Generally when the owner of a small business leases retail space, the landlord will demand a personal guarantee.  This means, of course, that in the event of a default, the business (which may be a corporation or LLC) faces liability and the business owner personally faces liability.

Given this reality, every small business owner should seek counsel to discussion asset protection options before starting his business, but that is a topic for another day.

If the business fails you might be surprised to learn that the landlord does not necessarily have to take any steps to "mitigate damages" by releasing the retail space.  Instead, the landlord can demand payment for the full value of the lease from the business owner personally.  If the business owner has a house with $100,000 of equity, that equity is therefore at risk, and given that Georgia's bankruptcy exemption statute is stingy ($10,000 for an individual or $20,000 for a married couple filing jointly), bankruptcy may not offer much protection.

I ran across two helpful resources that go into more detail about the landlord's obligations or lack thereof.  The first is a blog post from Atlanta lawyer David Pardue in his Georgia Real Estate Litigation blog.  In his post, David discusses a recent Georgia Court of Appeals case called Sirdah v. North Springs Assocs., LLLP, which was decided by the Court of Appeals in June, 2010.  In the Sirdah case, the Court restated its previous holding that a landlord is under no duty to mitigate damages unless (1) the landlord accepts the tenant's surrender, or (2) the tenant successfully terminates the lease.  In the Sirdah case, the tenant returned his keys to the landlord and argued that by accepting the keys, the landlord accepted the tenant's surrender.  The Court said that accepting the keys did not constitute an acceptance of the surrender.

Another helpful resource is a more extensive article written by attorney Stephanie Everett of the Bloom Law Firm in Atlanta.  In this paper, Stephanie examines the various scenarios that could arise when a tenant breaches a lease and the resulting consequences.  Although Stephanie's article is written for the benefit of landlords, tenants will find the information very helpful as well.

As the law in this area could change, you should not rely on these resources in the absence of counsel.  If you are a small business owner and you are coming to the realization that your business may not survive, you would be wise to consult with a lawyer to discuss your options both in business and in terms of bankruptcy.  I have seen far too many business owners who simply left and discovered after the fact that their bankruptcy options were limited, or too painful.

With unemployment exceeding 10 percent, a real estate market in shambles, and many laws in place which support creditors, Georgia has had one of the highest bankruptcy rates for years. In 2009, and even here in early 2010, the numbers of people in Georgia filing personal bankruptcy continue to increase. These increasing numbers are partially the result of the large numbers of filers who are experiencing financial instability for the first time.

Richard Thomson, a partner at the Atlanta-based bankruptcy law firm Clark & Washington, said his firm is taking on an increasing number of higher-income professionals as clients. These higher-income filers simply can’t pay for all of their assets and possessions – boats, expensive cars, etc. As a result, they are filing bankruptcy as a means to start over, and their possessions are often given up as part of the process. According to Thomson, “They’re just saying ‘Take it. It’s not worth the effort anymore. I can’t keep up with it.”

Susan Blum and I are seeing the same trends here at Ginsberg Law Offices.   While our firm has regularly handled cases for formerly high earners and individuals with substantial assets, we are seeing more and more people who start our meetings by saying "I never in a million years thought I would ever end up talking to a bankruptcy lawyer…."   In many cases, clients who had previously enjoyed a comfortable lifestyle wait until disaster is about to strike before calling our office, perhaps in the expectation that their situations will improve.  And more and more of these clients are turning to a Chapter 7 liquidation rather than a Chapter 13 reorganization.

More Chapter 7 Cases Being Filed

According to the National Bankruptcy Research Center, over half of Georgians filing between January and November 2009 filed Chapter 7 Bankruptcy. In a Chapter 7, most debts are wiped out, but so are assets that aren’t protected by exemptions – second cars or vacation homes, for example. 47 percent filed Chapter 13 Bankruptcy, which allows consumers to hold on to a house and car but requires that they repay a portion of their debts generally over a five year period. A Chapter 13 is more or less a reorganization of debt.

These percentages are new for Georgia, which traditionally has been dominated by Chapter 13 filings, as debtors were most concerned about holding onto a house and accumulated equity. Currently, many homeowners have little equity or owe more than their houses are worth, which may be one reason for the spike in Chapter 7 filings.

According to Consumer Credit Counseling Service of Greater Atlanta, one in five consumers receiving recent pre-bankruptcy counseling said avoiding foreclosure was the primary reason for seeking bankruptcy protection. Georgia’s foreclosure process is the fastest in the nation, as it occurs without court or government supervision and takes only a week. A bankruptcy filing is the only realistic option for most Georgians seeking to delay a public auction of their homes.

I (Jonathan) have been representing individuals in Chapter 7 and Chapter 13 cases for over 20 years and I can only remember two or three times when the demand for our services was so high.  The Congressional Budget Office says that the recession is over but I am not seeing any indication that this is true.

