First, it does make a difference whether the small business is incorporated.  If your small business is a proprietorship (i.e. "Tom Smith d/b/a Tom's Lawncare") then there is no way to separate personal assets and debts from business assets and debts.  In this situation, all debts are "personal" because the proprietorship does not have a separate identity from the individual.  All debts would have to be listed – for bankruptcy purposes in this situation, there is no difference between your personal credit card debt that arises from gasoline and grocery purchases and a credit card that you use for business purchases.

Assets of the proprietorship would be considered personal assets – assets that do not fit within the Georgia exemption statute would be at risk.

In a Chapter 7, if you have non-exempt assets you would have to surrender those assets to the trustee or offer to buy the "estate's interest" from the trustee (usually at a discount from fair market value).

Note that any receivables of the business or any other property with potential resale value (i.e. customer lists, pending contracts) could be claimed as estate assets.

In rare instances a Chapter 7 trustee could object to your small business bankruptcy using an "income suppression" argument.  This argument asserts that you should not be eligible for bankruptcy relief because you have intentionally suppressed your income by leaving a highly paid job or intentionally refused to maximize income opportunities.

If you are incorporated, the shares of your business are assets and you may very well be asked to justify a de minimus (i.e. $500) valuation that you put on those shares.   I see this issue frequently when clients own service businesses.  For example, I recently represented a client in an incorporated service business that had about $75,000 worth of equipment, but also had around $80,000 of credit card debt, $2,000 of tax debt and was behind on rent and facing a possible eviction.  What is the value of the shares in this case?   Is it $75,000 under the theory that the equipment was not subject to any lien and could be liquidated?  Is it zero under the theory that the business (and my client as personal guarantor) could be liable for a fraudulent transfer if it liquidated the equipment when the business was insolvent?  Or is the value somewhere in between zero and $75,000 using a compromise argument?

The income suppression argument described above also applies when the individual debtor's business is incorporated.  I have seen trustees take the position that a debtor with a certain level of education and training should make a reasonable effort to monitize that education rather than chase an entrepreneurial dream at the expense of creditors.

In the case of an incorporated business where the debtor has partners, the Chapter 7 trustee may become a replacement partner by virtue of his trustee powers and thereafter force a liquidation or a buyout.

I usually advise my clients who own small business clients that there is a possibility that the trustee may demand that the business close its doors and that they may have to find a new line of work.  This possibility is less likely if the business is a service business that does not involve hard assets or inventory, and more likely if there are business assets with value or receivables.

Needless to say there are a myriad of potential issues for small business owners who are thinking about filing a personal bankruptcy.  As always, you will benefit greatly by seeking counsel before your situation becomes critical.

Two of the protections provided by the FDCPA include:

• a prohibition against communicating with a debtor when the collection agency employee does not identify himself as a debt collector; and
• communicating about your debt with third parties

The 11th Circuit Court of Appeals (which provides controlling precedent for Georgia) recently issued an important decision that struck down a somewhat bizarre argument by a debt collector regarding phone messages.  This case benefits consumers by clarifying the rules about telephone messages by bill collectors.

The case of Edwards v. Niagara Credit Solutions involved a situation in which the debt collector (Niagara) left "bare bones" messages on a phone answering machine asking Ms. Edwards to call back about an "important matter."

Niagara argued that its employee did not identify itself as a debt collector because someone other than the debtor might hear the message, thus violating the "third party communications" prohibition.

The 11th Circuit rejected Niagara's argument, stating that it is not permissible to violate one provision of the FDCPA in order to comply with another provision.   The Court further noted that the FDCPA does not guarantee a debt collector the right to leave answering machine messages.

What does this mean to you?  If an unknown party leaves you a message asking that you call about an "important matter" you should save the message and contact a lawyer knowledgeable about FDCPA actions.   If a debt collector leaves you a message and identifies himself as a representative of a collection agency or otherwise discusses a debt that you may owe, save that message as well.  You may have a cause of action for damages.

Here is a comparison table

Current Median Income Numbers            Median Income numbers after November 1, 2009

Family size

1                                $40,760                                                                               $40,691

2                                $54,054                                                                                $55,258

3                                 $61,959                                                                                $61,104

4                                 $71,554                                                                                $68,502

Let's consider how this change affects you if you have a family of 4.  If you file by October 31, 2009, you can have household income of $71,554 and still qualify for Chapter 7 without having to qualify under the means test.  As of November 1, 2009, if you earn $71,554, the presumption of abuse arises and you must try to qualify by rebutting the presumption using the means test.

