Why a Sole Proprietor Filing Chapter 7 Bankruptcy Had Better Retain a Good Bankruptcy Lawyer

Sole Proprietorship Business in Personal Chapter 7 BankruptcyMy simple advice to self-employed business owners needing to file bankruptcy, is to consider filing Chapter 13 bankruptcy. But let’s say that there is some reason why the debtor cannot file a Chapter 13–for example, she has debts greater than the limits set for Chapter 13.

If you own and operate a small business as a sole proprietor and are thinking about filing a personal Chapter 7 bankruptcy, I cannot stress enough how important it is that you first seek the advice of an experienced bankruptcy attorney. First, you and your lawyer will need to work through the tedious and often thorny issues involved in placing a value on the small business. Your sole proprietorship is not a separate legal entity from you, so its assets are your assets, and that means you will need to diligently list and provide values for the business’s tools, equipment, fixtures, inventory, accounts receivable, intellectual property and so forth on your personal bankruptcy petition.

Unlike Chapter 13, Chapter 7 is a liquidation bankruptcy, so if the value of your business assets is greater than the exemptions available to protect those assets, then the trustee in your Chapter 7 case can seize and liquidate some or all of those assets. So it may be that you will not be able to keep your business in a Chapter 7 in any event. This is just one reason why getting thorough bankruptcy advice prior to filing is all the more critical for the self-employed sole proprietor. Suppose, however, that the current replacement value of the debtor’s business assets are minimal, and can be fully protected by the available bankruptcy exemptions. In that case there may be little or no risk that the Chapter 7 trustee will seize any of the debtor’s sole proprietorship business assets. Can you go ahead and file Chapter 7 bankruptcy with nothing else to worry about? If only it were that simple. Read More »

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When Does It Make Sense to Reaffirm an Auto Loan in Chapter 7 Bankruptcy?

Reaffirmation Agreements in San Jose Chapter 7 BankruptcyOur Bay Area Chapter 7 bankruptcy clients as well as those who have read my previous posts know that I can be fairly hostile to reaffirmation agreements of car loans in bankruptcy. After all, the whole idea of reaffirming a personal debt that would otherwise be discharged in bankruptcy runs counter to what I, as a consumer bankruptcy lawyer, work to achieve for my clients. Outside of bankruptcy, we all know that if a borrower defaults on an auto loan, the lender can repossess the car and sue for any balance still owed on the loan after auctioning the vehicle. But a bankruptcy discharge eliminates the lender’s right to sue on the promissory note. Sure, the lender could still repossess if the borrower failed to make her payments after filing bankruptcy, but without a reaffirmation agreement, repossessing the car would be the lender’s only remedy. No more lawsuits for the balance owed on an “underwater” car (plus attorneys’ fees, tow truck fees, storage fees, auction fees, etc., etc.)

Signing a reaffirmation agreement for a car loan in bankruptcy means that the debtor agrees to once again become personally liable for the contract debt for his car. It’s like voluntarily giving up the benefit of his bankruptcy discharge for that loan. Why would anyone voluntarily do this, you ask? Because the 2005 BAPCPA changes to bankruptcy law contained a giant giveaway to auto loan finance companies and credit unions, that’s why. Today, if the bankruptcy debtor refuses to sign a reaffirmation agreement of a car loan in his bankruptcy, then the Automatic Stay will automatically expire, and the lender can repossess his car even if he is current on the payments! Read More »

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How the National Mortgage Settlement May Help California Homeowners and Those Who Have Lost Their Homes

California Bankruptcy Lawyer Explains the National Mortgage Settlement Since long before the beginning of the current economic downturn, we have counseled hundreds of individuals and families seeking information about filing personal bankruptcy in the Bay Area. But since this recession began, those seeking bankruptcy advice have likewise needed advice on how they might be able to avoid foreclosure, modify their home loans, or what to do about debt from a home equity line of credit on a home they have already lost.