Although based in Atlanta, Mann, Bracken has a national practice and it has apparently been growing by merging with other law firms.   I found a web site called paymbw.com which purports to be a payment gateway for debtors to make electronic check or credit card payments on debts being handled by Mann, Bracken.  This site notes that Mann, Bracken is the successor by merger to Wolpoff & Abramson L.L.P., and Eskanos & Adler P.C., two collection law firms well known to debtor's lawyers.

The domain mbllc.com has a "coming soon" page and the registration information for that domain is private.   I looked up the contact information for the partners.  Douglas Mann's shows him as an inactive lawyer affiliated with Mann, Bracken.  Chris Bracken's registration shows a gmail.com email address, a business address at Mann, Bracken's location, but the space for the law firm information is blank.  Two other partners – Bill Layng and Steve Knezo – are now affiliated with other law firms.

Atlanta TV station WSB sent a crew to the Mann, Bracken offices and found deserted premises along with handwritten placards stating that the firm has closed down.  According to WSB, Mann, Bracken was associated with a large debt collector called Axiant, which is now in Chapter 7.

Based on all the information I can gather, the law firm of Mann, Bracken is no more.  However the demise of this firm does not mean that debts owed to clients of Mann, Bracken or Axiant are no longer collectible.   Apparently another large debt buyer/collector, NCO, has purchased or is about to purchase Axiant's accounts.

If you had a deal with Mann, Bracken to settle your debt, you may find that the underlying creditor or a subsequent collection agency may not honor your deal – so hold on to any paperwork you may have.  As attorney Glover notes on his blog, you should contact your creditor directly if you have previously been dealing with Mann, Bracken.

The newspaper story quoted a spokesperson from Consumer Credit Counseling who offered the following observation about the "typical" bankruptcy filer in the Northern District of Georgia:

• a homeowner
• Caucasian
• annual income of $43,000
• credit card debt of $39,000
• mortgage and car payment totaling $1,600 per month
• average credit score of 529
• negative net worth of $73,000 (up from negative $57,000 in 2008)

I think that the most telling aspect of these statistics is the amount of credit card debt vs. annual income. If you are trying to service credit card debt that is equal to your annual before tax income, you will never dig out of that hole.

In my practice I often see men and women earning $80,000, $90,000, even $100,000 or more – and often their credit card debt will be double or even triple the household income. With interest rates anywhere between 14% to 28%, it is mathematically impossible to pay off credit cards without some large lump sum payments or remedial action by the credit card companies.

It would be interesting to know what percentage of bankruptcy filers in Atlanta have tapped into their 401(k) or other retirement plans (usually a big pre-bankruptcy mistake, by the way). It would also be interesting to know how long these bankruptcy filers waited between the time they first thought about bankruptcy and the time of actual filing.

If you have filed for bankruptcy or if you are thinking about filing, I would be interested to have you post a comment answering the above questions.

Attorney's fees and filing fees in those days were relatively low and relatively hassle free. Most Chapter 7 cases processed through to discharge, and Chapter 13 cases worked as long as the debtor remained employed and committed to making his case work.

Fast forward to October, 2005 – the time that the BAPCPA amendment to the Bankruptcy Code went into effect. The system became significantly more complicated. Clients were expected to gather page after page of documents, lawyers were charged with performing extensive budget calculations (the median income and means test).

Fees went up because both the attorney's liability and the amount of work required increased greatly. And what is the end result? Many people with limited income and no hope of paying it back are filing Chapter 7. Others who would have fit into Chapter 7 sometimes do not qualify immediately and end up having to delay their filing for a few months. Folks with some capacity to pay end up in Chapter 13, but trustees are more demanding and Chapter 13 plans that would have worked under the old law do not always work now.

Honest, hardworking men and women have to jump through hoops and pay a lot more money. In my career I can count on the fingers of one hand the number of clients or potential clients who I felt were dishonest. Those with the goal of gaming the system are not deterred. If the purpose of the BAPCPA amendments were to ferret out fraudsters, it has been a complete waste of time.

Another unintended consequence of the BAPCPA laws – deserving debtors do not seek the relief to which they are entitled because they get frustrated with all the paperwork required. Many of these folks remain in financial limbo – unable to save or psychologically move forward because of crushing debt. In a macro-economic sense I wonder if the country is better off with these folks living in financial purgatory rather than moving on with a fresh start.

My colleague, South Carolina bankruptcy lawyer Russ DeMott, and I were chatting about this tendency of deserving debtors to give up or delay filing because of the burden that the Bankruptcy Code places on debtors in terms of document production, costly credit counseling that offers marginal benefit and record keeping. Russ calls this syndrome "financial repression" and he has written a compelling and thoughful article about this problem.  Russ has given me permission to republish his article on this blog, which will be the next post published here.  You should also check out Russ' Charleston bankruptcy blog. Your feedback is welcomed.

