Sacramento Bankruptcy Lawyer Blog

As expected, the final 2009 numbers showed a spike in bankruptcy filings. There were 1.43 million bankruptcy filings in 2009, a 32 percent increase from 2008. Consistently, every month in 2009 reported bankruptcies in excess of the same month in 2008. Last month, there were 22 percent more bankruptcies than in December 2008.

The recession has caused bankruptcies to reach a level that has not been approached since 2005, when Congress rewrote the Bankruptcy Code to discourage consumers from filing bankruptcy. This year's 1.43 million filings was the seventh-highest year on record, behind 1998 and 2001-2005.

Some experts contend that the 2005 Bankruptcy Code reform has been ineffective. They attribute the decline in bankruptcies after 2005 to the healthy economy, the surge of people filing bankruptcy in 2005 to avoid the new rules, and the new rules making bankruptcy more expensive and time-consuming. The reform had intended to prevent filers from abusing the system. But, those safeguards are now costing filers more money and delaying relief to families that need protection from creditors or need to save their homes.

This year does not project much, if any, reduction in bankruptcies. Foreclosures and subprime mortgages going bust will likely continue. And many more families may be under financial stress due to unemployment and underemployment in 2009.

The Los Angeles Times reports that over the twelve months that ended September 30 small business bankruptcies in California were up 81 percent over the previous twelve months. In all, 19,000 small businesses in California filed bankruptcy, compared to 10,500 the previous year. Nationally, small business bankruptcies were up 41 percent. The Sacramento area had one of the nation's highest rates of small-business bankruptcy filings.

The figures fail to account for small business owners who file for personal bankruptcy, a strategy that many bankruptcy attorneys recommend because it is simpler than filing for a business. Many small business owners personally guarantee debt and therefore cannot just close their business because they are personally liable for lingering debt. And, business owners often use personal finances to prop up their businesses. So, even if their business survives, their personal financial situation may become untenable.

Small business owners have been plagued not just by the downturn in the economy, but especially by the credit crunch. Banks have been reluctant to take on any risk, including providing loans to small businesses, even though they owe their continued existence in large part to bank bailouts funded by the taxpayer. More than just refusing to loan to vulnerable businesses, banks have rejected loan applications from businesses that have been operating healthily for years. Without funds to pay bills and employees, debt piles up and becomes unbearable.

The Obama administration is exploring providing stimulus funds aimed at small businesses. Potential plans include providing loans, temporarily suspending capital gains taxes on new investments in small-business stock, and tax incentives to encourage small businesses to hire more employees. The government must act quickly because every month more and more small businesses and businessmen flounder.

The following is a fictitious scenario:

Year 2005: Jeff, Controller never thought he would settle in California, but the politics start here, the best athletes are from here, the fashions are ahead of everyone else's. Everyone knows the major cities from rap: Frisco for San Francisco, Sacto for Sacramento, Oaktown for Oakland. People judge based on area code, and if asked where they're from, they give their area code. 2 hour commute from the 831 to the 650, but the commute is an excuse when late. To some, Jeff's life is perfect. The office is walking distance from a pool, East West Bookstore, and ethnic foods (Vietnamese, Greek, Mexican...). Silicon Valley is where the money is. Save on groceries - free snacks, sodas, lunches. Save on water - free showers, gyms. Save on tickets - free parking. In other places, the best you may get is a filtered water cooler with little paper cups.

Year 2009: Jeff was shown the door when after returning from lunch. Jay, his manager, discussed ridding him all day behind closed doors, but pretended there was nothing happening when he asked Receptionist to help on one of his quarterly goals, when he expensed a training course. Jay read from a script and left on the guise that he had to take care of personal business so he would not need to say anything further to Jeff. Before the meeting, Jay instructed IT Manager to take Jeff's computer away so it would be gone by the time he returned to his desk. Facilities Manager wouldn't let him take his personal things, afraid that he would steal confidential information. She would not let him sit at his desk to read the exit paperwork. She treated Jeff like he stole something, and rushed him out the door.

Continue reading "Bankruptcy Discharge" »

Under 11 U.S.C. § 547(b)(4)(A), transfers made from the debtor's estate up to 90 days prior to filing of the bankruptcy petition are avoidable by the trustee as preferential transfers. In other words, the bankruptcy trustee can undo any such transfers because they are deemed to improperly favor the recipient over other creditors.

However, under § 547(c)(4), those transfers are not preferential if the creditor made a new loan after the borrower paid off the old loan. This exception is designed to protect revolving credit arrangements. Typically, a credit card provides a borrower with a debt limit that cannot be exceeded. If the borrower pays the full balance one month, then the next month the borrower has the full credit limit at his disposal. If the borrower has not paid the full balance, then the following month he has a correspondingly less amount at his disposal to borrow.