If your six month average gross income (April-September) is close to the current median income numbers and you expect the May-October numbers to be similar, it may make sense to try to file prior to November 1 – or at least to discuss this possibility with your lawyer.

My wife and law partner, Jodi Ginsberg, was recently questioned about this subject by a man who she is representing in a Georgia workers' compensation case.  This gentleman had been in a Chapter 13, but his case was dismissed after over 3 years when he got hurt and lost his regular income.   Now that his Chapter 13 has been dismissed, one of his creditors has filed suit.

Jodi's client wants to know if he should refile his Chapter 13 case to avoid having a judgment rendered against him.  He is rightly concerned that a judgment creditor could seize his bank account and/or place a lien on his home.

Here is my take on this: while I think that a refiled Chapter 13 could work, I would be very reluctant to pursue this course of action.  First, there is the practical question of whether Jodi's client has enough disposable income to make a Chapter 13 work at all.   I have not run the numbers in this case, but it would not surprise me if there is zero or negative cash flow in this prospective debtor's budget – and a Chapter 13 will not work without some positive cash flow.

Second, our prospective client will not face any kind of garnishment of his workers' compensation benefits as Georgia law protects weekly wage benefits from garnishment.   I would think that this protection would extend to benefits even after they have been deposited into a bank account but I have not seen any statute or case law on this point – so, in my mind, a workers' compensation claimant should be careful about depositing wage benefits into a (possibly) unprotected bank account.

Thirdly, I think that a Chapter 13 filed on behalf of a workers' compensation claimant would be complicated and expensive.  There is a strong likelihood that the case would become ripe for settlement at some point during the 3 to 5 year pendency of the Chapter 13.  This means that the debtor's counsel would need to file a motion to ask the court to declare the settlement as "exempt" property.  Further, since a settlement means that weekly wage benefits will stop, the Chapter 13 would fail if the debtor could not come up with another source of income.  Then, there is the possibility that the debtor might apply for Social Security disability.

The bottom line – as a debtor's attorney, I see a filing by a debtor who is currently on workers' compensation as a time consuming project and I would hesitate to accept such a case without a substantial retainer up front (not a likely prospect for debtor in such a situation).

This is one of these situations where multiple areas of law overlap with the amount of legal work needed greatly in excess of what a prospective debtor can afford.

In my practice I observe that when they come to meet with me many prospective bankruptcy filers are angry – angry at harassing creditors, angry at their employer for cutting hours or jobs, and angry at some of the rules that apply when one files bankruptcy.   Despite what some in Congress may say, no one wants to file bankruptcy and I have met many very nice, reasonable people who feel that they played by the rules and now they are going to have to start all over at age 40, 50 or older.

The net result of this anger sometimes is a sense of "us against them."  Sometimes this manifests itself in an attitude that the debtor will follow the rules mostly but who is going to harm if they don't reveal a cash payment to a relative or the transfer of an old car to a brother.

As Rachel points out in her fine post, this sort of an attitude can really get you in trouble.

When you sign your name to a bankruptcy petition, you are declaring under oath that the information contained therein is truthful and accurate.  If you leave something out intentionally you may not get caught, but, then again you may.  The  U.S. Trustee and the U.S. Attorney have been known to prosecute debtors to set precedent.

Attorneys give you long questionnaires for a reason.  If you leave something off and it later comes to light, we can turn to your original paperwork to confirm what was disclosed to us.  In this same vein, if you notice a mistake on your petition, advise your lawyer in writing.  Proving a verbal notice is difficult.  Further, given that there is a filing fee to add creditors it is unlikely that any lawyer would file an amendment without payment of a filing fee.

The bankruptcy process is not an enjoyable process, although it can put you on the road to financial recovery.  Don't put the benefit of a bankruptcy discharge or risk criminal prosecution by intentionally leaving relevant information off your bankruptcy petition.

By the end of foreclosure Tuesday, the lender's law firm had learned of the Chapter 13 filing so the law firm did not "record" the foreclosure deed.  Instead, the lender filed a motion to "validate foreclosure" asking the judge to permit the foreclosure to go through thereby divesting the debtor of title.

The debtor painted a very sad picture – he and his wife had four children of their own and a sister and her three children were also living in the home – and they faced  homelessness if the foreclosure was allowed to go through.  Further, the debtor claimed that he and his wife had been victimized by a "paralegal service" that had prepared emergency "two page" petitions then did nothing more.

