numbers that your household income will be compared to. As a result of increased and prolonged unemployment, “median family income” in Arizona continues to decline. Therefore, when the numbers update again on November 1, 2011, more families and individuals in need of bankruptcy protection will find themselves above the “median family income”. For example: The following table shows the current numbers and the numbers that will go into effect on November 1, 2011.

Household        Current        Nov. 1, 2011
1                        $42,603         $41,385
2                        $55,404         $53,781
3                        $59,659         $56,508
4                        $67,113         $61,267
5                        $74,613         $68,767
6                        $82,113         $76,267
                       
If you are over these income numbers for your household size, there may be other ways to still qualify you for a Chapter 7 case if that is in your best interest. If you have questions about bankruptcy, we encourage you to attend one of our free seminars or contact us for a free personalized consultation. For more information about our seminars please visit http://www.freearizonabankruptcyseminar.com/.

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The Good News about Bankruptcy: The Automatic Stay

April 21st, 2011

In the majority of bankruptcy initial consultations I have conducted, I hear the same story. This story is about someone who has fallen on financial hard times. Many times, this story involves  the person recounting me about how they are paralyzed by the fear of impending lawsuits, garnishments, or foreclosure.  This story inevitably includes a comment about how collection agencies and creditors have driven that person to a full blown case of telephonophobia. This story always gets to the point where the person in the consultation explains to me how they are in a tragic situation that has spiraled out of their control. These consultations, while sad, have a silver lining. The silver lining comes when I get to tell my side of the story. My side is about the “good news” that comes with a bankruptcy. The “good news” is encapsulated in  two words involved in every bankruptcy… those two words; automatic stay.

The automatic stay is one of the fundamental aspects of bankruptcy law. It is codified in 11 U.S.C. § 362(a). In essence, the automatic stay forbids all entities from initiating  or continuing actions to collect from the debtor or take possession of property that is part of the bankruptcy estate. It goes into effect upon the filing of the bankruptcy petition, granting the petitioners immediate relief.

The automatic stay serves two main purposes. First, it provides the “good news” that those who file bankruptcy are seeking. That is to say, the automatic stay stops the harassing phone calls, it stops the pressuring collection agencies, it stops the lawsuits and it stops the foreclosures. In fact, creditors who violate the automatic stay could even be subject to sanctions or have their remedy declared void.

Second, the automatic stay ensures that the bankruptcy estate assets are properly distributed. By preventing all creditors from commencing or completing collection actions, the automatic stay stops the creditors from racing to see who can sue and collect from the Debtor first, a race which would inevitably result in a minority of creditors collecting the majority of the debtor’s non-exempt assets, to the detriment of the other creditors.

The decision to file bankruptcy is often a difficult one. However, learning about the automatic stay is usually the best news that an overwhelmed debtor can hear. If you are in a situation where you need protection from harassing phone calls, lawsuits, or garnishments, and are interested in learning more about the automatic stay, please visit us at www.bankruptcylawyeraz.com or call us at (480) 829-9081 to schedule your free initial consultation with one of the experienced attorneys at McGuire Gardner, PLLC,  so you too can hear more good news about bankruptcy.

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