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$1,200 Coming Soon to Most U.S. Adults

March 30th, 2020 at 7:00 am

The huge emergency coronavirus law will provide, “as rapidly as possible,” over 80 percent of American adults with money, many getting $1,200.   


On Friday (March 27) Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act. Also known as the CARES Act, better known as the massive $2.2 trillion pandemic relief law. The stated purpose of this 880-page law:

Providing  emergency  assistance  and  health  care  response  for  individuals,  families  and  businesses  affected  by the 2020 coronavirus pandemic.

One of its major provisions is to provide most American adults a payment directly from the U.S. government. This is estimated to cost $290 billion, or about 13% of the $2.2 trillion total. This blog post discusses how much each person will receive, who will and will not, and other urgent details.

How Much Money?

This is probably the most straightforward part of this law, but it has some important twists and turns.

Every “eligible individual” will receive $1,200, if his or her adjusted gross income is no more than $75,000. If the adjusted gross income is more than $75,000, the $1,200 is reduced by 5 percent for any amount over $75,000. This means that individuals with adjusted gross income of $99,000 or more will receive nothing.

If you file a joint tax return, the joint payment will be twice as high, $2,400. And your joint adjusted gross income can be twice as high, $150,000, for the two of you to receive the full $2,400. Income beyond that would reduce the amount paid by 5 percent of the amount over $150,000.

If you file your federal tax return as a “head of household,” the adjusted gross income trigger amount is instead $112,500.  (This tax filing status is usually for single parents with children.) 

In addition to the $1,200 (or less) per adult, you receive $500 for each “qualifying child.” (See the IRS’ Qualifying Child Rules.)  In general, a qualifying child is any dependent of a taxpayer under the age of 17.  So dependents aged 17 or older do not qualify for the $500 payments.

An example: a family of two spouses filing jointly, with two under-17 children, would receive $3,400: $2,400 + $500 + $500.)

Technically, the IRS is treating this money as an advance tax credit. It will not be considered taxable income on your 2020 tax return.

Which Year’s Income Counts?

Practically speaking, look to the adjusted gross income on either your 2018 or 2019 federal tax return. The 2019 amount will count if you’ve already submitted it, or likely will if you submit it very soon. Otherwise look to your 2018 adjusted gross income.

Note: the IRS has postponed the usual April 15, 2020 deadline for submitting 2019 tax returns until July 15, 2020. (See our last week’s blog post about this.) So if it’s to your advantage to use your 2018 income, consider waiting to submit 2019 until after receiving this relief payment. On the other hand, consider filing your 2019 tax return quickly if your income went down, qualifying you for more money.

Under the language of the law it’s your 2020 income that actually counts because it’s a credit for this year. But of course nobody knows for sure how much your 2020 income will be. So the law has the IRS use your 2019 or 2018 income amount.

So what happens if you get the relief payment but your 2020 income is higher and would have reduced the payment? Regardless, you don’t have to pay back any of  the payment.

Who Is an “Eligible Individual”?

The main people who don’t qualify are “nonresident aliens” and “dependents” who can be claimed on someone else’s tax return.

Individuals on Social Security who have no other income and may not file a tax return are eligible. Individuals who have little or no income, or who receive federal benefits, are all eligible. There’s no minimum income requirement. The person just can’t qualify as a dependent for someone else, and must have a Social Security number.

What If You Owe the IRS, a Federal Student Loan, or Child/Spousal Support?

With tax or student loan debt, it doesn’t matter. The IRS can’t set off the relief check against federal taxes or student loans you owe. This is according to Sen. Chuck Grassley, chair of the Senate Finance Committee.

“The only administrative offset that will be enforced applies to those who have past due child support payments that the states have reported to the Treasury Department,” he said.

What If I Have Other Questions?

The law leaves lots of details to be worked out by the IRS. It has a special webpage called “Coronavirus Tax Relief” where it will have updated information. As of our writing of this blog post, it says the following:

Stimulus payment checks: No information available yet, No sign-up needed

Instead of calling, please check back for updates.

Please also check back with us here on our website about the timing and other practicalities of these relief payments. The statute simply says that the Department of Treasury shall pay them “as rapidly as possible.” It will take at least three or four weeks, and maybe more. We’ll dig into these important details and tell you when we know more.

In the meantime, you can also call us, your bankruptcy lawyers. We are following this closely.

 

Does Filing for Bankruptcy Affect Employment?

March 26th, 2020 at 4:17 pm

Texas bankruptcy lawyer, TX chapter 7 attorney There are many situations in which a person might resort to filing for bankruptcy. Maybe they or a family member was severely ill and they have tons of medical bills that they cannot afford to pay. Maybe they lost their job and are now getting behind on payments for their bills. Whatever the reason, bankruptcy is usually entered into by individuals who no longer can keep up with their monthly bills because their income is greatly surpassed by their debts. Filing for bankruptcy is often a person’s last chance at trying to reconcile their finances. Most people understand that a bankruptcy affects many areas of their life. What they might not realize, however, is how their bankruptcy could affect their professional life and career.

Can I Lose My Job if I File for Bankruptcy?

