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Creditor in Bankruptcy

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If you are owed money and the person or business that owes you the money filed for bankruptcy you are a creditor in bankruptcy. You need to pay attention to the mail you receive and mark the various deadline on your calendar. You should seek counsel of bankruptcy lawyers in your area as well for more detailed information about the bankruptcy process. A common problem is how much should be spent trying to collect a debt now that the person or business has filed for bankruptcy protection? The answer is it depends. For the most part few creditors in bankruptcy participate in the process. It just costs too much to pay an attorney to monitor or participate in the bankruptcy case and get nothing from the bankruptcy estate in return.

The automatic stay becomes effective as soon as the person or business files their bankruptcy petition. You may not take any further collection action without permission from the bankruptcy court. So what now?
The first issues is what chapter of the Bankruptcy Code did the person or business filed under? If a chapter 7 case was filed then the likelihood of payment from the bankruptcy estate is unlikely. If the person or business filed a reorganization bankruptcy under Chapter 13 or Chapter 11 payment from the bankruptcy estate of some amount is likely.
The second issue is whether this is a business debt or a personal debt that is owed. If the debt is for the sale of goods to a business you may have additional rights such as reclamation. Reclamation rights belong to creditors to take back goods already sold to the business that has filed bankruptcy and not paid for the goods. There are specific time periods regarding reclamation.

If there are assets to distribute to creditors you will be asked to file a proof of claim. The proof claim provides the amount owed and why, with documentation attached to the proof of claim to prove the amount owed and why. In a chapter 11 or chapter 13 you may have to object to confirmation of the plan of reorganization. If you are not being treated properly based upon your type of claim or debt you need to objection to confirmation. Your objection will either be overruled or sustained.

If the case is a no asset no bar date Chapter 7 there is really nothing for you to do unless you believe you were the victim of fraud or some other argument to not have the debt discharged. You will need to hire bankruptcy attorneys to file an adversary proceeding on your behalf and argue the debt owed to you should not be discharged.

Discharge Taxes in Bankruptcy

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What happens if you owe taxes and you need to file for bankruptcy? Are taxes dischargeable in bankruptcy? Taxes can be discharged depending upon the circumstances. The general rule is that if prior to filing bankruptcy the taxes are due more than three (3) years ago, or the return was filed more than two (2) years ago, and the taxes are assessed more than 240 days prior to the filing of your bankruptcy case (assuming the taxes were not filed fraudulently) should be dischargeable in your current bankruptcy case.

Like any tax law there are some limitations and exceptions to this general rule. Make sure the bankruptcy lawyers you seek counsel from obtain your tax transcript from the Internal Revenue Service. There are certain activities that may stop the clock from ticking and therefore may keep you from getting that discharge in your bankruptcy case. These activities that stop the clock are called “tolling provisions.”

Assessed 240 Days Prior to Filing Bankruptcy

One of the tolling provisions is if there is a pending Offer in Compromise with the taxing authorities. The time that the Offer in Compromise is in consideration stops or “tolls” the 240 day assessment requirement plus an extra 30 days. That means that the tax will not be dischargeable until at least 270 days after it was assessed, including the time that the Offer in Compromise was on the table. If you were paying your taxes through an installment agreement you do not have to worry. The time you are in the installment agreement does not count against the time period for dischargeability of taxes. If you have filed a previous bankruptcy petition that prevents the collection of the taxes, so the 240 day assessment period is tolled and an additional 90 days is added on top of the 240 days.

Due More Than 3 Years Prior to Filing or Filed More Than 2 Years Ago

The three year rule includes any applicable extension periods. For example, if you owe taxes for 2001 tax year, the taxes are due April 15, 2002. These taxes will not be eligible for discharge until April 15, 2005 (3 years from the time the taxes are due). If the date the taxes are due falls on a weekend, then the taxes will be due the next business day. This may mean that taxes are sometimes due on April 16 or April 17. If you are provided with an extension then your taxes will not be due until October 15, 2002 and your taxes will not be dischargeable until October 15, 2005. A bankruptcy filing will also toll the three year rule.

