BANKRUPTCY? If you must, when you must!

Prior to any filing of a bankruptcy petition, careful consideration must be given to the anticipated benefits of filing, versus the costs and risks of filing.  This is so regardless of whether the possible bankruptcy petition will be filed on behalf of a corporation, a married couple, someone hoping to save real estate or other assets with a Chapter 13 petition, or someone with nothing more than a pile of unsecured debt and the clothes on their back.For small corporations, the reason for filing is usually to put an organized end to the business and thereby avoid a multitude of lawsuits.  Pesky lawsuits may require the officers and directors to respond to discovery requests, force them to appear at depositions to explain the downfall of the business, and may even require court appearances.  A bankruptcy could avoid it all.  However, prior to filing a corporate bankruptcy, it is very important to give close scrutiny to the company’s books and records.  Often, checks are written to the shareholders as “draws” or as undefined “distributions.”  This is perhaps the first concern we look at, and typically the most problematic.  Unlike regularly stated wages to employees, including shareholder employees, “draws” and undefined “distributions” often lead to action by the trustee against the shareholder for recovery of such transfers within the prior year.  The trustee may also attack payments made to family members and close friends or to trade suppliers to whom debt had been owing.  The “look back” period for such transfers may be as short as 90 days for payment of preexisting debts to trade suppliers, to a year for transfers to family and friends, to as long as four years if the transfer does not appear to have been in return for value that was received.  It does not matter whether the transfers were cash, cash equivalents, or hard assets.

Prior to any individual filing for bankruptcy, it is important that they are also screened for transfers to friends, family members, and others.  Individuals are also questioned methodically in order to ascertain all of the exemptions that are allowed them under the law, and to determine whether they are better off filing a Chapter 7 petition (liquidation, typically concluded in four to six months) or a Chapter 13 petition (wage earner plan, requires monthly payments to a trustee for what is usually 60 months).  If the individual has no real estate, then the hope and goal will be to file a Chapter 7 bankruptcy to rid you of all of the nagging debt.  Unfortunately, some debt cannot be discharged and it is essential that the client understand that before filing.  Additionally, available exemptions may not fully cover all of the property that the client wishes to keep.  Obviously, for those times it is important that the client also understand the risk of possibly having to either give up some of the property to the trustee or “buy back” the property by either invading an exempted asset (ex. an IRA), getting help from a friend or family member, or finding a way to pay over time.

Chapter 7 bankruptcy is not always available to those who wish them, nor are they the best alternative in many cases.  Depending on the income of the petitioning individual(s), Chapter 13 may be the only available option (i.e., when income exceeds a predetermined amount).  Chapter 13 is also the correct option when: (a) the debtor desires to force a reinstatement of a mortgage, or (b) wishes to strip-off completely underwater second mortgages and subordinate liens such as homeowner association liens, or (c) when their exemptions are not sufficient to allow retention of necessary assets as is the case with sole proprietors of businesses, or (d) when seeking to deal with certain debts that are not dischargeable such as many IRS debts.

While bankruptcy may remove all debt, if not severely reduce debt, there are many issues that must be considered before proceeding.  Sometimes it is best to wait before filing, and sometimes it is best not to file at all.  No one wants the bankruptcy to cause them an unanticipated problem, or possibly heartache.  A wrong decision early on could be very costly and upsetting down the road.  Only a full analytical consultation with an experienced bankruptcy practitioner is likely to yield the best result possible.

Bankruptcy is a very complex area of the law.  Even a very lengthy article would not likely cover every possible issue that might apply to a particular case.  It is the facts and circumstances of the case that drive the analysis.  We typically charge for initial consultations because at times we give valuable advice on protecting assets when bankruptcy is not a reasonable option.  Often we spend more than an hour talking to the client in order to reach that determination.  However, for a limited time, a free initial consultation is available to former clients and their referred friends and family members for personal bankruptcy issues.  It is our way of saying “THANKS” for trusting us to give your referrals quality advice. 

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