The simple answer to this question is no, your employer cannot fire you solely for filing for bankruptcy. According to the United States’ Bankruptcy Code, neither governmental or private employers are permitted to, “terminate the employment of or discriminate…against an individual who has been a debtor or bankrupt under the Bankruptcy Act.”

This means that you cannot be fired, reprimanded, denied a bonus, demoted or otherwise disciplined just because you filed a bankruptcy case. However, if you do happen to experience any of these things after you file for bankruptcy, it can sometimes be difficult to prove that the reason your employer did these things was solely because of the bankruptcy.

Can an Employer Discriminate Against Me Because of My Bankruptcy?

This is where it can become a little tricky. The Bankruptcy Code states that governmental and private employers are both prohibited from discrimination against individuals who file for bankruptcy, but it does not address hiring practices for both types of entities. Government agencies are prohibited from doing nearly anything in relation to an employee who files for bankruptcy, but the same standards are not applied to private employers.

The Bankruptcy Act states that government agencies cannot, “deny employment to…a person who is or who has been a debtor or bankrupt…” When it comes to private employers, the term “deny employment to” has not been included. This means a private employer is not prohibited from denying employment to an individual on the basis that they have filed for bankruptcy.

Are You Worried About How Your Bankruptcy Could Affect Your Career? Contact a New Braunfels, TX Bankruptcy Lawyer Today

One of the biggest financial decisions you may have to make in your lifetime is whether or not you file for bankruptcy. While this could be the best decision for you financially, you may face repercussions, such as issues with your employer. If you are concerned about how your bankruptcy could affect your career, you should speak with a knowledgeable Boerne, TX bankruptcy attorney as soon as possible. At the Law Offices of Chance M. McGhee, we understand how important it is that you protect your finances and your career. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://www.thebalance.com/how-will-bankruptcy-affect-your-job-4151846

https://www.thebalance.com/will-filing-bankruptcy-affect-your-job-4140677

Tax Filing and Payment Extended to July 15

March 23rd, 2020 at 7:00 am

The federal April 15, 2020 tax filing and payment deadlines have been postponed to July 15, 2020.  Also, no interest or penalties accrue. 

 

Federal Income Tax Return Deadline Postponed

Responding to the COVID-19 pandemic, the IRS has postponed the deadline to file federal income tax returns by 3 months. This was announced (on Twitter, no less!) on Friday, March 20, and then explained in more detail on Saturday.

This tax return postponement applies to all individuals, but also more broadly. It includes every legal “person”:  “an individual, a trust, estate, partnership, association, company or corporation.” IRS Notice 2020-18. So it covers all individuals and businesses.  

Federal Income Tax Payment Due Date Postponed

Just as important, the date that tax payments are due is also postponed from April 15 to July 15, 2020. (The IRS actually announced this two days earlier, on Wednesday, March 18, 2020. IRS Notice 2020-17.)

This applies more broadly than just taxes due for the 2019 tax year. For those paying estimated income taxes quarterly, the payment that was due April 15 is now instead due on July 15, 2020.

There’s no limit to the amount of tax amount postponed. There was a prior maximum amount postponed (in IRS Notice 2020-17) but that maximum has been eliminated. IRS Notice 2020-18, Section III, paragraph 2.

No Interim Interest and Penalties

Since taxes previously due on April 15 are now due on July 15, 2020, no interest or penalties will accrue during those 3 months. As the official Notice states:

the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the Federal income tax returns or to pay the Federal income taxes postponed by this notice. Interest, penalties, and additions to tax… will begin to accrue on July 16, 2020.

IRS Notice 2020-18, Section III, paragraph 5.

No Extension Needed

This postponement of tax returns and tax payments is automatic. You don’t need to file any extension forms.

If you’ll need more time past July 15, the IRS says:

Individual taxpayers who need additional time to file beyond the July 15 deadline can request a filing extension by filing Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. Businesses who need additional time must file Form 7004.

IR-2020-58.

Tax Refunds Not Affected?

You may well be expecting a tax refund and so want to file as soon as possible. The IRS is encouraging you to do so:

The IRS urges taxpayers who are due a refund to file as soon as possible. Most tax refunds are still being issued within 21 days.

IR-2020-58. If you need your refund, the pandemic makes it all the more important to file as soon as possible.

ONLY April 15, 2020 Deadlines Affected

Things are changing fast, but at the moment this postponement does not apply to any other deadlines. For example, there’s no current extension for the March 16, 2020 deadline for corporate tax returns for tax year 2019 or the May 15, 2020 deadline for tax-exempt organizations. Also, the regular filing/payment date of July 15, 2020 still applies for quarterly filers. Again, these may also change.

State Income Tax Deadlines

Many states with income taxes have already matched the IRS’s postponement of tax returns and payments. For example:

  • California had earlier postponed to June 15 but extended to July 15 to match the IRS.
  • New Jersey’s legislature unanimously passed a bill last week to the likely same effect.
  • Montana’s governor on Friday postponed state filing and payment deadlines to April 15.
  • Arizona’s governor and then its Dept. of Revenue postponed the April deadlines to July.

It’s reasonable to believe that all or most states will follow the IRS’ lead, and do so quickly. So, please check with your own state’s taxing authority for updates.

 

Priority Debt for Intoxicated Driving

March 16th, 2020 at 7:00 am

If you injured someone by unlawfully driving while intoxicated, the resulting personal injury debt would be a priority debt in bankruptcy.   