However, it is very important to make a distinction of whether the bankruptcy filing actually stayed the collection of the taxes. If you filed a Chapter 13 bankruptcy case and owed taxes prior to filing the bankruptcy the taxes are included in the Chapter 13 plan. The taxing authority is therefore prevented from collecting against you. If the Chapter 13 case is dismissed for any reason and you file a subsequent bankruptcy you need to remember that the while the taxes were in the Chapter 13 plan the time is tolled. The time you are in the Chapter 13 is not added as part of the three years. If you filed a Chapter 13 bankruptcy case but for whatever reason your tax debts were NOT included in the Chapter 13 plan (for example, if you filed your bankruptcy case and then owed taxes for the years after the Chapter 13 plan was confirmed), the taxing authority was not prevented from collecting the taxes from you because the estate property revested in you upon confirmation of your Chapter 13 plan. See In re Jones, (No. 10-60000, 9th Circuit, 2011). You need to make sure you ask the bankruptcy lawyers in your jurisdiction about whether property of the estate revests in you the debtor. Different jurisdictions have different Chapter 13 plans and not all revest property of the bankruptcy estate in you the debtor upon plan confirmation.

Small Business Bankruptcy

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If you own a business, sole proprietor, a corporation or an limited liability company you can still file a personal bankruptcy case or a small business bankruptcy. There are a number of issues to address and this article touches on some of the most common. Speak with an experienced bankruptcy lawyer in your jurisdiction for more information. Different jurisdictions do have different practices.

In the Northern District of California when filing a chapter 7 bankruptcy, just like many other jurisdictions, the trustee assigned to your case can take over the business and operate it. It is rare though. If the business is worth quite a bit of money and is making money you most likely do not need to file bankruptcy anyway. The value of the business and the business assets are an issue that needs to be discussed at length. Valuing a business can be very difficult and there are a number of different ways to determine a value.

For sole proprietors the filing of a Chapter 7 case should be the least complicated. Assuming the business does not have significant assets and the income it is producing is not very much filing a Chapter 7 bankruptcy should not be too complicated. The California Wild Card exemption should be enough to protect the assets along with the tools of trade exemption.

If you own a corporation or limited liability company it becomes more complicated given that you are separate legal entities. If the only owners are you or your spouse and you are taking a distribution or income you should have w-2’s to document your income. Again the valuation becomes an issue.

If the value of your business is somewhat significant and it is producing decent income a Chapter 13 bankruptcy may be the best choice to allow you to continue to operate the business and get rid of some or all of your debts depending upon the circumstances of course. In a Chapter 13 a liquidation analysis must be made and if your business is worth more than what can be protected then that is your obligation to your creditors. The obligation is paid over three to five years in the chapter 13 plan of reorganization. Again, this is article touches on basic concepts regarding filing bankruptcy when you are operating a business or own a corporation or limited liability company. Please consult a bankruptcy attorney in your jurisdiction for more detailed information about your specific circumstances.

What Do Debt Collectors Pay For Debts

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This is one of the most common questions we are asked by potential bankruptcy clients. Once financial problems make paying credit card companies each month the likelihood of the debt being sold or transferred to a debt collector or collection agency are high. So what do debt collectors pay for debts?

In January 2013 the Federal Trade Commission issued a report about the collection agency industry. The FTC is trying to obtain information about the process of buying and selling debt. The report is entitled “The Structure and Practices of the Debt Buying Industry.” The average amount paid for debts by collection agencies is $0.04 per dollar of debt. So if you had a debt of $15,000 owed on a credit card and it was purchased by a debt collector, the debt collector would pay on average $600.00. The older the debt the less was paid and conversely the new the debt the more that was paid. Keep in mind that the statute of limitations for breach of contract is four years in California. Please consult your state’s statute of limitations for breach of contract claims.

The FTC further says in the report that collections agencies typically received the information required to validate a debt pursuant to the FDCPA. Debt collectors also received or were likely to receive the name of the original creditor which a consumer is entitled to know upon request pursuant to The Fair Debt Collection Practices Act.
According to the study if a debt was disputed as not owed only 2.9% of these disputed debts were then resold to another collector.

