The Business of Bankruptcy

                On September 9, 2013 I spoke at the monthly meeting of the Mount Vernon Business Women’s Club about bankruptcy.

                The person who invited me, Marilyn, was my wife’s boss for many years before she retired and is also a good friend of both of us. I said I would be happy to speak at their meeting. Considering the audience, we decided the topic should be about how bankruptcies affect businesses.

                Here is a transcript of the speech from my notes with details filled in and some details changed for a wider audience (“In my district courthouse” replaces “In Benton”, that sort of thing). I hope you enjoy it.

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                As a business owner, bankruptcy can affect you in three ways: as a creditor, as an employer and as a debtor.

                Of the different types of bankruptcies available, there are three that you would see – the Chapter 7, Chapter 13 and Chapter 11.

                They are called that because the Bankruptcy Code is just like any book – it is divided into chapters, 1 … 2 … 3. And the Chapters that involve individuals are 7 & 13. Why 7 & 13 and not 1 & 2, who knows, that’s just the way it is laid out.

                Chapter 7 is what most people think of as bankruptcy – a liquidation of all unsecured debt. These are credit cards, medical bills, back utilities, book clubs, record clubs, finance company loans, bad checks, and cash advance businesses. Unless you’re in the business of giving loans to customers in exchange for collateral, debt owed to your business is unsecured debt.

                Chapter 7 lasts for 90 days. From the time of filing until it is finished, 90 days pass.  At the end of those 90 days the debtor receives a discharge and all of those unsecured debts are discharged.

                As for secured debts – where I have a lien on my house or car – I can either reaffirm with the bank and keep paying for the collateral or surrender the collateral. Banks usually will allow me to do that if I am current.

                Some bills survive bankruptcy – taxes, student loans, and child support – government-ordered debt. The federal government is saying, “We’ll forgive all debt you owe except for debt you owe to us.”  I would doubt any of your accounts receivable would qualify as that kind of debt.

                Chapter 13 is a consolidation of all debt into one payment. It includes all debt owed – even vehicles – except for your house payment if you are current. Otherwise the bankruptcy payment has to include that as well.

                Chapter 11 – I do not do Chapter 11s although the senior partner of our firm does once in a while – is similar to a Chapter 13 but it is for corporations or individuals who owe about $260,000.00 in unsecured debts.

                Corporations or LLCs cannot file Chapter 13. Only an individual or an individual doing business as can.

As a Creditor:

            You will receive notice in the mail that a customer/client/debtor has filed for bankruptcy in any of the available Chapters.

                At that time, all collection activity must cease. It’s called a “stay”. It’s automatic. Boom. No questions asked. Stop the collection. You might dispute the dischargeability of your debt, but that is an argument for another time. Right now, stop collecting it.

                To avoid anti-dun letters or even sanctions, contact your collection agency, department or individual in charge of trying to collect the debt and get it stopped. Press whatever button you need to press on your computer to stop that bill from being mailed out.

                You don’t have to write the bill off entirely – wait until you get the letter from the court discharging the debtor. If for some reason the bankruptcy is dismissed or the discharge is set aside, your debt is “revived” and you can go back to collecting it.

                A bankruptcy can be dismissed for several reasons – usually because the debtor has done something wrong.  He doesn’t qualify because he had filed before or his income is too high. He may have failed to appear in court or failed to provide the Court the documents required.

                You can dispute and fight someone’s discharge – if they wrote a bad check or if they committed fraud against you. It’s hard to do, and you should discuss the possibility with an attorney. And I don’t mean fraud in that someone left off a credit card on their application. I’m talking about if they said their income was double what it really was.

                But you will have to prove you had the wool pulled over your eyes to win. The first thing the court will ask is “did you pull a credit report? Was the missing credit card on there? Did you ask for paystubs? Didn’t you notice his income was substantially lower than what he said it was?”

                Here’s a tip – if he just got a loan from you five days before filing bankruptcy; unless there was a change of circumstances in between (he lost his job, his family went to the hospital), odds are he was insolvent when he got the loan and was considering filing bankruptcy when he was in your office.

                Sometimes if the Chapter 7 Trustee (this is the person in charge of investigating the facts of the case to make sure the person qualifies for the discharge of his or her debts) has an asset to sell you will be notified to file a claim.

                A Chapter 7 liquidation is not only the liquidation of debts but also liquidation of assets. If someone has a luxury item or property they do not need – a boat, a piece of land, a third car, expensive collections of coins or guns or comic books – those things can be liquidated and the cash from the sale will be disbursed to the creditors for one last payment. But to get any money, you have to fill in and file the claim form provided.

                It’s a simple form. Fill it in, mail it to the court, and send a copy to the Debtor’s attorney and you you’ll get a few bucks. You may have to file it electronically, which will mean a trip to the courthouse. Ask the clerks for help. That’s what they are there for.

                “It’s not worth the time and postage.” I don’t think that’s true, even if it only gives you a few dollars.  But I’m cheap that way…

                In Chapter 13, you will also be notified to file a claim. You will probably get substantially more than you would in a Chapter 7, so it is worth preparing the claim and sending it to the court and Debtors/counsel. It is possible after five years you will get a few dollars, if any at all. With the time-value of money it is easy to repeat, “It’s not worth the time and postage.” Five minutes to fill in the form, a stamp or a trip to the courthouse. If you complain about the gas spent, do something else during the trip to the courthouse. In my district the courthouse is next door to a wonderful city museum. See the radio DJ booth George Harrison visited in 1963.  See the jail cell of the last man hanged in Illinois – my grandfather was there and watched it.