Priority Debts

For many weeks our blog posts have been considering how bankruptcy deals with “priority” debts. Examples of these special debts that we’ve covered include child/spousal support, income taxes, and wages owed employees. Sections 507(a)(1),(4), and (8) of the U.S. Bankruptcy Code.

There’s one more kind of priority debt. It does not come up often but if it affects you, you need to know about it.

Priority Debts vs. Non-Dischargeable Debts

But first we need to clear up something that could be quite confusing.

Some debts cannot be discharged (legally written off) in bankruptcy, or can’t in certain circumstances. For example, bankruptcy never discharges child/spousal support debt, and discharges income taxes only under certain conditions. So the issue is whether or not you will owe the debt after the bankruptcy case is over. See Sections 523 and 524 of the Bankruptcy Code.

Whether or not a debt is a priority debt is a different consideration. Those are debts that the law treats with greater priority during the bankruptcy case itself.  For example, in an asset Chapter 7 case—one in which the bankruptcy trustee has assets to distribute to creditors—priority debts receive payment in full before general unsecured debts receive anything. Similarly, in a Chapter 13 case, the debtor must pay priority debts in full during the payment plan. General unsecured debts usually receive payment only to the extent you can afford to pay them after the priority debts.

The confusion comes from the fact that most, but not all, priority debts also cannot be discharged in bankruptcy. But that’s not absolutely always true. The considerations are sometimes different. In any event, priority and dischargeability are different considerations that have different consequences in different situations. You and your bankruptcy lawyer need to consider them separately.

Specifically with debts related to driving while intoxicated, the law makes those debts nondischargeable in many situations. See Bankruptcy Code Section 523(a)(9). But those situations are not exactly the same ones as the ones determining priority. The rules are a bit different. And again, the discharge of drunk driving debts vs. whether they qualify as priority are separate considerations with different consequences. We’re focusing today on the priority question.

Debts from Unlawful Operation of a Vehicle because Intoxicated

The Bankruptcy Code says that a debt is a priority debt if it is

for death or personal injury resulting from the operation of a motor vehicle or vessel if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.

Section 507(a)(10).

Under this language there are three key issues:

  1. It covers debts related to death or personal injury. The statutory language doesn’t cover property damage. Those would not be priority debts. However, in most accidents the personal injury side of the accident debts is much larger than the property damage side.
  2. The debt must come from your unlawful operation of a vehicle. So, the issue is whether you met your state’s standards of unlawful intoxication.
  3. Debts arising from other forms of unlawful operation of vehicle not involving intoxication are not priority debts. For example injuries resulting from speeding or reckless driving would not qualify as a priority debt.

The Consequences of Being Priority Debt

The consequences of having a personal injury debt being priority are different under Chapter 7 and Chapter 13.

Under a Chapter 7 “straight bankruptcy” case it only matters if it’s an asset case. As mentioned above, those are ones in which your trustee has assets with which to pay some of your debts. In that case he or she would pay your priority debts before paying other debts. So if you had a priority personal injury debt, it would receive payment before all non-priority debts. There’s a good chance the assets the trustee is distributing would not be enough to pay off the personal injury debt. Then you may or may not owe the balance depending on the discharge considerations mentioned above.

Most Chapter 7 cases are no-asset ones. All of your assets are “exempt,” protected from bankruptcy trustee liquidation. So the trustee has no assets to pay any creditors, including the priority personal injury debt. So there’s no practical effect from that debt being a priority debt. Again, whether or not you continue to owe the debt after the case is over turns on the separate discharge issue.

Under a Chapter 13 “adjustment of debts” case, your court-approved payment plan must “provide for the full payment” of all debts “entitled to priority.”  Bankruptcy Code Section 1322(a)(2).  Therefore you must budget enough to pay off a priority personal injury debt during the payment plan. You’d have 3 to 5 years to do so. You’d pay that in full before paying anything on non-priority unsecured debts. However, if that priority debt is huge, you may not have enough money to pay it off within that time. If so, a Chapter 13 case would likely not be a feasible solution. Therefore, determining whether the personal injury debt is or is not a priority debt would likely be very important.

 

Top Things You Should Know About Declaring Bankruptcy

March 12th, 2020 at 3:11 am

TX bankrupcty lawyers, TX chapter 7 lawyersBeing in debt can feel like you are drowning, especially if you are so far into debt that you do not see a way out. Whatever the reason for the extreme amount of debt, there are options that you can consider to help with the debt. For many people, bankruptcy can be the right option to relieve them of most, or even all of their debt. However, filing for bankruptcy is not easy and can actually be quite complicated and confusing. Each bankruptcy case is different, so it is not always simple for you to know what to expect after you declare bankruptcy. Here are a few things you should know if you are considering filing for bankruptcy.

Bankruptcy Does Not Happen Overnight

Some people think of bankruptcy as being similar to small claims court where you usually receive your disposition the same day you attend court. This is not the case. The bankruptcy process is complex and typically lasts at least a few months if you file for a Chapter 7 bankruptcy. If you file for a Chapter 13 bankruptcy, the case is open and ongoing for three to five years, the duration of your repayment plan.