First, it does make a difference whether the small business is incorporated.  If your small business is a proprietorship (i.e. "Tom Smith d/b/a Tom's Lawncare") then there is no way to separate personal assets and debts from business assets and debts.  In this situation, all debts are "personal" because the proprietorship does not have a separate identity from the individual.  All debts would have to be listed – for bankruptcy purposes in this situation, there is no difference between your personal credit card debt that arises from gasoline and grocery purchases and a credit card that you use for business purchases.

Assets of the proprietorship would be considered personal assets – assets that do not fit within the Georgia exemption statute would be at risk.

In a Chapter 7, if you have non-exempt assets you would have to surrender those assets to the trustee or offer to buy the "estate's interest" from the trustee (usually at a discount from fair market value).

Note that any receivables of the business or any other property with potential resale value (i.e. customer lists, pending contracts) could be claimed as estate assets.

In rare instances a Chapter 7 trustee could object to your small business bankruptcy using an "income suppression" argument.  This argument asserts that you should not be eligible for bankruptcy relief because you have intentionally suppressed your income by leaving a highly paid job or intentionally refused to maximize income opportunities.

If you are incorporated, the shares of your business are assets and you may very well be asked to justify a de minimus (i.e. $500) valuation that you put on those shares.   I see this issue frequently when clients own service businesses.  For example, I recently represented a client in an incorporated service business that had about $75,000 worth of equipment, but also had around $80,000 of credit card debt, $2,000 of tax debt and was behind on rent and facing a possible eviction.  What is the value of the shares in this case?   Is it $75,000 under the theory that the equipment was not subject to any lien and could be liquidated?  Is it zero under the theory that the business (and my client as personal guarantor) could be liable for a fraudulent transfer if it liquidated the equipment when the business was insolvent?  Or is the value somewhere in between zero and $75,000 using a compromise argument?

The income suppression argument described above also applies when the individual debtor's business is incorporated.  I have seen trustees take the position that a debtor with a certain level of education and training should make a reasonable effort to monitize that education rather than chase an entrepreneurial dream at the expense of creditors.

In the case of an incorporated business where the debtor has partners, the Chapter 7 trustee may become a replacement partner by virtue of his trustee powers and thereafter force a liquidation or a buyout.

I usually advise my clients who own small business clients that there is a possibility that the trustee may demand that the business close its doors and that they may have to find a new line of work.  This possibility is less likely if the business is a service business that does not involve hard assets or inventory, and more likely if there are business assets with value or receivables.

Needless to say there are a myriad of potential issues for small business owners who are thinking about filing a personal bankruptcy.  As always, you will benefit greatly by seeking counsel before your situation becomes critical.

My wife and law partner, Jodi Ginsberg, was recently questioned about this subject by a man who she is representing in a Georgia workers' compensation case.  This gentleman had been in a Chapter 13, but his case was dismissed after over 3 years when he got hurt and lost his regular income.   Now that his Chapter 13 has been dismissed, one of his creditors has filed suit.

Jodi's client wants to know if he should refile his Chapter 13 case to avoid having a judgment rendered against him.  He is rightly concerned that a judgment creditor could seize his bank account and/or place a lien on his home.

Here is my take on this: while I think that a refiled Chapter 13 could work, I would be very reluctant to pursue this course of action.  First, there is the practical question of whether Jodi's client has enough disposable income to make a Chapter 13 work at all.   I have not run the numbers in this case, but it would not surprise me if there is zero or negative cash flow in this prospective debtor's budget – and a Chapter 13 will not work without some positive cash flow.

Second, our prospective client will not face any kind of garnishment of his workers' compensation benefits as Georgia law protects weekly wage benefits from garnishment.   I would think that this protection would extend to benefits even after they have been deposited into a bank account but I have not seen any statute or case law on this point – so, in my mind, a workers' compensation claimant should be careful about depositing wage benefits into a (possibly) unprotected bank account.

Thirdly, I think that a Chapter 13 filed on behalf of a workers' compensation claimant would be complicated and expensive.  There is a strong likelihood that the case would become ripe for settlement at some point during the 3 to 5 year pendency of the Chapter 13.  This means that the debtor's counsel would need to file a motion to ask the court to declare the settlement as "exempt" property.  Further, since a settlement means that weekly wage benefits will stop, the Chapter 13 would fail if the debtor could not come up with another source of income.  Then, there is the possibility that the debtor might apply for Social Security disability.

The bottom line – as a debtor's attorney, I see a filing by a debtor who is currently on workers' compensation as a time consuming project and I would hesitate to accept such a case without a substantial retainer up front (not a likely prospect for debtor in such a situation).

