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Archive for the ‘bankruptcy planning’ tag

Timing Your Bankruptcy

July 13th, 2020 at 7:00 am

The timing of your bankruptcy case is important, sometimes extremely important. It can determine if your case is as successful as it can be.

 

Five weeks ago we started a series on why you should get legal advice from a bankruptcy lawyer. We’ve also been making a point of showing why it’s smart to do so early, when you start considering bankruptcy.

It’s super important to get this legal advice so that you can learn:

  1. if bankruptcy is the best option for you, and how to pursue other alternatives
  2. how Chapter 7, 11, 12, and 13 work, and whether either are right for you
  3. what actions you should take to position yourself, whether you’re possibly or definitely filing bankruptcy
  4. what you should avoid doing
  5. the best timing for your bankruptcy filing

If you want to look back, we covered #1 and #2 five weeks ago. The next four blog posts got into different aspects of what you should and shouldn’t be doing before filing (#3 and #4). These included keeping assets (4 weeks ago), taking on debt (3 weeks ago), filing income tax returns and paying the taxes (2 weeks ago), and paying child/spousal support (1 week ago).

Today we start on how to best time the filing of your bankruptcy case.

Bankruptcy Timing

Frankly, this is a huge topic. That’s because so much our financial lives are tied to time. One day you don’t owe a debt. The next day you go to a medical appointment and immediately owe a debt to the doctor’s office. You get the bill with a due date (after insurance pays a portion, if you’re fortunate enough to have insurance). If you can’t pay it by the due date, the debt goes into collections at some point in time. Then at some point you get sued, which turns—a certain amount of time later—into a judgment against you. After a short period of time (usually), that turns into a garnishment of your paycheck. All of these steps involve timing, with deadlines and time-based events.

Similarly, bankruptcy involves many issues of timing. Using the example above, filing bankruptcy stops the debt collection process wherever it is at the time.  If a lawsuit has been filed by the collector but no judgment yet entered, bankruptcy stops the entry of a judgment. If a judgment has been entered but no garnishment yet ordered, bankruptcy filing at that time prevents the garnishment. If your wages are the midst of being garnished, bankruptcy stops the garnishment. Whether it stops your current paycheck from being garnished or the next one, it all depends on timing.

Important Examples of Good (and Bad) Timing

The timing of your bankruptcy filing can affect all of the following. Whether:

  1. the bankruptcy case includes recent or ongoing debts or not
  2. you have to pay an income tax in full, in part, or not at all
  3. you must pay interest on an income tax because of a tax lien
  4. you can discharge (legally write off) a credit card debt, or a portion of it
  5. you can discharge a student loan debt
  6. you qualify for a vehicle loan cramdown—reducing monthly payments, interest rate, and total debt—and still keep the vehicle
  7. you qualify for a personal property collateral cramdown—paying less—and still keep the collateral
  8. you stop the repossession of your vehicle in time, or lose it to the vehicle loan creditor
  9. you prevent the foreclosure of your home in time, enabling you to catch up over time
  10. you get more time to sell your home, including years from now
  11. you qualify for a Chapter 7 case under the “means test,” or must instead file under Chapter 13
  12. you qualify for a 3-year Chapter 13 payment plan or instead must pay for 5 years
  13. your sale or gifting an asset is a “fraudulent transfer
  14. your payment to a friendly creditor is a “preference
  15. you can keep all of your assets if you’ve moved from one state to another in the past several years

Conclusion

Just looking down this list gives you a better idea how important the timing of your bankruptcy can be. We’ll be covering these timing issues one-by-one in our next blog posts. There’s a good chance that one, or even a number of them, apply to you. If any do, and you need to know more about it, please call us. We would appreciate being your bankruptcy lawyers, helping you fully  benefit from the law.

 

Wages Owed to an Employee

February 10th, 2020 at 8:00 am

If you owe wages to an employee when you file bankruptcy, that may or not be a priority debt. Here’s what determines this and why it matters.  

 

Our last dozen blog posts have been about “priority” debts. These are special unsecured debts that bankruptcy law treats better than the rest, called “general unsecured” debts.