Not Everyone Qualifies for Bankruptcy

Not just anyone can get a bankruptcy. Especially for a Chapter 7 bankruptcy, there are certain requirements that you must meet, such as being below a certain income level and passing the means test. The means test is a way of determining your monthly income and expenses to figure out how much disposable income you have each month.

If You Do Qualify, Not All Debts Are Eligible to Be Discharged

Another misconception that people have is that they will be completely free of debt once they have filed for bankruptcy. This depends on a couple of things. First, it depends on the type of bankruptcy you file and second, it depends on the type of debt you have. Most unsecured debt will be discharged in a Chapter 7 bankruptcy, such as credit card debt. However, student loan debt, federal, state and local taxes, alimony and child support debt cannot be discharged or forgiven in bankruptcy.

Your Bankruptcy Will Affect Your Credit

Though bankruptcy can have a huge effect on your life, perhaps one of the most prominent effects is what bankruptcy does to your credit. After a Chapter 7 bankruptcy is finished, it will be reported on your credit report and will stay there for up to 10 years. Most creditors will shy away from loaning money to someone with bankruptcy, so it may be hard for you to open a credit card, take out a mortgage or buy a car.

A New Braunfels, TX Bankruptcy Attorney Can Help

If you are unsure of whether or not bankruptcy is right for you, you should talk with a skilled San Antonio, TX bankruptcy lawyer. At the Law Offices of Chance M. McGhee, we can help you understand all of your options available to you to manage your debts. We can also help you make the right decision about what is best for you and your family’s situation. To schedule a free consultation, call our office today at 210-342-3400.

 

Sources:

https://www.thebalance.com/top-things-to-know-about-bankruptcy-316198

https://www.thesimpledollar.com/credit/bankruptcy/what-to-expect-when-filing-for-bankruptcy/

 

Avoiding Paying Prior Employee Debt

March 9th, 2020 at 7:00 am

If you prefer NOT to pay back wages to a present or prior employee, bankruptcy can help you use the law to prevent it being a priority debt.


Imagine that in the near future you’re closing down a business and filing bankruptcy.  You owe an employee or independent contractor back wages or commissions. But you’d rather not pay that debt because you believe that employee had a major role in the business failing. You’d much rather have your scarce money go towards, for example, paying your income taxes. How do you use the law to your advantage to accomplish this?

Our last blog post showed how to use the law to pay a favored prior employee or independent contractor. Today we show how to avoid doing so.

It’s All about the Timing

We fully laid out the rules about “priority” wage/commission debts in our blog posts of 3 and 4 weeks ago. Briefly, a wage or commission is a priority debt if it meets two conditions. One’s a timing condition and the other a dollar-amount one. The wage/commission money owed:

  1. must have been “earned within 180 days before the date of the filing of the [bankruptcy] petition or the date of the cessation of the debtor’s business, whichever occurs first …” Section 507(a)(4) of the Bankruptcy Code;  and
  2. the amount earned can be no more than $13,650. Section 507(a)(4) of the Bankruptcy Code, with a cost-of-living adjustment of the $10,000 stated there.

Assume that the amount you owe your prior employee or independent contractor is less than $13,650, thus meeting that condition. So the other, timing condition is what we’re focusing on.

A wage/commission is a priority debt if it was earned within the indicated 180-day period. If it wasn’t earned within that period, the wage/commission is instead a “general unsecured” debt. As we’ll show in our two examples below, general unsecured debts are much less likely to get paid in bankruptcy.

Some Facts for Our Example

Imagine the following basic facts.

You owe your prior employee $7,500 for wages and benefits. He earned these wages and benefits over a period of four months, from 180 to 60 days ago. That’s when you laid him off, suspecting embezzlement or other inappropriate behavior.

Your sole proprietorship business is still operating, but you intend to close it and file personal and business bankruptcy soon.

You owe $10,000 in last year’s personal income taxes. In addition you owe $150,000 more on all of the rest of your debts. These consist of unsecured trade debt, business and personal unsecured credit cards, and medical bills. These are all considered “general unsecured” debts.

Not Paying Employee in Asset Chapter 7

An asset Chapter 7 case is one in which you have some assets which are not protected. They are not protected from a Chapter 7 trustee taking and liquidating them to pay your creditors. The crucial fact is that the trustee pays any priority debts in full before paying a dime of general unsecured debts. Often there’s only enough money to pay priority debts—in full or pro rata—with nothing or very little left for the general unsecured debts.

In our example assume that your bankruptcy lawyer has advised you that your business equipment is not protected. It’s not “exempt.” It has a liquidation value of $10,000. If you file a Chapter 7 case it’s the asset that your bankruptcy trustee would use to pay your creditors.

This equipment has a liquidation value of about $10,000. You won’t need the equipment after closing the business. But you do want to put its value to the best use possible.

The point is to use the above timing condition to turn this prior employee debt into a general unsecured one. You do that by either closing your business or filing the Chapter 7 case so that the $7,500 wage debt was not earned during the 180 days before either of those two events. Under our facts the wages were most recently earned 60 days ago. So wait 120 more days to either close down the business or file the Chapter 7 case. That way none of the wages would have been earned within the 180-day period  (It’s the earlier of those two events that counts so you can’t do either for 120 days. But once you do one—such as close down the business—you can file the bankruptcy case at any point later.)