The lender's attorney took a very hard line – between the husband and wife, these debtors had filed 5 previous cases only one of which actually worked for more than a few months.  The debtor was trying to scam the system and the court ought not permit such an action.  Further, the debtor had used the same paralegal service twice – if they were a ripoff why did he use them a second time?

The judge, who is a compassionate and decent man,  was clearly struggling with what to do.  I felt that the lender's attorney took the wrong approach.  In my view the debtor and his wife came across more confused than pathologically dishonest.  They clearly did not have entirely clean hands when it came to using the bankruptcy process to stop a foreclosure, but I could see that the judge was bothered by the idea that 7 children and two families might end up on the street.

In my previous post I asked what you thought would happen.  Here's what the judge did:

The judge decided to validate the foreclosure and lift the stay.  He was very concerned about the multiple filings and by the fact that there was no equity and an almost impossible likelihood that the debtor could actually fund a Chapter 13 that included over 2 years of mortgage arrearage.  He did note that Georgia law now provides that foreclosure notices must include the name and contact information of a human being at the mortgage company who has the authority to enter into loan modifications.  He directed the lender's lawyer to include this information in the order that would be issued granting the lender's motion (in most cases, the moving party in a motion hearing has the obligation to draft a proposed order for the judge to sign).

In case you are wondering, I would not have a lot of hope that the lender will be very cooperative in working out a deal with the debtor.

He also directed the debtor to cooperate with the U.S. Attorney in investigating the paralegal service.

What can you take from this case?  First and foremost, any Chapter 13 case that you file must be viable on its face.  In other words if you have only $200 disposable each month, and you have to pay $20,000 over five years, your case is not viable.  You have to present a workable plan.

Second, multiple filings make judges very concerned.   I am not a big fan of petition preparation services or paralegal services.  Bankruptcy has become a lot more complicated over the past 10 years or so.  I think that you take a very big chance when you use a non-attorney for your bankruptcy filing.  If you are going back a second or third time you should never do so without a lawyer as the Bankruptcy Code has been amended specifically to make repeat filings more difficult.

The mortgage creditor went first and presented her client's case:  the debtor had filed a bankruptcy on the morning of July 7, 2009 minutes before the lender sold the debtor's house on the courthouse steps.  The lender was not aware of the filing and proceeded to foreclose.  When the lender's attorney returned from the courthouse, he discovered that a bankruptcy had been filed, so he did not record the deed.

Instead, the lender retained bankruptcy counsel who filed a motion have the bankruptcy annulled and the foreclosure validated.   If validated title would pass and the lender would now be the title owner of the property.  In such a situation the debtor's bankruptcy would offer no protection and the debtor would be subject to eviction.

The mortgage company's attorney noted that this was the fifth bankruptcy filed by the debtor and his wife, and the third case filed this year to stop a foreclosure.   In none of the cases filed this year did the debtor or his wife make any payments to the trustee or pay anything to the mortgage company.  In none of these cases did the debtor or his wife file any of the required bankruptcy paperwork.

Clearly the debtor and his wife were acting in bad faith, argued the mortgage company's lawyer, and they should not be allowed to misuse the bankruptcy process.

What would the debtors have to say?  The debtor and his wife appeared pro se (without an attorney).  They told the judge that they filed this bankruptcy to save their home, where they lived with their 4 children, and the wife's sister and her 3 children.

They further explained that the bankruptcy paperwork they filed was prepared by a "paralegal" from a "foreclosure prevention" company.   The paralegal had instructed them to file the Chapter 13 to stop the foreclosure and to give the company a chance to continue its negotiations with the mortgage lender.  Now, however, the foreclosure prevention company did not seem to be in business anymore – its telephone number was disconnected and its st0refront abandoned.

Now, they just needed some time to obtain representation and to restart negotiations with the lender.   They were victims of a foreclosure rescue scam (the same company that had misled them twice before this year) and now they finally realized that they were on their own.

What would you do in this situation?  What did the judge do?  The answer – see my next post….

What happens if the proposed cure is not feasible for the debtor?  In such a case, the judge would sustain the trustee's motion to dismiss or the debtor would not oppose the motion.  Either way, the debtor's Chapter 13 case will be dismissed.

