Los Angeles Bankruptcy Law Monitor : Los Angeles Bankruptcy Lawyer & Attorney : Christine Wilton Law Firm : Southern California Chapter 13 & Chapter 7 Bankruptcy, Foreclosure

When closing a small business, there are advantages to using Bankruptcy as a means to winding up your small business.  If you're Going Out of Business and are looking for alternatives to Bankruptcy, or a more detailed discussion on bankruptcy advantages, then you must read Gordon Eng's recent article in the Los Angeles Lawyer magazine of the Los Angeles County Bar Association entitled, Going Out of Business. 

The advantages of using Bankruptcy as a means of closing your small business include having the Court judicially assist in winding up the financial affairs of the business by providing a single forum for contesting the validity of creditor's claims.  The Court also provides a valuable mechanism for the liquidation of the debtor's assets and determining the allocation among the creditors based upon their priority in a chapter 7 bankruptcy.  After the business has been liquidated and distributed among the creditors, any remaining debt is usually discharged.

Debts that cannot be discharged in a bankruptcy are

• Federal, state and local taxes
• Family support; i.e., spousal and/or child support
• Student Loans, absent undue hardship
• Secured debts
• Government imposed fines or penalties
• Fraud and punitive damage claims

A small business may file a chapter 7 bankruptcy as a corporation or LLC., otherwise the business owner must file a personal bankruptcy.  If the business is not incorporated and the owner files a personal bankruptcy, they are subject to the means test in determining whether they qualify for a chapter 7, or if they must file under chapter 13. 

Business owners who are shutting their doors would be wise to consult with an attorney who can help them work through the issues of closing a business in the most efficient manner that limits or eliminates their financial and legal exposure. 

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The November, 2009 issue of ABA Journal article entitled, The Bad-Debt Blues, explained the need to take federal taxes into consideration when restructuring debt as, "crucial."  The article provides an excellent overview of the federal tax rules that apply to debt workouts, and focuses on the impact to individual debtors.

The recent media blitz touting the end of the recession is an illusion caused only by government spending.  Bankruptcy filings are still up over last year and climbing to record numbers since the BAPCPA in 2005. Americans continue to struggle with what to do about their debt.

The so-called housing bubble we appear to be experiencing is caused by the fact that banks are holding foreclosed homes in their inventory rather than selling them because putting them on the market will only reduce already depressed housing values.  Similarly, the banks are also refraining from foreclosing on homes and moving toward more workout programs and modifications because they're starting to realize the error of their greedy ways. 

When faced with the tax consequences of the restructuring of individual consumer debt; either through foreclosure, repossession, or modification; filing bankruptcy provides a safe harbor and important IRS exclusions.  There is another exclusion under the Mortgage Forgiveness Debt Relief Act of 2007 that applies to Qualified Principal Residence Indebtedness on or after Jan. 1, 2006. 

It is important to remember that most financial transactions have tax consequences and we all know that ignoring the IRS with its hand out is never a good idea.  Consult with your lawyer to fully understand the tax consequences and restructure debt in the way that best minimizes tax liabilities for you. 

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Today I read an article by Katie Adams entitled, Financial Mistakes that Could Haunt You Forever and it got me thinking.  In this unprecedented Economic Depression, we are faced with more difficult decisions about our finances than ever before.  Who can we turn to?  Who do we trust?  I say that now more than ever before we need radical self reliance.  Don't wait for someone else to tell you what you need to do.  Be informed and then decide the proper course of action for your own financial well being. 

I hear it every day.  "We cashed in our savings and retirement to try to stay afloat."  "We lived off our credit cards and now we can't afford the payments."  These 4 financial mistakes can be fatal in the long run and you may land in bankruptcy:

1. Living beyond your means is so yesterday
2. Cashing out retirement accounts to pay bills is fatal
3. Fear, Shame and Guilt will paralyze you financially
4. Never, Ever Co-Sign on a Loan, unless you intend to own it and can afford the payments!