The Result in the Asset Chapter 7 Example

Under our facts the trustee would do the following with the $10,000 from sale of the business equipment. After paying his or her legally-allow fee, all the rest would go to your income tax debt. None would go to your disfavored prior employee.

The trustee’s fee would likely be no more than $1,750. It’s calculated at a maximum of 25% of the first $5,000 liquidated amount and then 10% on the second $5,000. Section 326(a) of the Bankruptcy Code. $10,000 minus $1,750 leaves $8,250. That remaining $8,250 would go to pay priority debts first, before paying anything to the general unsecured debts. In our example the wage debt is all general unsecured debt, not priority debt. So all of the remaining $8,250 would all go to your last year’s income tax debt of $10,000. You’d owe the rest—about $1,750. But you would have used most of your equipment value towards a debt you would have otherwise had to pay anyway, leaving a relatively low balance. And again, you met your goal of having none of your equipment value go to your prior employee.

Not Paying Employee in Chapter 13

In a Chapter 13 case you must pay all priority debts in full during the 3-to-5-year court-approved payment plan. Usually you must pay general unsecured creditors only as much as you can afford to pay them. This is AFTER paying priority debts in full, and often after paying secured debts as well. General unsecured debts often receive little, sometimes nothing at all. So whether a debt is a priority debt usually has a huge impact on whether and how much you must pay it.

In our example, if you were to close down the business or file bankruptcy right away, the $7,500 prior employee wage would be a priority debt. During the course of the payment plan you’d have to pay it in full. That’s in addition to paying the $10,000 income tax priority debt in full.  What happens if your budget would not allow you to do that in 3 years? The payments could be extended as long as 5 years to accomplish that. That is, you could be in your case years longer if your employee debt was a priority one.

However, if you waited the 120 day mentioned in the Chapter 7 example above to close down your business and file the Chapter 13 case, the $7,500 wage debt would likely receive much less. It may receive nothing. It would be a general unsecured debt, mixed in with the other $150,000 of general unsecured debts. This pool of $157,500 of general unsecured debts would only get paid to the extent your budget allowed. It would receive something only after you paid the $10,000 priority income tax debt in full. Plus your bankruptcy lawyer fees and Chapter 13 trustee fees receive payment usually before the general unsecured debts receive anything.

The Result in the Chapter 13 Example

So, if you’d close the business or file the Chapter 13 case right away, you’d have to pay your prior employee’s prior wage debt in full. If you couldn’t do so (and pay the income tax debt, etc.) within 3 years, you’d have to pay as much as 2 years longer.

If instead you’d wait until the wage debt turned into a general unsecured debt, you’d likely pay it very little. There’s a decent chance (depending on your budget) that you’d pay nothing on it at all.

 

Paying Employee Debt in Chapter 13

March 2nd, 2020 at 8:00 am

If you prefer to pay back wages to a present or prior employee, you can do so in Chapter 13 especially well if that debt is a priority one.

 

Our last three blog posts have been about debts you owe to your employees or independent contractors. Specifically, we discussed the conditions under which past wages, commissions, or benefits qualify as a“priority” debt. These posts covered:

  • the conditions that apply to both employees and independent contractors (3 weeks ago)
  • the special additional condition applicable only to independent contractors (2 weeks ago)
  • an example of paying an employee’s wages as a priority debt in an “asset” Chapter 7 case (last week)

Today, we’ll show how you could pay an employee/independent contractor in full in a Chapter 13 “adjustment of debts” case.

Why Priority Matters under Chapter 13

Assume you’d really like your former (or ongoing) employee/independent contractor to receive payment on what you owe. Whether that debt qualifies for priority status often determines whether you’ll pay that debt or not. Or it may determine whether it’s paid in full, in large part, very little, or nothing at all.

Focusing on Chapter 13, whether or not a debt qualifies as a priority one is usually crucial. That’s because you are legally obligated to pay all priority debts in full. Debts that don’t qualify as priority usually receive much less, and sometime receive nothing.

Your Chapter 13 payment plan must show how you will pay all priority debts. The bankruptcy judge will otherwise not approve the payment plan. The U.S. Bankruptcy Code is straightforward:

(a) The plan—

(2) shall provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507

Section 1322 of the Bankruptcy Code.

(There’s an exception if the employee/independent contractor agreed not to receive “full payment.” But assume here that—as is almost always true—he or she does want to get fully paid and won’t agree not to be.)

So what happens under Chapter 13 if that wage/commission debt does not meet the conditions to be priority debt? That wage/commission is lumped in with all the other ordinary “general unsecured” debts. Very seldom do Chapter 13 plans pay general unsecured debts in full. (A so-called 100% plan.) Most often they receive significantly less than 100%. (Say, a 30% or 40% plan.) Quite often they receive payment of only pennies on the dollar. (For example, a 3% plan.) Finally, it’s not unusual that general unsecured debts—including a non-priority wage/commission debt—would receive absolutely nothing. (A so-called 0% plan.)

In summary, your plan must pay a priority debt in full. But the plan will very likely pay your general unsecured debts a fraction, or possibly even nothing.