This is one of these situations where multiple areas of law overlap with the amount of legal work needed greatly in excess of what a prospective debtor can afford.

By the end of foreclosure Tuesday, the lender's law firm had learned of the Chapter 13 filing so the law firm did not "record" the foreclosure deed.  Instead, the lender filed a motion to "validate foreclosure" asking the judge to permit the foreclosure to go through thereby divesting the debtor of title.

The debtor painted a very sad picture – he and his wife had four children of their own and a sister and her three children were also living in the home – and they faced  homelessness if the foreclosure was allowed to go through.  Further, the debtor claimed that he and his wife had been victimized by a "paralegal service" that had prepared emergency "two page" petitions then did nothing more.

The lender's attorney took a very hard line – between the husband and wife, these debtors had filed 5 previous cases only one of which actually worked for more than a few months.  The debtor was trying to scam the system and the court ought not permit such an action.  Further, the debtor had used the same paralegal service twice – if they were a ripoff why did he use them a second time?

The judge, who is a compassionate and decent man,  was clearly struggling with what to do.  I felt that the lender's attorney took the wrong approach.  In my view the debtor and his wife came across more confused than pathologically dishonest.  They clearly did not have entirely clean hands when it came to using the bankruptcy process to stop a foreclosure, but I could see that the judge was bothered by the idea that 7 children and two families might end up on the street.

In my previous post I asked what you thought would happen.  Here's what the judge did:

The judge decided to validate the foreclosure and lift the stay.  He was very concerned about the multiple filings and by the fact that there was no equity and an almost impossible likelihood that the debtor could actually fund a Chapter 13 that included over 2 years of mortgage arrearage.  He did note that Georgia law now provides that foreclosure notices must include the name and contact information of a human being at the mortgage company who has the authority to enter into loan modifications.  He directed the lender's lawyer to include this information in the order that would be issued granting the lender's motion (in most cases, the moving party in a motion hearing has the obligation to draft a proposed order for the judge to sign).

In case you are wondering, I would not have a lot of hope that the lender will be very cooperative in working out a deal with the debtor.

He also directed the debtor to cooperate with the U.S. Attorney in investigating the paralegal service.

What can you take from this case?  First and foremost, any Chapter 13 case that you file must be viable on its face.  In other words if you have only $200 disposable each month, and you have to pay $20,000 over five years, your case is not viable.  You have to present a workable plan.

Second, multiple filings make judges very concerned.   I am not a big fan of petition preparation services or paralegal services.  Bankruptcy has become a lot more complicated over the past 10 years or so.  I think that you take a very big chance when you use a non-attorney for your bankruptcy filing.  If you are going back a second or third time you should never do so without a lawyer as the Bankruptcy Code has been amended specifically to make repeat filings more difficult.

The mortgage creditor went first and presented her client's case:  the debtor had filed a bankruptcy on the morning of July 7, 2009 minutes before the lender sold the debtor's house on the courthouse steps.  The lender was not aware of the filing and proceeded to foreclose.  When the lender's attorney returned from the courthouse, he discovered that a bankruptcy had been filed, so he did not record the deed.

Instead, the lender retained bankruptcy counsel who filed a motion have the bankruptcy annulled and the foreclosure validated.   If validated title would pass and the lender would now be the title owner of the property.  In such a situation the debtor's bankruptcy would offer no protection and the debtor would be subject to eviction.

The mortgage company's attorney noted that this was the fifth bankruptcy filed by the debtor and his wife, and the third case filed this year to stop a foreclosure.   In none of the cases filed this year did the debtor or his wife make any payments to the trustee or pay anything to the mortgage company.  In none of these cases did the debtor or his wife file any of the required bankruptcy paperwork.

Clearly the debtor and his wife were acting in bad faith, argued the mortgage company's lawyer, and they should not be allowed to misuse the bankruptcy process.

What would the debtors have to say?  The debtor and his wife appeared pro se (without an attorney).  They told the judge that they filed this bankruptcy to save their home, where they lived with their 4 children, and the wife's sister and her 3 children.

They further explained that the bankruptcy paperwork they filed was prepared by a "paralegal" from a "foreclosure prevention" company.   The paralegal had instructed them to file the Chapter 13 to stop the foreclosure and to give the company a chance to continue its negotiations with the mortgage lender.  Now, however, the foreclosure prevention company did not seem to be in business anymore – its telephone number was disconnected and its st0refront abandoned.

Now, they just needed some time to obtain representation and to restart negotiations with the lender.   They were victims of a foreclosure rescue scam (the same company that had misled them twice before this year) and now they finally realized that they were on their own.

What would you do in this situation?  What did the judge do?  The answer – see my next post….