One of the most interesting sections of the report discusses time-barred debts. What is a time-barred debt? It is a debt that the statute of limitations for enforcement has run out. This means that you cannot be sued to be forced to pay the debt and the debt is therefore unenforceable. So this begs the question of why does a collection agency attempt to collect on a time-barred debt? Unfortunately most collection agencies do not disclose that they do not have the right to sue and they try and get you to make a partial payment. Once you make the partial payment this revives the statute of limitations on the whole debt. The FTC says that a debt collector should disclose that they do not have the right to sue and that any partial payment will revive the statute of limitations. I have never heard of a collection agency making honest disclosure such as this. I have heard story after story from clients and potential clients about misleading or false statements to fool people into making payments on defaulted debts.

Secured Debt and Bankruptcy

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A common question is can I keep my house or my car when filing bankruptcy even though I still owe money on the loan? The answer is definitely yes. Just keep making the normal payment you have always made each month and you should keep the collateral, the vehicle or house.

But what about things like a motorcycle, an ATV, a travel trailer, an airplane or motor home? If you are current on the payments for the loans you should be able to keep them when filing a Chapter 13 bankruptcy case. The Ninth Circuit Court of Appeals made it clear that these secured debt payments are not within the courts discretion to determine whether they are reasonably necessary or not. See In re Welsh (No. 12-60009, 9th Circuit, March 25, 2013). The Welsh’s owned a house, three cars, 2 ATVs and a trailer. Given this decision bankruptcy lawyers can now provide clearer counseling to clients.

The Chapter 13 trustee reasonably and understandably argued that the Welsh’s were making payments on luxury items not reasonably necessary for the maintenance and support of the Welsh’s or their dependents. The key here is that the Chapter 13 Statement of Monthly Disposable income or Means Test is governed by §707(b)(2) of the Bankruptcy Code. Section 707(b)(2) does not limit the amount of secured debt payments that reduce a debtor’s disposable income. Line 42 or Form 22C, Chapter 13 Statement of Disposable Income, lists the long term secured debts deducted from a debtor’s disposable income. The secured debts are listed in Schedule D of the bankruptcy petition.
The Ninth Circuit Court of Appeals held that if Congress wanted to limit the amount of the secured debt a debtor could have they would have provided language for it in Section 707(b)(2). So, if your monthly mortgage payment is 70% of your monthly income and therefore you have no money left over after living expenses for your credit card companies that is okay. If you are single and have two car payments, two ATV payments and a motorcycle payment is that okay too? You are single and need all of these toys? According to the decision in In re Welsh it is not bad faith to continue to make regular payments on secured debts.

It is still possible that a trustee could attempt to object to confirmation of the chapter 13 plan under other grounds. Make sure that you fully disclose your income expenses and assets to your bankruptcy attorney so they can give you the best possible advice.

Should I Pay A Collection Agency?

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The question, “Should I pay a collection agency is?” is a common question. There is no easy answer though. A collection agency purchases a debt, is transferred or assigned the debt for collection from original creditor. How much they paid for the right to collect the debt or how of the debt are they entitled to is always a question. Generally most collection agencies want to obtain some sort of payment for as little work as possible.
What is as little work as possible? Well there are many reputable collection agencies that do not resort to violating the FDCPA (Fair Debt Collections Practices Act) when attempting to collect a debt. They do not call you at every hour of the day or threaten to put you in jail.

Unfortunately there are quite a few that use harassing phone calls and intimidation tactics to try and make you pay. You can sue a collection agency for damages if they violate the FDCPA. You can receive up to $1,000 in statutory damages plus attorney fees and costs. You may also receive damages for emotional distress, lost wages, loss of consortium and punitive damages.

There are many violations of the Fair Debt Collections Practices Act. Collection agencies should not call you before 8:00 a.m. and after 9:00 p.m. They cannot harass you by calling you continuously all day. No contact should be made with a third party disclosing that you owe a debt to them. A collection agency can contact a third party to ask about your location and nothing more. After the initial contact with the third party the third party should not be contacted again to ask about your whereabouts. If you receive calls at work and then tell the collection agency that you are not allowed to receive calls from them at work they should not call back. Disturbing you at work is not only embarrassing but can lead to termination of employment if you productivity is significantly affected.

