Monday, August 15, 2011

Bankruptcy filings continue to fall in Athens area

Bankruptcy trends provide useful information but fuel much speculation. Does a drop in bankruptcy filings indicate the economy has improved or that most people who needed to file have already done so? Does it mean that people are finding better income to pay their debts or that they are just able to borrow more now that the credit freeze has thawed out?

Bankruptcy statistics in the U.S. Bankruptcy Court for the Middle District of Georgia (which includes Athens) show the number of filings continuing to drop since their recent peak in 2009. This trend cannot be easily observed on a daily basis since individual debtor attorneys like myself observe the short-term trends that follow seasons and even monthly payment cycles. However, comparing the first two quarters of this year still show a drop in comparison to the first two quarters of the previous two years.

Professor Bob Lawless of the University of Illinois explained on the Credit Slips blog that there is a relationship between total consumer debt and bankruptcy filings. ("Debt Causes Bankruptcy (But Sometimes in Counter-Intuitive Ways)".) Bankruptcies go up when the amount of consumer credit goes down and thus limits the options of borrowers. He also explained that bankruptcy is a lagging indicator and not a leading indicator. On an anecdotal level, I have indeed seen that some of my clients were pressured to investigate bankruptcy options when their credit card or home equity limits were dropped, and they often try to pursue various options for months or years before considering bankruptcy.

This June article from Reuters, "US consumer credit climbs in April for 7th month," observed that borrowing has increased but noted warnings that this increase is due to "tough economic times" rather than "an economic rebound." So the recent drop in bankruptcy filings does not really show an improvement in the economy, just an increase in the amount of credit available. (A rosier view is painted by Professor Ronald Mann of Columbia University on Fox Business.) Of course, there are many particular trends on a finer level of detail that affect bankruptcy filings overall, such as foreclosures, employment, income, and even changes in the rules that govern credit and bankruptcy.

All this means about bankruptcy statistics is that they are symptoms of economic changes but not a direct indicator of the health of the economy, at least on the shorter scale of comparing year to year. Over a period of years, however, they do seem to indicate the economic stress of the time period as long as they are considered in the context of the regulations and market trends of that period. (For instance, filings were pushed down in 2005 by new bankruptcy laws and pushed up in 2009 by the housing market crash.)

Monday, August 1, 2011

Debts which are dischargeable and nondischargeable

Most people who file for bankruptcy do so to get a discharge of their debts so they can start over financially. Debts fall into different categories under federal law which may or not be dischargeable. In many consumer cases, many debts are either clearly dischargeable or clearly not dischargeable, though some debts fall into gray areas.

The discharge order in a bankruptcy case does not specify which debts are being discharged. A dischargeable debt that was not challenged (e.g., a credit card balance) is presumed to be discharged, and a nondischargeable debt (e.g., a student loan) is presumed to remain collectible. A debt from any category can be challenged for dischargeability by the creditor for special reasons, sometimes after the bankruptcy case is closed. A debtor can also start a proceeding to determine the dischargeability of a debt in order to settle conflicts that may arise after the bankruptcy case.

The common types of debts that are discharged are:
  • Credit cards
  • Personal loans
  • Medical bills
  • Liability on repossessed cars and foreclosed houses
The common types of nondischargeable debts are:
  • Student loans
  • Taxes (but not all of them)
  • Child support or alimony
To help clear this up, the Bankruptcy Code lists only the exceptions to discharge. You only have to look up a type of debt to see if there is an exception but not to see if it is allowed. However, we run into gray areas when we are not sure whether the facts and circumstances of a debt will put it into one of these exceptions. And to make things more complicated again, a hardship discharge could be available for a nondischargeable debt (e.g., for a student loan for someone who has become permanently disabled).

A major exception to dischargeability is based on some kind of fraud. A creditor can challenge the dischargeability of a debt if it was incurred by false pretenses, a false representation, actual fraud, or a false written statement with certain conditions. It could also be challenged if it was incurred by fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. The first problem for the creditor making the challenge is deciding what type of fraud was involved and how the circumstances fit into all the necessary legal elements. The second problem is actually proving that all these elements (which may come from state law as well as federal law) are met.

If you choose to file for bankruptcy protection, be sure you understand which debts you are discharging, which debts you are not discharging, and if there are any risks of uncertainty.

Monday, April 4, 2011

Why small business owners file personal bankruptcy

Owners of small businesses often ask if they can file a bankruptcy petition only in the name of their business or otherwise keep their consumer debts out of a business bankruptcy filing. In many cases, the owners themselves will need to file a personal bankruptcy and not a bankruptcy for their business entity. Here is why:

Most small businesses are not properly capitalized for the business owner to avoid giving personal guaranties on their loans and lines of credit. Although a business may be operating as a limited liability company or a corporation, these private entities only receive enough capital to operate and the owners can quickly and easily withdraw assets. Even though banks lending money might hold furniture, fixtures, and equipment as collateral, they will still want the personal responsibility of the business owners on the line.

So when the business runs into debt trouble, the owners are worried about lenders collecting from them personally. If they are shutting down the business, the debts of the business entity will not be a problem, but the personal liabilities will haunt them. Unfortunately, the bankruptcy system does not separate debts for a prospective bankruptcy filer. A legal person, whether an individual or a corporation or other entity, has the option of entering bankruptcy, but the debts of only a business operation cannot be separated from the debtor for bankruptcy treatment.