Our Chapter 13 Case Example

Assume you owe a prior employee $5,000 for wages earned over a period of four months. This period was from 150 to 30 days ago, at which point you had to lay him off.

Your sole proprietorship business is still operating. You intend to close it and file a Chapter 13 bankruptcy soon. You have a decent job waiting for you as soon as you do, and have some flexibility when to start.

You owe $125,000 on all of the rest of your debts, which are all general unsecured. None are priority debts except potentially the $5.000 you owe to your prior employee.

Reminder about the Priority Conditions

As discussed in our last 3 blog posts, a wage is a priority debt if it meets two conditions:

  1. it was “earned within 180 days before the date of the filing of the [bankruptcy] petition or the date of the cessation of the debtor’s business, whichever occurs first …”. Section 507(a)(4) of the Bankruptcy Code.
  2. the amount is no more than $13,650. Section 507(a)(4) of the Bankruptcy Code, plus a cost-of-living adjustment of the $10,000 stated there.

With the amount of the wage owed in our example being $5,000, this debt meets the second, dollar-limit condition. So we focus the rest of this blog post on the first, timing condition.

Timing the Filing of Your Chapter 13 Case

As you can see from the timing language in the statute above, a wage’s priority status turns on when the employee earned it.  The wage (or commission or benefits) must have been earned within a 180-day period. That period must be immediately before either the closing of your business or your filing Chapter 13, whichever of those happens first.

Back to the Example

To pay the $5,000 wage debt in full, you need to have it meet the conditions of priority status. Your business is still operating at the moment. You have control over when to cease operating, and when to file the Chapter 13 case.

In the real world you actually likely have limited control over these two events. You likely have various constraints on both. Timing when to shut down even a small business usually involves a variety of practical, and sometime tough, choices. Timing a Chapter 13 filing likely turns on the creditor collection pressures and there are often other legal timing considerations.

But let’s assume you have at least some flexibility. Under our facts, if you want this employee’s wage debt to be a priority debt you need to do one of two things within the next 30 days. You need to either close down your business or file your Chapter 13 case within that time.  After that some of this employee’s wages will start turning into general unsecured debt. (Recall it was all earned 150 to 30 days ago.) So after 30 days the oldest of the wages will be start being more than 180 days old. Then 210 days from now the last of the wages would turn into general unsecured debt.

If you can’t file your Chapter 13 within 30 days for practical or legal reasons, it’s enough to just shut down your business. As you see from the statute’s language, that triggers the 180-day period, even if you don’t file the Chapter 13 case until later.

What Happens in the Chapter 13 Case

Assume you either shut down your business or file your Chapter 13 case within the next 30 days. Then the $5,000 wage debt would be a priority debt. Simply put, Chapter 13 law requires the payment plan you and your bankruptcy lawyer put together to include enough money to pay that $5,000. The bankruptcy court would otherwise not approve the plan. Furthermore, you could not complete the case without actually paying off that $5,000.

Now assume instead that you don’t shut down your business and don’t file Chapter 13 until after 210 days from now. Then, as just discussed, none of the wage debt would qualify as priority. It would all be general unsecured debt. Assume that in the next 3 years you would afford to pay $200 per month on all of your debts. That’s a total of $7,200. Assume that you paid all your attorney fees when you filed your case (leaving none to pay in the plan). In your jurisdiction assume the Chapter 13 trustee gets 5% of everything that flows through the plan—$360. That leaves the rest—$6,840—to go to all of the creditors. The general unsecured debts total $130,000—$125,000 plus the $5,000 wage debt. The $6,840 would be divided among this $130,000, meaning that these debts would receive about 5% of the amounts owed. Your former employee would receive only about $250 on the $5,000 wage debt.

So, if the $5,000 wage debt would qualify as priority, your former employer would receive payment in full. If none of it would so qualify, your employee would receive only about $250

.

Can I Keep My Car if I File for a Texas Bankruptcy?

February 28th, 2020 at 10:10 pm

bankruptcyFor most people in the United States, owning a vehicle is a necessity that allows them to get to work, go to school or even just go about their daily lives. Because of this, those who are struggling to make car payments or who are aiming to file for bankruptcy tend to be worried about whether or not they can keep their vehicle. For most people, keeping your vehicle after a Texas bankruptcy is entirely possible, though it depends on whether or not you are still making payments on your car and what type of bankruptcy you file.

Understanding Secured Debt

The first thing you should understand is that your car loan is a secured debt, which is unlike other types of debt such as credit card debt. A secured debt is one that is backed by physical property used as collateral, such as a vehicle. If you stop paying on your secured debt, your lender has the right to repossess your property.

If you file for a Chapter 7 bankruptcy, you must include all of your assets and debts, including your vehicle, even if you plan to still make payments after the bankruptcy. If you file a Chapter 13 bankruptcy, you can continue to make payments under your current plan, include your car payment into your monthly bankruptcy payments or work out a “cramdown” agreement which allows you to keep your vehicle.

Options for Dealing with Your Vehicle

For the most part, there are three choices when it comes to dealing with your vehicle during your bankruptcy: you can stop making payments on your vehicle, sign a reaffirmation agreement or you can redeem your car.