A debt collector cannot belittle you on the phone or lie to you to induce you to make a payment. The truthful and hones collection of a debt is always allowed, but deceptive collection practices are not. You will know when a debt collector is not speaking to you correctly or doing something the is against the law. You will feel it. Give us a call toll free at 1-877-963-9543 to discuss your circumstances and determine if you have a claim for damages.

Do I Need a Bankruptcy Lawyer?

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The short answer is it depends and the long answer is it is always a good idea. Yes, we are bankruptcy lawyers, but that does not mean that this article just advocates the use of an attorney for that reason alone. Please keep reading to learn why.

First and foremost you are just not familiar with the process and do not do it every day. We do. There are changes to the law and procedure all the time. How things are done or what the trustee assigned to your case requires is different from jurisdiction to jurisdiction and trustee to trustee.

When a Chapter 7 bankruptcy petition is correctly drafted and all requirements are met for you to obtain a discharge of your debts it may look like your attorney did not do too much. In my firms case that is far from the truth. We do our due diligence and the majority of the work before your case is ever filed to make sure once the case is filed there are no issues, which may make it look easy.

It is possible to navigate the filing of a basic no asset Chapter 7 bankruptcy case on your own. If you make no money and own nothing it should be difficult to financially harm yourself. Keep in mind that you do not have the absolute right to dismiss a Chapter 7 case once it is filed. If a problem arises and you think you can solve it by asking the court to dismiss your case think again. You will be searching fast and furiously for a bankruptcy attorney to help when the trustee assigned to your case requests that you turnover money in your bank account or your car. The Chapter 7 trustee or their attorney is not on your side and will not tell you what is in your best interest or assist. You will be on your own. That recently cost a person who filed a Chapter 7 on their own about $17,000 that should have been protected in their bankruptcy case. But they did not know that and you cannot go back sometimes once the case is filed and change things.

If you do not qualify to file a Chapter 7 bankruptcy case you will almost always need to hire an attorney to help you with your Chapter 13 reorganization or Chapter 11 reorganization. Most Chapter 13 trustee’s will require you to obtain counsel because it is not their job or their staffs job to make sure your plan of reorganization satisfies the requirements to be approved or confirmed. The odds of you navigating the Chapter 13 process without a lawyer are slim to none in the Northern District of California anyway. It is possible that in other jurisdictions the Chapter 13 trustee’s take the time to help pro se filers with their cases. That is not their job though.

All in all it is always a good idea to hire counsel that has experience in the area of law you need assistance with. There are many firms like ours that offer reasonable fees and provide you with personal service.

Are You Upside Down on Your Rental Property?

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If you have a rental property in California or another state and you are upside down on the mortgage or the rental income is not enough to pay the mortgage bankruptcy can help. When filing a consumer Chapter 13 bankruptcy case the primary mortgage on the filer’s principal residence cannot be modified. This is not true of the bankruptcy filer’s rental property.

When you file bankruptcy to reorganize your debts you can cram-down a loan to the fair market value of the collateral. So if you purchased a rental property or vacation home in 2007 for $150,000 in Texas and the value is now only $70,000, you do not have to pay the $150,000 of the original loan, but the $70,000 the house is now worth. How does this work? Pursuant to section 506(a) of the bankruptcy code the loan is only secured up to the value of the collateral. If the house is only worth $70,000, then that is the amount the loan is secured by and that is what you have to pay back in the Chapter 13 plan over five years. $70,000 divided by 60 months equals a payment of at least $1,166.67, plus the Chapter 13 trustee fee and attorney fees.