Hence, it is unfair for the lender if payments made prior to a new loan are undone. The lender would not have offered the new loan unless it received those payments.

An illustration: John has a $1000 credit limit. He uses $600 to make purchases in Month 1 and pays off the full balance at the end of the month. In Month 2, he makes total purchases of $800 and pays off the full balance at the end of the month. In Month 3, he makes $1000 in total purchases, but does not pay off the balance and files bankruptcy. Under section 547(c)(4), John's payments at the end of Months 1 and 2 are not preferential transfers, and the lender does not have to return the payments to John's bankruptcy estate.

The American Bankruptcy Institute (ABI) reported encouraging numbers for November. Consumer bankruptcy filings dropped 18 percent from October, as there were 112,152 filings as compared to 135,913 the previous month. Chapter 13 filings held steady at 29 percent of all consumer cases.

The November numbers still represented a 12 percent increase from the previous November. Samuel J. Gerdano, ABI's Executive Director, attributes the rise to the persistently high unemployment figures and still beleaguered housing market. National unemployment remains high and many consumers are still struggling with housing debt in excess of their homes' values. Negative equity prevents homeowners from being able to refinance to lower monthly payments and to use any equity to pay down debt.

Many subprime, adjustable-rate mortgages (ARM) have yet to reset. Banks wrote an avalanche of five-year ARMs into 2007 before the credit crisis began. Bankruptcies may remain high as these mortgages switch from their low initial interest rates, and the monthly payments adjust upwards accordingly. Chapter 13 bankruptcies will also remain high, as homeowners are more likely than non-homeowners to have income and assets that preclude them from filing Chapter 7.

If you are a homeowner struggling with an ARM, then you may benefit from consulting with an experienced bankruptcy attorney.

On November 6, 2009, the New York Times reported Jason Rodriguez opened fired at his former workplace in downtown Orlando, FL. The engineer gave his life away when he randomly shot 6 people, injuring 5 and 1 dying at the scene. The shooting resulted from anger in being terminated in 2007 at an architectural firm. Rodriguez filed for bankruptcy and was working at a Subway shop.

It seemed difficult for his former employer to understand why he would still be angry at the termination, but those who have jobs, are not in debt, or are otherwise productive, may not realize angry thoughts continue to play over and over when someone is stuck at the same place for a long period of time. The unemployed today have taken much longer to find new positions, with some taking possibly over a year to land only a part-time or temporary job. It seems Rodriguez allowed an injury to go beyond its original scope, defining his self-image based on one company, but compassion is what separates a bankruptcy attorney who is an ally from one who advises only on legal proceedings. Bankruptcy is not a sign of imperfection, but an unburdening of the past, and a test in courage to face whatever comes.

Bankruptcy proceedings are governed by federal law - the Bankruptcy Code, found at Title 11 of the United States Code. Title 11 contains numbered chapters that define eligibility to Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13 and Chapter 15.

Chapter 7 can be used by both businesses and consumers to liquidate assets to pay creditors. A Chapter 7 debtor cannot reorganize, emerging from bankruptcy with restructured debt. In Chapter 7, upon the filing of the proceeding a trustee oversees the liquidation of the debtor's assets. The trustee is chosen randomly from eligible panel trustees in the district where the case is filed. For a business, the trustee takes over control and oversight from an entity's board and leadership team. For a voluntary bankruptcy, there is little chance for payment of creditors.

Chapter 9 provides for reorganization of a municipality like Vallejo, CA and perhaps Pacific Grove, CA.

Chapter 11 refers to the business reorganization chapter of the Bankruptcy Code. Unlike Chapter 7, in a Chapter 11, the company's management and board remain in control of the process. A company continues to operate post-filing. No trustee is appointed in most Chapter 11 proceedings, but bankruptcy court approval is necessary for many operational decisions. Chapter 11 by a business does not necessarily mean that it will reorganize. Many Chapter 11 cases begin with an immediate sale of substantially all of the debtor's assets (a liquidation), commonly known as 363 sales. After substantially all of the assets are sold, Chapter 11 proceedings may end with court approval of a reorganization plan.

A reorganization plan is provides for payment of creditors and interest holders in accordance with the Bankruptcy Code. The plan may involve distributing proceeds to creditors after a liquidation sale, restructuring debts, and continued operations. The plan offers creditors an opportunity to review and take a position as to property distribution and future operations of the debtor.

