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.
***
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