You get the picture though. What a significant savings and you can own the property outright in five years. The problem that comes up most of the time is that the Chapter 13 monthly payment is too high for most people to make. In California, and the Bay Area specifically, there are almost no properties worth less than $200,000. A rental property or vacation home in the Bay Area would have been purchased for $650,000 and is only worth $500,000 today. Well $500,000 divided by 60 months is $8,333.33 per month. But it is possible. Most people do not choose to file a Chapter 13 bankruptcy case to just cram-down the mortgage on their investment property or vacation home though. There are usually other financial difficulties going on that make reorganizing their debts like this not possible.

Whether a motion to value is filed with the bankruptcy court or an adversary proceeding is filed to determine the value of the house, the bankruptcy court will have to sign an order or enter a judgment stating the value of the property. It is also possible to enter into a stipulation with the bankruptcy attorney representing the mortgage company regarding the value of the house. This would be unlikely though. It is more likely that the mortgage company will fight and try and prove the house is worth significantly more than what you believe the house is worth. An evidentiary hearing or trial may have to be held to determine the value of the house.

The largest benefit bankruptcy lawyers can provide residents’ of California is possibly cramming down on a rental property they have in another state where the home values are lower. Many states across the United States have homes that are not worth more than $200,000. These clients are few and far between, but helping someone keep their rental property for future generations is always a worthy cause.

The City of Stockton’s Position Regarding Qualifying to File Chapter 9 Bankruptcy

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The single most important issue in the City of Stockton’s Chapter 9 bankruptcy case at the moment is whether Stockton is eligible to be a debtor under Chapter 9 of the Bankruptcy Code. Assured Guaranty Corp.’ bankruptcy lawyers have mounted a pretty good case as to why Stockton is not eligible. Stockton’s bankruptcy attorneys continue to fire back though.

The City of Stockton Fires Back

On February 15, 2013, Stockton filed its Reply to Objections to its Statement of Qualifications Under Section 109(c) of the United States Bankruptcy Code. The three issues are: (1) whether Stockton was insolvent at the time the petition was filed; (2) did Stockton act in good faith during the AB 506 process and generally by failing to seek pension concessions and/or additional concessions from the members of its nine unions and retirees; (3) did the City’s 790-page Ask produced for and during the AB 506 process satisfy the good faith negotiation requirement of Bankruptcy Code § 109(c)(5)(B)?

Was Stockton Insolvent?

The argument is that Stockton could have or should have done a number of things and then it would not have been insolvent. While that might be true, hindsight is always 20-20. Stockton argues that as a matter of law a third-party, such as Assured Guaranty, Corp., is not legally relevant. Of course Stockton could have fired 90% of their employees and stopped providing essential services and then be able to pay bills as they came due.
Did Stockton Act in Good Faith During the Neutral Evaluation Process?
Stockton believes it did act in good faith. They point out that they reduced the city workforce to levels that made delivering basic levels of service near impossible. They also have reached concession agreements with all nine labor unions and reduced pay and employment benefits. Stockton believes that making or requesting additional reductions would make seasoned veterans, particularly police officers, seek employment in other cities. They go no to point out Stockton is not the safest city. While this seems to be a valid concern, what counties or cities are really hiring new employees right now? Not many. At the same time, how can decisions to try and preserve the workforce be determined to be not in good faith?

The City of Stockton Made Significant Cuts

Stockton reduced its general fund by 36% of three years prior to filing for bankruptcy protection. It reduced non-public safety staffing by 43%, reduced sworn police officers by 25% even while violent crime was increasing and reduced fire staff by 30%. Stockton argues it aggressively negotiated and reduced the above-market compensation it chose to give employees in earlier years and now offers compensation at below market rates. What markets are they comparing themselves to is the question though? They also provide they closed senior centers and reduced recreation classes, after school programs and library programs, reducing library hours by 48%, did not replace city vehicles and used them beyond their useful lives and deferred maintenance of roads and city buildings.

Stockton Hired A Professional to Provide a Second Opinion

In February 2012 Management Partners came to the conclusion that Stockton was insolvent and the city could no longer provide services at the appropriate level. Management Partners also came to the conclusion that additional reductions in expenses would have to take place. Assured argues that Stockton could have increased revenues by raising taxes. Stockton addresses this by countering the cities accounting irregularities and perceived or actually mismanagement would make tax increases unsuccessful.