Chapter 12 is limited to family farmers and fisherman, Chapter 13 is limited to consumers, requiring the consumer debtor to repay some amount to creditors. A business is not eligible for Chapter 13. Chapter 15 deals with cross-border insolvencies.

Continue reading "Bankruptcy Reorganization or Liquidation" »

On Tuesday, the Supreme Court heard two cases that could significantly impact bankruptcy law. Besides hearing arguments about the dischargeability of student loan debt in bankruptcy, the U.S. Supreme Court heard a second case challenging the validity of provisions of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). One rule prohibits lawyers from recommending that assisted persons, who are individuals with primarirly non-exempt consumer debts, take on additional debt. Another requires that attorneys who offer bankruptcy advice must advertise as debt relief agencies.

A Minnesota law firm challenged the provisions as violating lawyers' First Amendment rights, ethical duties to provide legal advice, and responsibility to not provide misleading advertising. The firm's stance is that 11 U.S.C. section 526(a)(4) is overbroad and wrongfully prevents attorneys from providing sound legal advice to clients. For instance, the law, which prohibits advising assisted persons to incur more debt, may prevent an attorney from advising a potential bankruptcy filer to sell his overly expensive home and rent an apartment because the lease would be additional debt.

The firm also argued that Congress did not intend for 11 U.S.C. section 528, which requires that debt relief agencies disclose in advertisements that they are debt relief agencies, to apply to bankruptcy attorneys because Congress designed the law to regulate behavior by non-attorney bankruptcy providers. The firm's attorney made the point that If Congress wanted the law to apply to attorneys the law's language would explicitly include attorneys.

The justices appeared to view section 526(a)(4) unfavorably and Justice Scalia even repeatedly referred to it as "a stupid law." On the other hand, a few justices treated the firm's position on section 528 skeptically. The Supreme Court will likely hand down a decision towards the beginning of 2010.

On Tuesday, the Supreme Court heard oral arguments in a case that could provide more clarity to what circumstances qualify as "undue hardship." Finding undue hardship is a requirement to permitting a bankruptcy filer to discharge student loan debt.

Over two decades ago, Francisco Espinosa took out $13,000 in student loans to go to an Arizona trade school to learn computer drafting. After four years, he graduated but could not find a job. He wanted to get married but first wanted to make sure his finances were in order. Without little recourse to pay back the debt, he called a lawyer. The attorney filed a Chapter 13 bankruptcy and drafted a plan that would pay back the original student loan principal but not repay the $4,000 in accrued interest. Although the lender, United Student Aid Funds, Inc., was notified about the bankruptcy, it did not object, and a bankruptcy judge approved the plan.

Espinosa made payments on the Chapter 13 plan, and after five years in 1997 the bankruptcy court declared the debt paid in full. Espinosa thought that was the end of the story, but two years later United started demanding that Espinosa pay the interest. Then, in 2003, eleven years after the bankruptcy court confirmed the original payment plan, United claimed that the original plan was illegal and void because the bankruptcy code only allows discharge of student loan debt if the borrower shows undue hardship.

The Ninth Circuit Court of Appeals in San Francisco ruled against United because of the multiple notifications it received and its failure to object to Espinosa's plan. United appealed and the U.S. Supreme Court took the case.

In front of the Supreme Court, the Justice Department, siding with United, argued that the "undue hardship" requirement ensures that student loan debt is not routinely discharged. This policy helps ensure that lenders continue to offer student loans, even to those with weak credit.

In rendering their decision sometime in the next few months, the justices must rule on Espinosa's fact-specific scenario and also indicate to lower courts how to approach undue hardship arguments. The decision may have significant ramifications for the lending industry and the millions who hold student loan debt.

As a result of a bankruptcy filing, an automatic stay prohibits creditors from seeking to take certain actions outside the bankruptcy proceedings to collect amounts due to them from the debtor which arose prior to the filing of the bankruptcy petition. Notwithstanding, a creditor may be entitled to take certain legal action to obtain relief from automatic stay.

For example, if a creditor is a supplier who shipped products received by the debtor within forty-five (45) days prior to the bankruptcy filing, a creditor might submit a timely written reclamation demand to recover possession of goods, or at the debtor's option, receive a higher priority administrative claim as to the products when opposing an unsecured claimant, thus increasing payment.

Another example is for a creditor to file a motion with the court to obtain relief from automatic stay by explaining the asset as a depreciating asset that will lose its value if the court does not allow the creditor to take back the asset to resell. The Bankruptcy Code allows the court to grant relief from automatic stay for cause when there is lack of adequate protection of an interest in property, if a debtor does not have any equity in the property, or if the property is not necessary for an effective reorganization of debtor. This usually occurs in the event of assets like cars where a debtor is no longer able to pay loan payments towards the car purchase.