(Secured debts are a third main category of debts, distinctive because they are attached to your assets as security. We’ve covered those before and will again later. But now we’re addressing priority debts, which are not secured by any of your assets.)

The most common priority debts in consumer bankruptcy cases are income taxes and child/spousal support. So our recent blog posts have focused on these two. But if you have been operating a business with employees or independent contractors there are other important potential priority debts. These involve unpaid wages, salaries, commissions and benefits owed at the time of bankruptcy filing. Our next few blog posts will focus on these.

The Conditions of Priority

If you owe a wage, salary, commission, or employee benefit when filing bankruptcy, that may or not be a priority debt. It depends on timing and the amount owed. The pertinent statute says that priority debts include those:

only to the extent of $13,650 for each individual or corporation, as the case may be, earned within 180 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first, for… wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual

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

The $13,650 Dollar Limit

This dollar limit is mostly self-explanatory. Any amount owed to an employee up to $13,650 is a priority debt. Any amount beyond that is just a general unsecured debt.

This amount may seem odd. That’s because it’s been adjusted for inflation every 3 years as mandated by law. Section 104 of the Bankruptcy Code. It was originally $10,000. It’s been $13,650 for bankruptcy cases filed since April 1, 2019 (and will likely increase on April 1, 2022). See this notice in the Federal Register of February 12, 2019.

Timing

The wage, commission, etc. must have been earned within a very strict time period of 180 days. This is 180 days before your bankruptcy filing date or before you stopped operating your business, whichever happens first. So for example if you stop operating your business on January 1 and then file bankruptcy on the following March 1, the pertinent period would be the 180 day period before January 1. Wages, etc. earned during that period would count as priority. Earnings outside that period would be general unsecured debt.

Why Priority Matters

Whether a debt is a priority or general unsecured one sometimes doesn’t matter. But often it matters a lot.

This distinction of itself does not matter in a simple, “no-asset” Chapter 7 “straight bankruptcy” case. That’s one in which everything you own is “exempt”—protected from collection by the Chapter 7 trustee. Most straightforward consumer Chapter 7 cases are “no-asset.” If you operated a business you may also have a “no-asset” Chapter 7 case although that’s less likely.

The priority-general unsecured distinction matters a lot in an “asset” Chapter 7 case. That’s because the trustee pays debts out of the collected and liquidated non-exempt assets. The trustee pays priority debts in full before paying anything to general unsecured debts. Often that means that priority debts are the only ones that receive any funds from the trustee. Or priority debts may be paid in full while general unsecured debts only receive a few pennies on the dollar.

The priority-general unsecured distinction also matters a lot in all Chapter 13 “adjustment of debts” cases. A 3-to-5-year court-approved Chapter 13 payment plan must pay all priority debts in full. In contrast, the plan usually pays general unsecured debts only if and only to the extent there’s any money left over after paying all priority (and often secured) debts first. The result is that priority debts stand a much better chance of getting paid. In contrast, general unsecured debts often receive only a small portion of the amount owed, and sometimes absolutely nothing. (This also largely applies to Chapter 11 business reorganizations and Chapter 12 farm reorganizations.)

So under “asset” Chapter 7s and all Chapter 13s, whether a wage, etc. meets the priority conditions or not usually makes a tremendous difference about whether and the extent to which it is paid.

Order of Priority

There’s one more important consideration in whether a wage, etc. gets paid and to what extent. The law doesn’t just make a distinction between priority and general unsecured debts. Some priority debts have higher priority than others. The higher priority debts receive payment in full before the lower priority ones receive anything.

This doesn’t matter so much under Chapter 13 in which you must pay all priority debts in full. Nor does it matter in an asset Chapter 7 case in which there’s plenty of money to pay all priority debts. But it does matter in an asset Chapter 7 case in which there are more than one type of priority debts and there’s only enough money to pay some of them.

The order of priority for wages and such is fourth out of the ten listed priority debts. Some of these ten are obscure ones that seldom apply. Focusing on the most common ones, the wage priority is lower than child and spousal support debts but higher than income taxes.

 

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