In many cases, we have been able to assist our bankruptcy clients catch up on their mortgage payments through a Chapter 13 bankruptcy, or even to strip off second mortgage loans from their property. In many other cases, due to job loss and other economic distress, our clients have been unable to catch up with a payment plan and have needed to surrender underwater homes in Chapter 7 bankruptcy cases. Frequently distressed homeowners have needed obtain a Chapter 7 discharge to ensure that their home equity line lenders can never sue them whether or not their property has been foreclosed. Read More »

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Stopping a Wage Garnishment by Filing Bankruptcy in San Jose

Bankruptcy Stops a Wage Garnishment in San JoseEvery individual who files personal bankruptcy, whether Chapter 7 or Chapter 13, gets immediate protection from the collection efforts of his creditors. This immediate protection is the Automatic Stay provided in section 362 of the Bankruptcy Code, which prevents, for so long as it remains in effect, the garnishing of the bankruptcy debtor’s wages (except for domestic support obligations), levies against his bank accounts, foreclosures, evictions, or the continued prosecution of civil law suits, among other types of collection activities. Thanks to the protection of the Automatic Stay, filing personal bankruptcy in California will put a stop to a wage garnishment.

Although the Automatic Stay goes into effect immediately, in practice it often takes a good deal of effort by a bankruptcy attorney to stop a wage garnishment once the bankruptcy petition is filed with the court. This is because there are at least three parties involved in the garnishing of the debtor’s wages. After a creditor obtains a civil judgment against an individual in California, in order to garnish that individual’s wages, the judgment creditor must obtain a Writ of Execution and then an Earnings Withholding Order from the California Superior Court. Each of these is then sent to the levying officer at the civil division of the sheriff’s office of the same county. It is the sheriff’s office that serves the Earnings Withholding Order on the debtor’s employer, which in turn, causes the debtor’s wages to be garnished. Read More »

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Reversing Fraudulent Transfers Before Filing Bankruptcy in San Jose

Reverse a Fraudulent Transfer Before Filing Chapter 7 Bankruptcy in San JoseSeveral weeks ago I posted a piece on this blog outlining what constitutes a “fraudulent transfer” prior to filing bankruptcy and the disastrous consequences such transfers create for the debtor in bankruptcy. Most commonly in the consumer bankruptcy context, a fraudulent transfer occurs when, prior to filing bankruptcy, one transfers an asset to someone else either with actual intent to “hinder, delay, or defraud” her creditors or for less than reasonably equivalent value. Put simply, you can’t give away a valuable asset or sell it at a bargain price before you file for bankruptcy protection. Such transfers are deemed by the Bankruptcy Code to be the equivalent of concealing an asset that would otherwise have been available to help pay your debts.

Although this may strike many as common sense, it is not uncommon that honest debtors make such transfers mistakenly, without getting advice from an experienced bankruptcy attorney, and without even thinking much about it. Take for example an elderly couple who needs to file Chapter 7 bankruptcy in San Jose largely due to medical debts. They recently owned a car but had become unable to drive. Because of their age and medical conditions, they have also recently become unable to live alone, so they moved in with an adult child. They have very few assets, all of which will be exempt in a Chapter 7 bankruptcy. They receive only social security income, and will qualify for a Chapter 7 bankruptcy discharge. However, just a few months before they consider filing for bankruptcy or meeting with a bankruptcy attorney, they gave their car to their adult child, innocently and without giving it much thought at all. Read More »

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How to Place a Value on Your Assets in Chapter 7 Bankruptcy (or in Chapter 13 for That Matter)

Valuing Assets in San Jose Chapter 7 BankruptcyOften prospective clients come to our San Jose offices for a free bankruptcy consultation armed with legal “expertise” they have garnered from sites pertaining to bankruptcy all over the internet. One of the principle fears that these folks convey to me is the idea that if they file Chapter 7 bankruptcy, they will lose everything because they have heard that Chapter 7 entails having to give up all of their property to the Bankruptcy Court in exchange for a discharge of their debts. This is simply not true.

It is true that when a debtor files Chapter 7 or 13 bankruptcy, all of his assets become known as the “bankruptcy estate.” In Chapter 7, the trustee assigned to the debtor’s case “owns” all of the Chapter 7 debtor’s assets in that bankruptcy estate. This could range from anything to a house, a vehicle, clothing, jewelry, electronics, and the like. However, and this is the most important point, just because the debtor’s property is included in the bankruptcy estate does not mean that she will lose it! In Chapter 13, the trustee cannot take any of the debtor’s assets. And, as I’ve written about in previous posts, the California bankruptcy exemptions allow Chapter 7 bankruptcy debtors to keep up to certain allotted dollar amounts of assets that they may “exempt” from the bankruptcy estate. This means the Chapter 7 debtor will be allowed to keep such exempt assets after the bankruptcy case is closed. So, in this post, I’d like to address the all-important question of how to determine how much your assets are actually worth? Read More »

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What Is the Difference Between Avoiding a Junior Mortgage Lien and Discharging a Mortgage Loan in California Bankruptcy?