If you take no actions on your car loan when you file for bankruptcy, you are technically relieved of your obligation to repay your car loan afterward, but bankruptcy cannot remove the right of the lender to repossess your property. So, if you stop making payments on your car after your bankruptcy, you will lose your vehicle.

You can keep your vehicle if you either reaffirm or redeem your car. Reaffirming your car is basically just resigning a loan agreement to keep paying off the remaining balance of your auto loan. Typically, the terms of the reaffirmation agreement are the same as the terms of your original loan unless you can renegotiate better terms, such as a better interest rate.

Redeeming your vehicle will also allow you to keep it and is an especially attractive option for those who owe more on their car loan than what their vehicle is worth. Redeeming your vehicle allows you to purchase your car outright for the current retail value, though it can be difficult for some to come up with a large amount of money all at once.

A Boerne, TX Bankruptcy Attorney Can Help You Keep Your Vehicle

If you are filing for a Texas bankruptcy and you are concerned about whether or not you will be able to keep your vehicle, the best thing to do is to contact a knowledgeable San Antonio, TX bankruptcy lawyer. At the Law Offices of Chance M. McGhee, we can help you understand your rights when it comes to bankruptcy exemptions and your vehicle. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://upsolve.org/learn/can-keep-car-file-bankruptcy/

https://upsolve.org/learn/what-happens-to-my-car-loan-after-bankruptcy/

 

Paying Employee Debt in Bankruptcy

February 24th, 2020 at 8:00 am

If you prefer to pay back wages to a present or prior employee, bankruptcy can help you do so if you use the law in that employee’s favor.  

 

Our last two blog posts were about debts owed to your employees or independent contractors. Specifically we discussed the conditions in which past wages, commissions, or benefits qualify as “priority” debt. Two weeks ago we got into the conditions that apply to both employees and independent contractors. Last week the focus was on a special additional condition that only independent contractors must meet.

Whether a debt qualifies for priority status is often crucial. That’s because this can determine whether or not you pay that debt in the bankruptcy case.   In a no-asset Chapter 7 case none of the debts receive any payment within the case. So whether an unpaid wage or commission qualifies as priority or not doesn’t matter in this situation. But in an asset Chapter 7 case it makes all the difference. It’s common that priority debts receive payment in part or in full, while the rest of the debts receive little or nothing. There’s a similar result in a Chapter 11 business reorganization or 13 adjustment of debts case. Priority debts generally receive payment in full while other debts receive little or nothing.

Assume that you’d prefer that your past or present employee/independent contractor receive payment for what you owe him or her at the time of your bankruptcy filing. If so, you need to know the conditions for making that debt a priority debt, and how to apply them. Today we’ll review the conditions and then apply them an asset Chapter 7 example. Next week blog post will demonstrate an example in a Chapter 13 case.

The Conditions

We covered the conditions that an unpaid wage or commission is a priority debt the last two blog posts. We’ll review them very briefly here.

For a debt you owe either an employee or independent contractor:

If you owe the debt to an independent contractor, he or she needs to meet an additional condition. The debt is a priority debt ONLY if

during the 12 months preceding that date [of bankruptcy filing or cessation of business], at least 75 percent of the amount that the individual or corporation earned by acting as an independent contractor in the sale of goods or services was earned from the debtor.

Section 507(a)(4)(B) of the Bankruptcy Code (bold added).

Our Chapter 7 Asset Case Example

Assume you owe a prior employee $7,500 for wages and benefits. Your employee earned these wages and benefits over a period of four months, from 150 to 30 days ago, when you had to lay her off.

Your sole proprietorship business is still operating. You intend to close it and file a Chapter 7 bankruptcy soon.

Your bankruptcy lawyer has advised you that your business equipment is not exempt. This mean it’s not protected from collection and liquidation by the Chapter 7 bankruptcy trustee. He or she will take it from you, sell it, and use the proceeds to pay your creditors.

This equipment has a liquidation value of about $10,000. You don’t need the equipment after closing the business because you don’t intend to be in this kind of business ever again. But you do wish you could put it’s value to some good use.

You owe $150,000 on all of the rest of your debts. These consist of unsecured trade debt, business and personal unsecured credit cards, and medical bills. These are all considered “general unsecured” debts. None are priority debts except potentially the $7,500 you owe to your prior employee. You have a home mortgage but you’ve managed to keep current on it. Your home has a bit of equity but it’s protected by the homestead exemption.

Timing the Filing of Your Chapter 7 Case

You may have reasons to delay filing your case. You may have new employment lined up but it doesn’t start for several months. You may have business customer paying you soon and you’ll need the money for your home mortgage in the meantime. There can be countless legal and/or practical reasons for filing your case later.

However, your prior employee would likely really benefit from you filing your case within about a month. Then, because of the 180-day condition cited above, there’s a good chance she’d receive all or most of her $7,500.

How? The Chapter 7 trustee would liquidate your business equipment. The trustee would receive a fee—likely about $1,750. (By law, no more than 25% of the first $5,000 liquidated and 10% on the second $5,000. Section 326(a) of the Bankruptcy Code.) $10,000 minus $1,750 leaves $8,250. (25% for the first $5,000 is $1,250, plus 10% for the second $5,000 is $500, totaling the trustee’s $1,750 fee.) The remaining $8,250 would go to pay priority debts first, before paying anything to the general unsecured debts.