This is why business owners filing personally will need to report all their debts in a bankruptcy case, the business debts along with personal credit cards, car loans, and home mortgages. Furthermore, for many small businesses it does not make sense to file a petition for the business entity at all. Individuals usually file with the goal of receiving a discharge of debts, but corporations and limited liability companies are not eligible to receive a discharge. In fact, there is some risk for an attorney who represents an entity and files a bankruptcy petition where one is not warranted. There are some cases where the business entity needs a bankruptcy case to liquidate its assets and bring the resolution of lawsuits to a single forum, but small entities with negligible assets have no benefits from filing for bankruptcy.

The next challenge a business owner may face after filing a personal bankruptcy is starting over in order to continue in his or her line of work. This can usually be done with the proper planning. It is important to wind down the old business and distribute the assets properly without transferring liabilities to the new entity and without violating bankruptcy procedures. Business owners also need separate the old and new businesses to avoid any liability under legal theories (such as corporate veil piercing) for themselves personally or for the new business. Essential relationships may also need to be preserved, and sometimes this means that the new business may actually pay debts of the old business when another party recognizes the business owner personally as being the one in control.

Monday, March 28, 2011

Stopping garnishments without bankruptcy

Debtors frequently ask if they can do anything to stop a garnishment or a lawsuit before they are ready to file a complete bankruptcy case, perhaps as a "pre-filing" measure. After all, how can they afford to pay a bankruptcy lawyer once part of their take-home pay is being garnished? I am sorry to report that there is no procedure in bankruptcy to stop debt collection before you really file bankruptcy. The process is only started with a bankruptcy petition, and for Chapter 7 cases your attorney must be paid in advance. (Bankruptcy attorneys also usually want all the documents fully prepared for the time of filing, though you can file a "skeletal" petition and then file the complete forms within 14 days. However, there are serious pros and cons.)

Debtors frequently ask if there are non-bankruptcy alternatives for stopping or adjusting garnishments. These options are usually not available or not worthwhile. You can challenge a garnishment in Georgia if there is something wrong with the judgment that is being collected (and there are a lot of default judgments out there based on faulty procedures). For instance, if you were never served with the lawsuit but the creditor thought you were served because a deputy sheriff actually served papers on the wrong person, then the judgment can be attacked as invalid. This is called a collateral attack, and there are many ways to do this if there are legal grounds for doing so. However, this will only buy you more time. If you really owe the debt and it is collectible, then the procedural defect can be cured by serving the lawsuit again or filing it in the proper court or whatever it takes, so then eventually you will be hit with a valid judgment and a valid garnishment. In many cases it is simply not worth hiring a lawyer just to buy time.

The amount of the garnishment is regulated by the federal Consumer Credit Protection Act and Georgia's statute that essentially mirrors the federal rules. These rules (found in the Federal Wage Garnishment Law Fact Sheet) allow up to 25% of your take-home pay to be garnished (though a certain amount will be protected if you work less than full time at minimum wage). These rules define what part of your income is "disposable" and is available for garnishment. Because these rules are in place, they give creditors the right to take what is allowed. Judges do not have the power to review garnishments case by case and lower the garnishment amounts based on the needs of a particular family's budget. It might be possible to negotiate with the creditor, but the fact that there was a lawsuit usually means that negotiation ended some time ago.

Despite the hardship imposed by a garnishment, there are still other considerations for whether one should file bankruptcy. For instance, sometimes the amount left to be garnished is not more than the cost of a bankruptcy case, so there may be no benefit from rushing into bankruptcy unless there are other potential garnishments waiting and money to be saved. Sometimes a debtor has enough income and assets to pay their other creditors on their own terms when a bankruptcy might force the liquidation of assets or impose a payment plan. You should review your situation just as carefully as if there were no garnishment, preferably with the help of a patient and understanding bankruptcy attorney.

Friday, March 11, 2011

When to file bankruptcy

Deciding whether bankruptcy is best for your situation is complex enough. If you have decided you need bankruptcy relief, the next question to consider is whether to file now or file later. Although filing provides immediate protection against collection efforts, there are situations in which you will be better off if you wait.

No health insurance: Bankruptcy petitions only address the debts you had on the date of filing, so you will be stuck with debts you incur later. Some debts are practically involuntary, such as medical bills for important treatment. If you have no way to pay for serious unforeseen medical bills in the near future, then you may want to wait until you are able to obtain insurance before you file bankruptcy so that your debts will stay cleared for a long time after your case.

Expected inheritance: A Chapter 7 case generally looks only at your assets on the day of filing, but what if one of your parents passes away after filing? Property that you inherit and life insurance proceeds you receive can still come into your bankruptcy estate if something happens within the six months after you file. If you have the unfortunate situation where you know someone may die and leave property to you, you need to think about how bankruptcy would affect that situation. If your inheritance is substantial, you may be able to deal with your creditors on your own terms. Even if it is small, you may prefer to not have a bankruptcy trustee disrupting the choices your siblings or other heirs want to make about selling or dividing the property.

Recent loan payments: Have you recently paid back a substantial loan to a family member? Bankruptcy trustees can avoid preferential transfers. In other words, they can sue your relative to get back much of the money you paid in order to share the money with the banks and credit card companies you owe. Trustees can look back at your payments to creditors over periods of 90 days or twelve months, with the longer period for "insiders" such as relatives or corporations in which you have a certain interest. Some debtors need to wait to file in order to let this payment history move farther back into the past.

Means test timing: Do you qualify for Chapter 7 under the means test now? Has your income gone up or down? Debtors with new, well-paying jobs may want to file sooner while they still qualify. Those who have lost good jobs may want to wait until they qualify. The means test looks back at your six months of income history.

There are a number of timing issues in bankruptcy cases. If you think bankruptcy relief can help, make sure you consult an attorney who will help you identify timing issues and not rush you into filing a petition too soon. Sometimes you need to file sooner to avoid emergencies, but sometimes you need to wait to file to avoid other hassles.