When a Chapter 13 case is dismissed, creditors can immediately pursue all non-bankruptcy alternatives.  If there is a home and mortgage delinquency involved, the mortgage lender can start foreclosure proceedings.  If there is a car payment involved, the car lender can immediately start the repossession process.  Credit card lenders can restart collection efforts including calls and letters.

More importantly creditor claims go back to their pre-bankruptcy status.  If, for example your Chapter 13 plan called for a payment amounting to  5 cents on the dollar to unsecured creditors, a dismissal would give those unsecured creditors the right to pursue 100% of balances due + interest.

The law does allow a debtor to refile Chapter 13, but there are strings attached.  In a refiled case the automatic stay (the core protection of bankruptcy) would only last 30 days – your attorney would need to file a special motion asking the judge to keep the stay in effect beyond 30 days.

Generally, if case #1 was dismissed because of circumstances beyond the debtor's control – i.e. a job loss or illness – judges will be amenable to extending the stay and eventually approving a 2nd plan.   However, 2nd cases are inherently looked at with suspicion by Chapter 13 trustees.

A certain percentage of my Chapter 13 clients will fall behind because of illness, job loss, family emergencies, or an employer's failure to send in withheld funds.  Sometimes employers stop withholding funds for no particular reason.

Whatever the cause if you fall behind on your payment schedule to the Chapter 13 trustee, you will eventually face a trustee "Motion to Dismiss."   In the Northern District of Georgia, each of our three trustees use a computer system that periodically produces reports identifying cases that have gone delinquent and the system thereafter spits out a form motion to dismiss.

A motion to dismiss may also arise if claims (usually tax claims) come in higher than expected, thereby causing the plan to run more than 60 months.

What should you do if you receive a Motion to Dismiss in your case?

First, you should contact your lawyer's office to address the reason why the motion was filed and to discuss possible solutions.

From my side of the desk, I will discuss with you possible cures.  The good news here is that our Chapter 13 trustees are usually willing to work out a deal to save your case.  Typically the trustee will want 25% to 50% of the delinquent funds paid immediately and will accept the remaining balance of delinquent payments over time.

Here is an example:  Tom filed a Chapter 13 case in September, 2006.  It is now August, 2009.  The trustee motion to dismiss indicates that Tom is $3,500 behind on his payments to the trustee.  In this situation, I would look at the trustee's web site to see if there is a problem with the payroll deduction.  Perhaps Tom has changed jobs and I need to file a new payroll deduction.  Perhaps Tom's employer has been withholding and sending in the wrong amount.

I would also calculate how much longer Tom has in his plan.  Here the plan has been active for  almost 3 years (36 months).  This means that I have only 24 months left.

If Tom can come up with $1,000, I can propose a cure to the trustee: $1,000 payable now and $2,500 payable over the next 25 months at $105 per month.   Assuming the trustee accepts, I would modify the payroll deduction order to increase the monthly payment by $105.

The trustee will likely want "strict compliance" on such a cure – this means that if Tom should fall behind again, the trustee would not need to file a second motion to dismiss.  Instead the trustee would only need to send Tom and me a letter giving him 10 days to cure the delinquency, otherwise the case would be dismissed without further notice or hearing.

Now, let's consider another example:  Sally has been a debtor for 20 months.   Her monthly trustee payment is $1,300 per month.  Because of unexpected illnesses, Sally has fallen behind by $10,000.  She is currently out of work but will be back at her regular job in 6 weeks.  The hearing on the trustee's motion is scheduled for next week.

In this case, Sally would be able to come up with $2,000 within the next month.  Dividing the remaining $8,000 by 40 months = $200.   My proposal to the trustee would be $2,000 in 30 days + an additional $200 per month for the remainder of the plan and strict compliance on future payments.

If the trustee won't go for this type of deal, I would argue for it in a hearing before the judge.   The trustee might not accept it, and the judge might be concerned as well because Sally has no money up front.

What happens if Sally cannot afford this cure or if the judge would not accept our proposed cure?  I'll discuss that in another post.

I may be on the right track in obtaining more information.  One of my new colleagues at Solo Practice University (where I teach a class about creating a Social Security disability practice) is an attorney in New York who has actually represented clients and has obtained mortgage modifications.  She will be teaching a class about real estate law at SPU and I hope to be able to pick her brain about mortgage modifications.

In the meantime, here is a link to a recent blog post that Stefanie wrote entitled The Top 5 Loan Modification Myths.   I hope that more solid information from legitimate professionals who understand mortgage modification becomes available so I can bring it to you in the pages of this bankruptcy blog.