January 21, 2020

Are You Responsible for Debt Incurred by Your Failed Business

In difficult economic times, I regularly hear from small business owners who have been forced to shut down because of low sales. I recently heard from a blog reader named Evan who writes as follows:

Hello Jonathan!
Of all the info I have found on line yours is the best. I have 2 questions if you don’t mind answering.

I live in CA and have a judgment against me already for 24K for not paying the remainder of a commercial building lease after I went out of business.

1)Will bankruptcy stop them from getting this money?

2) I don’t mind paying them some of the money to be fair. If I paid them 10K and then filed bankruptcy for numerous other bad business debt would the bankruptcy then ask for the 10K back from them?

Here is my response: First of all, thanks for the kind words about my blog. I am glad you found my info helpful.

Secondly, I can only speak to how Georgia law works. California may have different rules. [Read more…]

Do I Have to Give Back the Car I am Financing if I File a Chapter 7?

I have a question about the blog in Nov,2006.  You said that filing bankruptcy can stop car repossion .  But after you file chapter 7 do you get to keep the car and the debt is discharged or you can keep the car only if you promise to make payments on tht vehicle.  Because I have been told the only way you can keep the car when filing chapter 7 is if you promise to make payments and you do not include it in your chapter 7 bankruptcy.  I was told if you owe on the vehicle and place it in your chapter 7 bankruptcy you have to give the car back. Could you give me some insight.
–Fana

Jonathan Ginsberg responds:  Fana, the minute you file a bankruptcy, all creditor action stops because of something called the "automatic stay."   There are a few exceptions to the automatic stay (i.e. multiple filings, child support debt, and a few other limited categories), but as a rule, all creditor action stops the minute you file.

Chapter 7 is primarily designed to get rid of unsecured debts like credit cards and medical bills.  In a Chapter 7, secured debts must be either reaffirmed or the collateral must be surrendered to the secured creditor.

Automobile loans are considered secured debts because the vehicle you purchased serves as security for the loan.  If you want to keep your vehicle in a Chapter 7, you must reaffirm it.  Reaffirmation of a vehicle loan is voluntary on the part of the secured creditor.  Generally, most car lenders will reaffirm if:

you are current with your payments

you have enough income to pay for the reaffirmed debt in your budget

your are able to shelter (exempt) your equity, if any, as part of your Chapter 7 petition

If the creditor refuses to reaffirm your choices are to surrender the vehicle or to convert to Chapter 13 where you can try to force a repayment down the lender’s throat.

If you do nothing – do not reaffirm and do not state any intention, the Bankruptcy Code will presume that your intention was to surrender and after the bankruptcy is over, the secured lender can repossess the vehicle.  Note that in this situation you would have no personal liability for a repossession deficiency – the Chapter 7 discharge serves to wipe out your personal liability.  However, the lien (in rem jurisdiction) that encumbers the vehicle remains and survives the bankruptcy.

So, if you are financing a vehicle and you file Chapter 7, there is a good chance that you can keep your vehicle if you qualify for a reaffirmation.

Weakening of Consumer Bankruptcy Protections Based on Faulty Assumptions

One of the consequences of the new bankruptcy law (BAPCPA law) has to do with erosion of protections offered by bankruptcy in various situations.  For example, the automatic stay provisions, which previously offered a comprehensive, no-questions-asked protection from any creditor action, no longer provides absolute protection in all circumstances.  Under BAPCPA, the automatic stay terminates in 30 days (unless you go to Court to renew it) in certain repeat filing situations and it does not exist at all in the third case filed within a year.

While the policy considerations that underlie this erosion of the automatic stay may be valid, my concerns are (1) when you create complicated exceptions to core concepts, the system loses predictability and public confidence and (2) the stage is set to undermine the entire bankruptcy system with exceptions that swallow the rules, i.e. the “slippery slope” argument.

I find the reduction in bankruptcy protection that applies to repeat filers especially troublesome.  There seems to be an underlying assumption that a debtor who seeks bankruptcy protection  – usually under Chapter 13 – more than once within a year is acting with less than honorable purposes.  In my experience, at least half of the second filers I see have to file a second case because they did not fully understand the process and their obligations thereunder the first time around.

In most jurisdictions, one or two high volume consumer bankruptcy firms account for a majority of the Chapter 7 and Chapter 13 filings.  These high volume firms are a product of the Bankruptcy Courts’ paternalistic attitude towards debtors and consumer bankruptcy counsel.  In most jurisdictions, the Judges set out “no look fee” provisions for Chapter 13 that essentially set the market rate for legal fees in that jurisdiction.  Although the standing court orders that set out these provisions are careful to state that the judges are not setting a fee, the practical effect is, in fact, to set a fee for services.

Because it is hardly practical for a small firm to spend three or four hours of non-billable time to present a fee application, most consumer bankruptcy attorneys accept the no look fee as a flat fee for services.  In the northern district of Georgia, for example, the no-look fee for Chapter 13 is around $4,500.  If a Chapter 13 lasts five years, that amounts to $500 per year to prepare, file and manage a case. Until just a few years ago, that no look fee was $1,500 for five years’ worth of work (that amounted to $300 for five years’ worth of work).

By contrast, in Chapter 11 cases, where the financial stakes may be in the millions of dollars, bankruptcy attorneys may bill at $500 or $600 per hour without any significant judicial interference.

Is it any wonder, therefore, that high volume consumer bankruptcy firms spend so little time with their clients to walk them through the filing and case management process.  Actually face to face attorney time in a high volume firm may amount to 30 minutes or less.  Further, because the business model dictates that costs must be kept down, the high volume firms have no choice but to rely on inexperienced, young lawyers who stay for a year or two then move on.

In simple consumer cases, a paralegal driven model may be fine and I personally have no issue with operating a law firm according to a profitable business model, especially when that model is driven by judicial control of attorney compensation.  In more complex cases, however, it may take a second or third filing for the debtor to find a lawyer who is equipped to deal with that debtor’s complicated problem.

The automatic stay issue discussed above is but one of the many erosions and exceptions to full relief now contained in the Code.  A 2005 article in the ABA Journal entitled “Debts that Will Follow You to the Grave” by Marc S. Stern and Larry B. Feinstein offers an excellent summary of other exceptions to bankruptcy relief.

The prevalence of high volume, limited service bankruptcy mill firms in every large jurisdiction is clearly the product of judicial control of bankruptcy fee payments in Chapter 13 cases.  Yet BAPCPA incorporates a simplistic formula to punish repeat filers, even those who have to seek repeat protection because they ended up in the wrong attorney’s office for their particular case.

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