Stockton adamantly believes that Chapter 9 was the only viable option for the city to stop the bleeding and continuous cuts in city programs and staffing. The trial on these issues begins March 26, 2013, and is supposed to last four days.

The Latest in the City of Stockton’s Chapter 9 Bankruptcy Case

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The single largest issue in the City of Stockton’s Chapter 9 bankruptcy case is the cities qualification under section 109(c) of the bankruptcy code to be a debtor. The City has filed its Statement of Qualification. In my previous blog articles I discussed the various arguments by parties in interest as to why the City faces challenges proving it qualifies to be a debtor and obtain relief under the Bankruptcy Code. Assured Guaranty Corp. (“Assured”) is definitely leading the charge. Assured has guaranteed bonds issued by Stockton and does not want to allow the bankruptcy court to allow Stockton to not have to pay the bonds back in full. If that happened then Assured would be on the hook to satisfy the bond holders. On December 14, 2012, Assured’s bankruptcy lawyers filed a supplemental objection to the City’s Chapter 9 petition and statement of qualifications.

The supplemental brief is a scathing analysis of events leading up to Stockton’s bankruptcy filing. To recap, Stockton must prove that it was insolvent under pursuant to 11 U.S.C. § 109(c)(3); (ii) has satisfied the negotiation requirement contained in 11 U.S.C. § 109(c)(5); (iii) has negotiated in “good faith” under Cal. Gov’t Code § 53760.3(o), which is a requirement for specific authority under Cal. Gov’t Code § 53760(a) to be a debtor under 11 U.S.C. § 109(c)(2); and (iv) has filed its petition in “good faith” under 11 U.S.C. § 921(c). Cal. Gov’t Code § 53760 was passed by the California legislature to force California municipalities down two paths before filing for bankruptcy protection. A municipality can either declare a fiscal emergency or participate in the neutral evaluation process before filing for bankruptcy protection under Chapter 9. Stockton chose the neutral evaluation process and it has caused the city nothing but problems since. Assured is using Stockton’s participation in the neutral evaluation process against them now that Stockton is trying to prove it qualifies to be a debtor under Chapter 9 of the bankruptcy code.

Back to the supplemental objection filed by Assured. Assured argues that Stockton purposely to budget itself into not being able to pay a few bills on time in an attempt to show it was not paying its bills as they came due. Assured also argues that Stockton has not changes its ways regarding spending. It appears Stockton is still paying millions to subsidize entertainment venues that are non-essential. Prior to filing for bankruptcy protection Stockton’s Chief Financial Officer direct the various departments to reduce general fund spending by identifying ways to cut costs by 5%, 10% or 15%. Each department head submitted ways to cut costs but Stockton’s city manager did not recommend the cuts the city council did not adopt any of the cuts. Stockton then initiated the neutral evaluation process to try and negotiate with debt holders. Why did Stockton not adopt the cuts suggested by its department heads?

As pointed out before the single most significant factor in Stockton’s financial problems is how it compensated employees. The most egregious was the medical benefits for retirees. Retirees enjoyed free medical care for themselves and a dependent for life without any co-pays or premiums. This just simply does not exist in the real world. Especially not for all the other hard working citizens of Stockton who do not work fo the City of Stockton.
Assured also argues that Stockton failed to seek additional revenue sources to prevent revenue shortfalls prior to bankruptcy. Assured argues that the City has not sought to increase taxes, has not charged for reimbursable services and not evaluated its saleable property.

Assured further argues that Stockton cannot prove it was insolvent as of the bankruptcy filing date given that Stockton’s record keeping and internal controls were so poor. Apparently the CFO in September 2011 called Stockton’s record keeping grossly negligent and California’s State Controller has launched an investigation into Stockton’s record keeping.
Assured’s supplemental brief provides many concerning alleged financial practices by the City of Stockton leading up to the bankruptcy filing. The hearing on Stockton’s qualifications to be a debtor under chapter 9 is actually today, February 26, 2013, at 1:30 p.m. It will be very interesting what arguments Stockton’s bankruptcy attorneys make to explain Assured’s allegations.