Bankruptcy: Debtor

What does each potential bankruptcy debtor want?  

Whether you want to file bankruptcy for yourself or for your business, all debtors want to eliminate their financial worries either by abandoning their current financial situation to a bankruptcy trustee or by improving their finances to get a new financial start

All Debtors want freedom from worry about:

–earning enough money to pay creditors.

–harassment from creditors attempting to collect their debt from you.

–losing their assets to pay creditors.

–their reputation since bankruptcy records are public.

–their financial situation during and after filing a bankruptcy, including access to credit

Who is the Villain?

  • For an individual, changes in one’s person life — such as divorce, job loss, judgment, an emergency (like a severe illness or injury), accidents, and mistakes can reduce a debtor’s cash flow to pay debts.
  • An individual may file bankruptcy to obtain forgiveness for his debts either all of them or only a portion of these debts.
  • For a Business any change that adversely and significantly affects your cash flow may require a bankruptcy to reorganize the business:
  1. an important supplier cuts you off;
  2. a significant customer leaves you;
  • Rival acquires your customer
  • Poor product quality
  • A better rival product
  • An external shock (oil embargo, government policy change, a strike in your supply  chain, terrorism, a legal judgment, accidents)
  • a recession;
  • input cost inflation cannot be passed on to your customers.
  • fraud

How does Madison Law guide the customer?

Madison Law, APC can guide you by advising you about the impact of a bankruptcy on your financial situation to resolve your worries and representing you in your bankruptcy case if you decide to file such a case. The bankruptcy code gives individual debtor’s exemptions to keep their assets, regardless of how much money a debtor owes.  These exemptions are not available for business entities.

If you have sufficient exemptions to protect your assets, then you would want to file a Chapter 7, which is a liquidation of all your non-exempt assets to pay your creditors.  If you do not have any non-exempt assets, then your creditors will be paid nothing and you will receive a fresh start financially by not having to pay them.  A Chapter 7 requires that you make no more than the median income for your geographic location as determined by the US Trustee.  This determination is called the “Means Test”.  A Chapter 7 case can take 3 months or longer, depending on how busy the Chapter 7 Trustee’s office and the bankruptcy court are.  The purpose of filing a Chapter 7 bankruptcy for an individual is to receive a discharge: a permanent court injunction to prevent any creditor from collecting any debt subject to the discharge.  Debt secured by collateral and taxes owed are not subject to this discharge usually and must be paid in full.

If you do not have sufficient exemptions to protect your assets and you make more money than the “Means Test”, then you would file either a Chapter 13 or a Chapter 11, depending on how much money you owed to creditors.  Many individual debtors qualify for a Chapter 13 by having regular income (any regular generation of cash that is paid to you) and roughly less than a million dollars in debts secured by collateral and roughly less than $337,000 for debts not secured by collateral (called general unsecured debts).  A Chapter 13 payment plan approved by the Bankruptcy Court is your new master repayment contract with all of your creditors and may permit you to pay your general unsecured  debts just “pennies on the dollar”.  These plans last from 3 to 5 years.  Under a Chapter 13, you keep all your assets.  This means you can cure any loan defaults and stop foreclosures on any property you own, such as your house or car.  You receive a discharge of your debts only after you make all of your Chapter 13 Plan payments.

For individuals that do not qualify for a Chapter 13, they have to file a Chapter 11, just like a business entity, which is discussed below.

Business entities are permitted to file a Chapter 7 to have the Chapter 7 Trustee appointed to the case to liquidate the assets of the business for creditors, if there are any.  Sometimes a Chapter 7 filing for a business is a signal to its creditors that there are not assets to collect a debt.  A business entity does not receive a discharge of its debts in Chapter 7.  An “Assignment for the Benefit of Creditors” (known as an “ABC”) is a creation under California law that acts as a Chapter 7 bankruptcy case and is a cheaper process than a Chapter 7 to liquidate assets to pay creditors.

A Chapter 11 case requires a debtor to confirm a plan of reorganization with its creditors.  The creditors who are eligible to vote on this plan have to be impaired (i.e. their legal rights are altered); otherwise unimpaired creditors are deemed to vote in favor of the plan.  Chapter 11 cases can take up to 3 years to complete from filing the bankruptcy to plan confirmation because the business needs to resolve its operating problems to generate sufficient cash flow to pay creditors under the plan.  If the business cannot generate enough cash to fund a plan, then the bankruptcy court will either convert the case to a Chapter 7 liquidation or require the debtor to sell the business or its assets in the Chapter 11 case.  A Chapter 11 plan can pay general unsecured creditors “pennies on the dollar” and still permit the debtor’s owners to keep their ownership in the business.  A Chapter 11 bankruptcy gives a business or an individual time to generate the money to fund a plan because the bankruptcy’s purpose is to reorganize businesses, not to terminate them.

Finally, both individuals and business entities are entitled to discharge their tax liabilities in bankruptcy cases.  If you have a tax liability that is at least 3 years old, please contact Madison Law, APC to arrange for a consultation to see if you qualify to have your tax liabilities discharged under bankruptcy law.

Take action now and contact Mr. Gardner to arrange for a consultation to determine if a bankruptcy can meet your needs and eliminate your worries.  A bankruptcy can transform your life from one of constant worry and anxiety to bring you a fresh start to achieve the financial future that you want.

Dixon Gardner, C.P.A., M.B.A., J.D.

Department Manager