In a recent case decision, Dumont v. Ford Motor Credit Company, 581 F.3d 1104 (9th Cir. (Cal.) Sep. 15, 2009), the Ninth Circuit Court of Appeals confirms the Bankruptcy ode does not protect a debtor's personal property if the debtor fails to commit to redeem, reaffirm or assume the underlying loan. According to Bankruptcy Code Section 362(h)(1)(A), a debtor has to file a Statement of Intention and indicate whether debtor will surrender or retain the property. If the debtor retains, the debtor is required to elect to redeem, reaffirm or assume the underlying loan. Otherwise, the automatic stay is terminated and the vehicle is no longer property of the bankruptcy estate, allowing the creditor to attempt repossession of the vehicle.

When doing business, a company should be wary of customers' credit to prevent becoming a potential creditor of a bankrupt estate. A company should watch out for publications on bankruptcy filings to ensure that it timely files any claims and meets deadlines for relief from automatic stays.

Continue reading "Relief from Automatic Stay" »

In describing the need for health care reform, President Obama noted the importance of insuring the middle class against financial catastrophe. When he addressed a joint session of Congress in September, he described the need to protect Americans "who live every day just one accident or illness away from bankruptcy."

A recent New York Times article describes how health care reform would improve the problem. The proposed bills in the House and Senate would expand Medicare eligibility and provide health insurance subsidies for those making up to four times the federal poverty level, which in 2009 was $22,050 for a family of four. The bills would prohibit insurers from denying coverage to those with pre-existing health conditions and would cap annual out-of-pocket medical costs.

As health reform has remained in the national consciousness, there is a growing awareness of just how big a role medical expenses play in the over one million bankruptcies filed by individuals and families every year. As one bankruptcy attorney described it, bankruptcy has become the insurance system for the country. A growing number of Chapter 7 liquidation cases discharge significant medical debt. For many middle class families who already have plenty of financial pressures, dealing with unanticipated medical expenses can prove to be overwhelming.

And medical debt is not limited to the uninsured. With deductibles in the thousands or policies that only cover a percentage of the cost, many insured are forced into bankruptcy by expensive and necessary medical procedures.

Hopefully, health care reform will be able to reverse the trend of medical bankruptcies. Until Congress passes reform, contact a bankruptcy attorney if you need some advice on how to deal with medical debt that has upset your finances.

There is a common misconception that filing bankruptcy will permanently prevent a person from being able to purchase a home. The reality is that there is no rule that banks cannot provide loans to those who have recently filed for bankruptcy. In fact, many people obtain home loans mere years after filing.

A bankruptcy filing will significantly affect a person's credit report initially, but the effect diminishes over time, especially as the filer actively rehabilitates their credit. A Chapter 7 filing may remain on a person's credit report for up to 10 years after the date that the bankruptcy court finalized the bankruptcy, which may be more than a year after the initial filing.

Still, banks will not necessarily reject a home loan application based on a years-old filing. Likely, the bank will evaluate how the applicant has handled debts that have accumulated post-filing. Additionally, if within the bankruptcy plan, a debtor has agreed to repay certain debts, then the potential lender may follow up to find out whether the debt has been repaid. If a potential borrower has collateral up front and has evidenced a responsible recent credit history, then the bank will not necessarily be scared away by past financial troubles.

If you are experiencing financial difficulties but are worried about bankruptcy ruining your hard-earned credit score and dreams of owning a home, understand that bankruptcy will not rule out homeownership. It may delay the dream, but that delay does not have to be for too long. Post-filing, you have the power to ensure that the delay is short. Consult with a bankruptcy attorney about how bankruptcy would affect you and how you can rehabilitate your credit after you file.

A Chapter 7 bankruptcy filer typically must liquidate many non-essential assets. However, the Bankruptcy Code exempts a debtor's "implements, professional books, or tools of the trade" from attachment of judicial lien or seizure by the bankruptcy estate. Under 11 U.S.C. sections 522(f)(1) and (2), the debtor can protect the fair market value of the exempted property up to the amount of all consensual liens on the property plus the applicable tools of trade exemption. If the property's value exceeds the exemption plus consensual liens, then the bankruptcy estate may attach a lien on the property.

By codifying the tools of trade exemption, Congress wants to ensure that the self-employed have the ability to earn a living post-bankruptcy and to rebuild their financial situations. For example, a barber can protect his personally-owned scissors and a computer programmer can protect his computer. Post-bankruptcy, both can resume with their jobs.