We're not in a recession, we're in a depression.  We need to adjust our lifestyles accordingly and stop creating debt and live within our means.  Never, Never, and I will say it again, Never cash in your savings or retirement accounts to pay bills because you will lose that compound interest, you'll be penalized for early withdrawal and wind up paying taxes.  It's just not worth it.  Besides, you'll most likely get to keep many of your assets in bankruptcy under an exemption. Lastly, you absolutely must not panic.  Don't let your fear paralyze you into inaction.  The last thing you need is to have your wages garnished by a creditor who has sued you before you decide you need to file for bankruptcy. 

I believe that the most important thing to remember is to never co-sign on a loan for anyone, unless you have the ability to pay for it yourself and intend to own it.  Here's the reason for this.  When you co-sign for the debt of another, you are putting yourself on the hook for that debt, in the event  this other person can no longer pay for it.  If the person you've co-signed for ends up in bankruptcy, then the lender can come after you for that debt.  You may find yourself being thrown under the bus, so to speak, and may end up in bankruptcy too, if you did not intend to pay for that debt. 

Don't go broke before you talk to a bankruptcy lawyer about your current financial circumstances.  Every situation is unique and you may have options outside of bankruptcy, but you must act now.

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I am excited to share with you, a new resource for information regarding student loans, as published by the National Consumer Law Center.  The Student Loan Borrower Assistance portal offers answers and and solutions to student loan borrowers, however, they do not provide legal advice. This issue has also attracted the attention of Congress, who recently held an oversight hearing on the matter.

Student Loans, in general, are not dischargeable in bankruptcy, absent undue hardship.  11 U.S.C. Section 523 (a)(8) provides that the debtor must show that the payment of the student loan debt will "impose an undue hardship on the debtor and the debtor's dependents."  Courts have interpreted this standard very restrictively, which makes it very difficult for even the most vulnerable to receive a discharge. A recent case, Booth v. U.S. Department of Education, et al., 10 CBN 1093 (Bankr. E.D. Wash. 2009) held that debtors can prove undue hardship even if their Income Contingent Repayment Loan Program (ICRP) payments are zero.  The Ninth Circuit Court asked, in Craig v. Educational Credit Management Corp., 19 CBN 1039 (9th Cir. 2009), how the bankruptcy court thought the debtor could pay their student loan. 

The Court will apply a three-part test, known as the Brunner test, to determine whether excepting all or part of a student loan debt from discharge will impose an "undue hardship" under § 523(a)(8); Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987). Under the Brunner test, a debtor must demonstrate:

(1) that she cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans;

(2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and

(3) that the debtor has made good faith efforts to repay the loans.

Further, the procedural difficulty level is a general deterrent for most attorneys since the debtor must affirmatively seek this determination in bankruptcy and prove her case.  For more information on this subject, check out Student Loans In Bankruptcy.  Bankruptcy practitioners can purchase Discharging Student Loans in Bankruptcy as a resource.

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The gulf states must contend with hurricanes.  The northeast has their bitter cold.  Here in California, we must always be prepared for "The Big One," earthquakes that is.  As our economy limps along, virtually lifeless, and looking more like a depression rather than the politically correct "recession," we must be prepared for the onslaught of more potential foreclosures.

If you, or someone you know is facing or potentially facing a foreclosure, an attorney who is familiar with this area of law can explain your options so you can choose the course of action that is best for your individual needs, goals and desired outcome.

The five (5) ways to stop a foreclosure are:

1. Modification
2. Short Sale
3. Deed in Lieu
4. Bankruptcy
5. Injunction

Of the methods listed above, only a bankruptcy and a court ordered injunction will legally stop a foreclosure and even those methods may be temporary.  Most of the time, the lender may suspend their foreclosure proceedings in order to entertain the workout options of a modification, short sale or deed in lieu of foreclosure, but they are not legally required to do so. 

Recent court rulings in Massachusetts to invalidate thousands of foreclosure proceedings because the chain of title had not included all of the assignments that had taken place prior to foreclosure.  Unfortunately, a homeowner is not likely to invalidate a foreclosure in California after the sale date, especially where a bonified purchaser is involved and the property has been transferred.

A Chapter 13 bankruptcy is still the most economical and effective way to temporarily stop a foreclosure because of the automatic stay.  This allows the homeowner time to make up all past due payments.  This also allows the attorney to file any adversary proceedings necessary to invalidate the foreclosure proceedings and possibly sue the lender under TILA and RESPA violations; potentially recouping damages on behalf of their clients.

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