Difference Between Discharge of Second Mortgage and Lien Stripping in California BankruptcyDepending on whether they are eligible for Chapter 7 bankruptcy or Chapter 13, homeowners who file bankruptcy in California with more than one loan secured by a deed of trust (which include home equity lines) may get very different types of debt relief when it comes to their second mortgage. Upon obtaining a bankruptcy discharge under either chapter, a California homeowner can rest assured that his recourse second mortgage loan will never be able to sue him. This is not the same thing as removing a second lien from the property, however. To understand this distinction requires some explanation of California deed of trust and foreclosure law.

Because residential foreclosures in California are nearly always “nonjudicial” foreclosures (really trustee sales) conducted by the servicer or trustee of the first mortgage lender, California’s anti-deficiency rule prohibits that lender from suing the homeowner for any balance still owed after foreclosing (a “deficiency judgment”). In other words, California homeowners who suffer a foreclosure are generally safe from further collections at least from their first mortgage lender even without filing bankruptcy. Read More »

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Keeping Student Loan Interest Rates Low Is Good, But What We Really Need Is to Reform the Law to Allow Discharge of Student Loans in Bankruptcy

Student Loan Debt Ought to Be Discharged in BankruptcyIn my last post, I noted the fact that Americans are now saddled with over $1 Trillion in student loan debt, more than all of us combined owe to credit cards. And as I also wrote, Congress has made it next to impossible to discharge student loans in bankruptcy. To be discharged in bankruptcy, the debtor must prove that repaying student loans will impose an “undue hardship” (a legally opaque standard). This standard used to apply only to government backed student loans, but the 2005 BAPCPA changed this rule to likewise make private student loans nondischargeable except in the most extreme cases where debtors can prove present, and likely permanent, poverty. By placing the burden of proving the likelihood of future poverty on the bankruptcy debtor, this imposes an enormous chilling effect on debtors seeking debt relief from student loans because the debtor, who is already in bankruptcy, has to be able to afford to litigate this issue with the student loan lender. The absurd result is that it is easier to obtain a bankruptcy discharge of back income taxes owed to the federal government than it is to discharge private student loans owed to Citibank.

Keeping the present interest rate at 3.4% for federally subsidized Stafford loans rather than allowing that rate to double to 6.8% in July, will not prevent the coming crisis in student loan defaults. That won’t happen without amending the Bankruptcy Code to offer a common sense approach to debt relief from student loans for a greater number of bankruptcy debtors. But keeping the interest rate low on federal student loans will help curb student loan debt balances from ballooning even further than they otherwise will if the rate is allowed to double. Read More »

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The Bankruptcy Code’s (and the Courts’) Treatment of Student Loans Is the Gift to Lenders That Keeps on Giving

Discharging Student Loan Debt in California BankruptcyIn 1976, Congress amended the Bankruptcy Code to make government backed student loans nondischargeable in bankruptcy unless the debtor could prove that being forced to repay her student loans would impose an “undue hardship.” This exceptional treatment of student loan debt ran counter to the general principle of bankruptcy law to favor a fresh start for the debtor and constituted special, preferential treatment for student loan lenders. In fact, this change was a solution in search of a problem, as the congressional record from the time shows that Congress was relying on just a few anecdotes of perceived abuse by students who had never attempted to repay their loans and ignored the empirical evidence then supplied by the General Accounting Office that less than one percent of student loans had previously been discharged in bankruptcy.

In 2005, when Congress passed the sweeping pro-creditor changes to bankruptcy law contained in the BAPCPA, Congress made even private student loans nondischargeable without a showing of “undue hardship.” This subversion of the Bankruptcy Code’s favoring of discharge of prebankruptcy debts was nothing but a shameless giveaway to the private student loan industry, according student loan lenders special treatment not given to any other type of creditors. Moreover, because “undue hardship” was never defined by Congress, the bankruptcy courts were left to create their own judicial test for what constitutes “undue hardship” sufficient to discharge student loans. Read More »

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