In California, a single debtor can exempt up to $6,750 for tools of trade. This amount doubles to $13,475 if two spouses file who are employed in the same occupation.

If you are considering bankruptcy, it is important to consult an attorney to determine what assets can be protected by the tools of trade exemption and any other exemptions in the Bankruptcy Code.

In early 2008, Silver State Helicopters, a flight-training school that operated a branch with about 200 students out of McClellan Business Park in Sacramento, filed for Chapter 7 bankruptcy. As a result, hundreds of would-be pilots, who had taken out tens of thousands of dollars in student loans, were left stranded with debt and short of the Federal Aviation Administration certifications they expected for their investments.

On October 28, California Attorney General Jerry Brown's office announced that those students would receive significant student loan forgiveness. Though it made no admission of wrongdoing, Student Loan Xpress will waive $112.7 million of the $174 million owed by Silver State students. Student Loan Xpress is owned by CIT Group, which itself recently filed for Chapter 11 bankruptcy.

In a news release, Brown stated that the loan forgiveness will save students from "a mountain of debt for training they never received." Brown's office stated that Student Loan Xpress, which had lent money to most of Silver State's students, "had reason to believe that the school was in serious financial difficulty" and provided students with loans anyways.

In the settlement, the California students will receive about $25.5 million in debt relief. Students borrowed an average of $69,900, but the slate will not automatically be wiped clean. Borrowers will receive debt relief in proportion to the progress made in their training. Thus, a student who received more FAA certifications will receive less debt relief.

This story illustrates the important role that regulators play in ensuring that the lending industry remains honest and treats customers equitably. Attorneys must also remain vigilant in advocating for their clients in negotiations with lenders.

After someone files a Chapter 7 or a Chapter 13 bankruptcy, the person will be required to attend a brief hearing called a Section 341 Meeting of Creditors. Bankruptcy professionals refer to this hearing as a "341 hearing." Consult with a bankruptcy attorney for help.

The 341 hearing is held between 30 and 45 days after a debtor files and it will last about 5 to 10 minutes. At the hearing, the trustee asks a series of questions on any updates to the debtor's petition, such as whether the debtor has lost his job, whether he has filed any lawsuits, whether he has married. The trustee will ask the debtor to raise his/her right hand and take an oath stating that what he/she are about to say is the truth, the whole truth, and nothing but the truth under the penalty of perjury. Failing to tell the truth is a criminal offense. Perjury is investigated and prosecuted by the FBI and the U.S. Attorney. If the debtor does not speak English, he/she should make arrangements for a translator ahead of time.

At the hearing, the debtor has to bring a social security card and photo ID to prove that he/she is the debtor and that his/her information matches what is on the petition. If the person forgets to bring the identification, he/she may be required to return in person with the information.

The hearing is recorded. Nothing final happens at the 341 hearing. Sometimes, there maybe missing information requested from the trustee, such as a review of tax filings or proof on wages earned. The debtor is required to read an information sheet on bankruptcy proceedings, and given instructions on a required education course on finances.

After the 341 hearing, the trustee determines whether there are assets that may be liquidated to pay the debtor's creditors. If there are assets to be liquidated to pay creditors, the creditors are paid based upon their priority established by the Bankruptcy Code on a pro rata basis. If there are no assets, the trustee files what is called a "no asset report" and no creditors receive payments.

Find a bankruptcy attorney who will be an ally in counseling on bankruptcy proceedings to make the process less intimidating.

When most people think about divorce they think about the process of dividing assets. Increasingly, however, dividing debt is also a big part of the process and this aspect of a divorce action should not be overlooked.

California is what's known as a Community Property state. In a CP state all assets obtained during marriage belong to the community and are divided equally upon divorce. However, the CP sword cuts both ways: debts incurred during marriage will also be split down the middle. And this holds true even if a debt is in only one spouse's name.

For couples with a heavy debt burden, bankruptcy can offer the hope of a fresh start. But this should be an individual decision, since you can file for bankruptcy jointly (with your spouse) or separately and either before or after a divorce. It can sometimes be best for a couple to file for bankruptcy jointly before they divorce. Not only does this reduce the amount of debt to be divided, but it also seems to reduce the level of acrimony present in a typical divorce proceeding.

One further consideration to keep in mind is that bankruptcy will not affect certain family obligations such as alimony and child support. These debts will not be discharged through bankruptcy.

I am a Sacramento bankruptcy attorney. Our Sacramento office is located at 1104 Corporate Way, Sacramento, California, 95831. We also have offices in Oakland, Fairfield, and Walnut Creek. I offer free consultations in these locations. Please call us at 925-932-7086 if you'd like to schedule an appointment.