                You should not send the Debtor a 1099 for the unpaid debt – a debt discharged in bankruptcy is not taxable income. It is not a forgiven debt. That IS a waste of time and postage.

                You can write it off as a loss. If you have insurance (most credit cards have bankruptcy insurance), you can submit a claim.

                The only thing you cannot do is try to collect the debt from a discharged debtor.

As an employer. 

                You’ll probably never know that your employee has filed a Chapter 7 unless his wages are being garnished.

                If an attorney knows what he is doing he will fax you a notice of the bankruptcy as soon as it is filed and ask you to stop withholding the funds. If you have already given the funds to the judgment creditor; that is nothing for you to worry about. If you are still holding funds and don’t know what to do about it – you can ask for a court order, you can call your attorney, the attorney for the creditor, the attorney for the debtor. “I’ll give this money to whoever the court tells me to…” Generally, though, if you stop the garnishment when you receive the notice of filing bankruptcy, you’ll be fine.

               

                An employer will receive notice if the employee does a Chapter 13.

                If you are employed the Chapter 13 payment comes directly out of your paycheck.

                The employer will be mailed a notice from the court to withhold a certain amount per month from this person’s paycheck. You should try to do it but if you simply cannot don’t worry about it. It is ultimately the responsibility of the Debtor to pay the Chapter 13 payment, not the employer.

                The withholding is an allotment, not a garnishment, so avoid assessing points against an employee or charging processing fees. You can do it, but … shame on you.  It would be best to simply not withhold it. If a Debtor’s attorney calls and asks why it isn’t being withheld, be honest: we don’t have the wherewithal to do that sort of thing; I don’t want to be responsible for any misplaced checks sent out, etc.

                If you do assess points or charge a fee the Debtor’s attorney will likely ask for direct payment and the court in this district is good about granting that. So, hey, maybe it IS a good idea to assess points or charge a fee, your employee will ask the court for direct pay and you’re out of it. No, don’t do that. It’s best just to contact the debtor’s attorney (and your employee) and tell them you just can’t withhold it.

                And remember – 525(B)(1) – (3) of the bankruptcy code says you cannot fire or discriminate against someone for filing bankruptcy.  Any employment attorney will tell you to keep a long paper trail when firing someone. You don’t want them to say, “You fired me because I filed bankruptcy,” any more than you want them to say, “You fired me because of the color of my skin or my religion or my gender.”

                “No, we fired you because you were late five days in a row or stole from us…” Keep a paper trail!

               

                And just as a favor to me – don’t blame the employee for collection calls. 

                “I get in trouble when I get personal calls at work.” I hear that a lot.

                “Then don’t take the call,” I say, “tell whoever is telling you that you have a call to hang up.”

                Boss:  “You have a call.”

                Employee: “You said I can’t take personal calls at work.”

                Boss: “That’s right.”

                Employee: “Then why are you telling me?  Tell them I can’t take calls. Yell at them the way you are yelling at me now.”

                It’s silly.  Imagine how easy it would be to get someone you don’t like fired. You just keep calling his work anonymously and after a week they’ll fire him for receiving personal calls. You can clear a factory floor in a few months.

                Don’t blame them for calls. They’re not the ones calling.

As a debtor

                Chapter 7 will eliminate the debts, but will also likely eliminate the business. People or corporations file Chapter 7 to walk away from their business. Let the Trustee dole out who owns what collateral and who gets what from the liquidated assets of the company. That way, it won’t be your fault if someone gets more than their fair share – you’ve dusted off your hands of the whole ordeal when you signed the paperwork.

                Chapter 13 (for non-corporations) or Chapter 11 (for corporations) – keeps the business going. You pay a trustee or an administrator; the trustee pays your creditors. It’s never that simple but that is the basics of it.

                You file a Chapter 7 to close the business; a Chapter 13 to keep it going.

                Results may vary.  In any of the three circumstances – if you have any questions, do some research and then ask an attorney. It’s worth paying an attorney for advice to avoid confusion and aggravation. As a creditor or employer you can always call the debtor’s attorney. They will USUALLY help answer your questions as long as you are courteous about it. You can always consult an attorney of your own.

                There are not many books out there about bankruptcy. The ones that do exist give only the most general and basic information. This is because a lot of bankruptcy law, although federal, depends also on the state laws in which the bankruptcy was filed. Plus it also depends on the individual trustee and judges. Some require specific documents, such as bank account statements; some do not. No book can cover every Trustee and judge’s rules and rulings. It’s like the old joke – a good attorney knows the law, a great attorney knows the judge. It’s true – in that a “great” attorney knows what will work and what will not. What works in Tennessee will not work in Missouri. What works in central Illinois will not work in southern Illinois. What works in Benton will not work in East St. Louis.

                The closest thing to a pamphlet is the 342(b) notice. That’s just the section of the code that says we have to give this paper to every debtor. It explains each type of bankruptcy, although it’s a little dry. You can each have a copy if you wish.

                I thank you for letting me speak with you today. I hope it informed you as a business owner of your rights and duties and responsibilities under the bankruptcy laws. Thank you for inviting me.

               

                And I hope you enjoyed reading it too. As a bit of a disclaimer – ALWAYS consult an attorney before attempting anything mentioned above. If you try to rely on the information above to file a bankruptcy alone or to try to fight a bankruptcy as a creditor, you are a very silly person and I will laugh at you if you blame me or this speech if something goes wrong …

Copyright 2013 Michael G Curry