The $7,500 debt to your prior employee would all be priority debt. That’s because in our scenario it was all earned within the 180-day period before your simultaneous business closure and bankruptcy filing. Plus the $7,500 amount is less than the $13,650 limit referenced above.

So in this example your prior employee would receive her $7,500 in full.

Of course if the business equipment sold for less, your employee would receive only partial payment. Assume it sold not for $10,000 but rather only $7,000. $7,000 minus the trustee’s $1,450 would leave $5,550 for the trustee to distribute. Likely all of this would go to your employee. So she’d receive at least a significant portion of her debt.

If You Delayed Filing Bankruptcy

Assume instead that you closed your business and filed your Chapter 7 case five months from now. At that point all of her wages and benefits would have been earned more than 180 days earlier. So, none of the $7,500 would qualify as priority. The debt would be a general unsecured one, lumped in with other $150,000 of such debt.

Then, your employee would receive very little. Assume again that the bankruptcy trustee sells your business equipment for $10,000, leaving $8,250 for payment of the debts. This would be distributed pro rata to the $157,500 in general unsecured debt (her $7,500 plus the other $150,000). $8,250 divided by $157,500 amounts to all debts receiving only about 5 cents on the dollar. So your prior employee would receive only about $375 on her $7,500 debt.

Conclusion

There are many factors that come into play for determining what day you file your bankruptcy case. Some of those factors may well be much more important than helping your employee/independent contractor receive payment. But sometimes a business owner has some flexibility on timing. And getting an employee/independent contractor some money may be a high priority for various personal or business reasons. This would be especially true if that money would otherwise go to a debt you don’t care about getting paid. In such situations you and your bankruptcy lawyer may well be able to put these priority laws to good use, as we showed in today’s blog post.

 

Commissions Owed to Independent Contractor

February 17th, 2020 at 8:00 am

If you owe sales commissions to an independent contractor when you file bankruptcy, it may be a priority debt. Here’s what determines this

 

Our last blog post was about conditions in which wages, commissions, or benefits owed to an employee are “priority” debt.

But what if your debt was not to an employee but an independent contractor? Especially in today’s “gig economy,” small businesses (and large ones, too) often have independent contractors instead of employees.

Why “Priority” Matters

As discussed last week, whether a debt qualifies as a priority debt can make a huge difference.

This most often matters in a Chapter 13 “adjustment of debts” case. You have to pay all priority debts in full during the 3-to-5-year court-approved payment plan. In huge contrast, usually you only pay the non-priority “general unsecured” debts to the extent you can afford to pay. The common result is that you pay priority debts 100%, while those that don’t qualify as priority little or nothing.

The distinction between priority and general unsecured also matters in an “asset” Chapter 7 case. That’s the relatively uncommon situation in which a debtor needs to surrender an unprotected asset to the Chapter 7 trustee. In that situation the trustee liquidates the asset and pays priority debts in full before paying any general unsecured debts. The result: priority debts often get paid in full or in part, while there’s nothing for any general unsecured debts.

The distinction between priority and general unsecured does not directly matter in a simple, “no-asset” Chapter 7 “straight bankruptcy” case. That’s the common situation when everything you own is “exempt”—protected from the Chapter 7 trustee. Many Chapter 7 cases are “no-asset” ones. (However, note that most priority debts can’t be discharged in a Chapter 7 bankruptcy. So while such debts won’t receive anything from the trustee, you’ll likely still have to pay the debt afterwards yourself.)

The Basic Amount/Timing Rule

Whether you owe an employee or an independent contractor, some of the conditions to make the debt priority are the same.

First is the maximum dollar amount. The maximum amount of a debt that would qualify as priority is $13,650. See the discussion in our last blog post about this amount. (Also see the original statute’s $10,000 amount in Section 507(a)(4) of the U.S. Bankruptcy Code, the cost-of-living provision in Section 104 of the Bankruptcy Code, and the current $13,650 amount since April 1, 2019 in this notice in the Federal Register.)

The second condition is the timing. The debt owed must be

earned within 180 days before the date of the filing of the [bankruptcy] petition or the date of the cessation of the debtor’s business, whichever occurs first

Section 507(a)(4) of the Bankruptcy Code.

So, any amount owed to an employee/contractor beyond $13,650 would be a general unsecured debt, not a priority one. Same with any amounts earned outside the specified 180-day period.

The Special Independent Contractor Rule

Beyond the above amount/timing conditions, there’s another significant condition especially for independent contractors. The debt is a priority debt ONLY if

during the 12 months preceding that date [of bankruptcy filing or cessation of business], at least 75 percent of the amount that the individual or corporation earned by acting as an independent contractor in the sale of goods or services was earned from the debtor.

Section 507(a)(4)(B) of the Bankruptcy Code.

So if your independent contractor earned less than 75% of its overall income during that one-year period from you, then none of what you owe it is priority.

Presumably the purpose of this condition is so that it applies only to independent contractors who are more like employees. It includes only those independent contractors who work mostly for you. It is not meant to apply to debts owed to suppliers of goods and services that serve many customers. Those are more like conventional payables, which are general unsecured debts, not entitled to priority.

 

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