Bankruptcy Options (7,13)

The last resort?

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I’ve written about how some folks are drowning in debt. And, the methods one can employ to restructure one’s credit card bills.  of course, that process means you will no longer have any credit cards at your disposal.   (Unless you obtain what is called a secured credit card– where you provide $ 1000 deposit that “secures” your credit line of up to $ 1000.  In essence, you can use a credit card only up to the amount of deposit you have with the bank or agency that issued your card.)

But, that doesn’t always solve the underlying problems.  If my client’s business is really tanking, then almost everything they have and own is at risk.  Which usually means they will have to swallow a very bitter pill.  They will have to file bankruptcy.

Bankruptcy Options (7,13)

A business filing bankruptcy has basically two options- Chapters 11 and 13.  Chapter 11 means they’ve thrown in the towel and the creditors will scramble to get every penny they can to settle the debts of the firm- and that’s typically pennies on the dollar. (By the way, if the business owes the US Government money for unpaid PAYROLL taxes (that’s withheld federal taxes, social security, as well as Medicare withholdings [these are called “trust funds”]), there’s another surprise.  Those trust funds are never discharged in bankruptcy.  Oh, and anyone (and everyone) who has bank signatory authority is personally at risk.

A business that files Chapter 13 wants to keep operating.  This chapter would be chosen because a special circumstance has put the firm behind.  Think of a toy company that is now short cash (and probably will never be paid) because ToysRUs filed for bankruptcy and has screwed its suppliers.  Or, a firm that had loan and checking arrangements with a bank that was recently acquired and the successor bank considers the firm too small for its business.  Their loan is called in and the firm now has a severe cash shortage.  Firms in Chapter 13 develop a plan (some may have a trustee overseeing them, others may be the debtors-in-possession to continue the firms operations under the supervision of the Bankruptcy court), until they have proven to the courts that they can now operate in a profitable fashion.

Annual Filings, Personal Bankruptcies

Humans, on the other hand, basically have two choices- 7 or 13.  Chapter 13, like that for businesses, requires a plan- a repayment plan over five years to ensure that all your creditors receive some sort of repayment.  The repayment can range from about 25 cents on the dollar to 100% recompense, depending upon your income.  And, that means (if you can find one who agrees) that your attorney can be paid off via periodic payments and not an upfront fee. But, the dirty little secret (Sara Greene, Parina Patel, and Katherine Porter, Cracking the Code:       An Empirical Analysis of Consumer Bankruptcy Outcomes) is that only about 1/3 of the Chapter 13 debtors are able to maintain these payments over 5 years.  Which means they end up using the other chapter- despite all the payments they may have made over the last few years.  And, now, they are left with little assets (they can lose their home and their car, for example, when exiting bankruptcy via Chapter 7, as described below)

Chapter 7 is the individual (personal) version of Chapter 11- except folks filing for Chapter 7 have to prove they have no means of paying back any portion of the debt.  The ‘means test” is fairly simple (not if you examine the form the US Courts provide, though), and is based upon your situation vis-a-vis the median income in which you live.  If your income is significantly below the median earnings for your region, a Chapter 7 filing is readily acceptable.  Even if your income exceeds the median income, you may be able to manipulate your situation (special school expenses, repayment of 401(k) or IRA loans, the cost of health insurance, etc.) so you could still file Chapter 7.

Costs to File Bankruptcy

Amazingly, many folks who should file Chapter 7 don’t.  Because the legal fees (the cost for an attorney) for the process run from $ 1000 to $2000- and the potential debtor hasn’t got that kind of money readily available.  After all, they waited until the last minute- long after the handwriting on the wall was visible, and now the “hammer” is about to hit the “anvil”.

We have helped folks fill out the forms, answering their questions, making sure the application was complete, when this was the case.  Because Chapter 7 filers are allowed to appear pro se [as their own attorney].   But, many folks can’t get much help- and without having the money needed to file the proper chapter for their situation, they are forced to file Chapter 13, which gives them time to pay the attorney and filing fees.  And, now you are probably much less surprised to know why only 37% of Chapter 13 filers ever finish making their mandated repayments- they never should have been in Chapter 13 in the first place.  But, they couldn’t get the help they needed to file the more appropriate and cheaper Chapter 7 when they realized they were in trouble.

Upsolve Chapter 7 filing Progam

Legal aid clinics don’t handle bankruptcy, because of how complicated the process could be.  But, that predilection may be changing.  A new non-profit, Upsolve, initially conceived by a Harvard University student, may have the solution.  The firm (Rohan Pavaluri is the student, Jonathan Petts is the attorney, Kevin Moore is the computer programmer- these form the founding team) obtained its initial funding ($75K) after presenting their idea at a Harvard symposium.

(Of course, many lawyers are up in arms about this; they claim the bankruptcy process is too complex.  I could buy that claim if the price for filing a Chapter 7 wasn’t between $ 1K and $ 2K.  The law firms with whom we work typically would never consider a case complex when it earns such low fees.  No, they earn at least $ 10K, [more often it’s $ 250K or $350K] for their complex cases.)

Basically, using Upsolve means the individual answers a slew of questions (think of a home-based tax program) and those answers are used to populate the Chapter 7 petition.  (The courts term the bankruptcy filing a petition; you are asking for permission to walk away from your debts).  Moreover, the program will notify the individual if their situation is a little too complicated to let them file for bankruptcy using the program.  And, since Upsolve will now be offering this program via legal-aid (nonprofit) clinics across the USA, the clinics can review the documents for errors and provide advice- simply.

Upsolve hopes to have this ready for every state in the Union by 2019.

Roy A. Ackerman, Ph.D., E.A.


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