So often much is written about the people and businesses that spend too much and owe too much. Over the last several months, we have focused on them also. In reality, the names are familiar. Enron, Adelphia, TWA, Henry Mayo Newhall Memorial Hospital, Anna Nicole Smith, and Wayne Newton are but a few. The newspapers are littered with their names. Very little is written about those who are effected by them. What happens to the unpaid accounts receivable owed to the local vendor, the banks that lend them money, or the employee that has no value left for retirement? How can any of them foresee what is happening and plan to reduce their risk of loss.
Marc and Marcia Marketer are in the advertising and marketing business. The Marketers represent businesses in need of getting their name and message out to the public. They charge clients to prepare and present advertising layouts for magazines and newspapers, as well as press releases. Diane and Douglas Distributor are in the business of selling parts and supplies. The Distributors deliver upon purchase orders and accept terms standard in their industry of 30 net 10, and charge a late charge of 10% per annum on unpaid balances. Village Bank is a business bank. Michael and Mary Mutuali have invested their retirement monies in their company’s 401K plan, but have not been paid for about sixty days. BKCO is a common customer, client, and now debtor of each, having filed for protection under Chapter 11 of the Bankruptcy Code within the last ten days. The business community remembers a large auto dealer failed and many businesses were hurt, and now the local hospital is in trouble. Hindsight is always 20/20!
Now that the holidays are over, Carol and Charlie Consumer find themselves inundated with bills from their credit card companies for the gifts they purchased for friends, family and business clients. To add insult to injury, they must face the result of not paying sufficient quarterly taxes to the IRS for self-employment taxes and Social Security. In April they know that the next installment of 2002-2003 real property taxes are due, around the same time as their income taxes are due. As with so many people, the joy of the holiday season is followed by the reality of the New Year.
There is not much that the Consumers can do to repair the damage done, but there is much they can do to avoid any damage to their financial future from poor decisions regarding how to handle their problems. Carol and Charlie meet with Harriet and Harry Homeowner, who they know have consulted with an attorney regarding the possibility of filing a bankruptcy. Before they meet with the Homeowners, the Consumer meet with the Pete Preparer, the paralegal from “No Lawyers,” who tells them that Bankruptcy is simple! He tells them “all they need to do is type out the forms.” For this, Pete tells them “he will charge $200, plus the filing fee, but he legally cannot give legal advice, but will give them pamphlets to read!” Charlie thinks, great deal, but before he commits, Carol reminds him they have a meeting with the Homeowner’s Attorney. Charlie holds up committing to Pete Paralegal. Carol is relieved, and they go to the Attorney’s office for an hour consultation.
Charlie and Carol Consumer are facing ever more difficulty in responding to the many phone calls they are receiving from collection agencies. It seems that their answering machine is full of “hang ups,” “out of area,” and “garbage” phone numbers, each from a different computer generated collection call. They are so upset about the onslaught that they are thinking of changing their telephone number, again, having done it once already. But, it seems that when Carol has sent in payments, she dutifully gives their new phone number and the calls start all over again. Also, they do not get an unlisted number, and Carol gives a forwarding number, so the collection agencies easily locate the new number.
Harriet and Harry Homeowner, having taken an advance against the equity in their home, now face the payments that are due. They financed a second on their home at 125% of equity, using all of the proceeds for remodeling, landscaping and paying off some credit cards used to get them into their home. Harry Homeowner has his own computer consulting business and Harriet is a realtor. Together they make just enough to service all of their monthly creditor obligations, but not enough to save. Each uses a percent of their monthly business income for advertising and promotions, but with ends just being met, marketing is often the first thing to go. They know they are just one month, one bad month, away from getting behind and in trouble on their home loans, auto leases, property taxes and income taxes. They are on extensions to file their 2001 tax returns, but having not made any self employment tax deposits, they know they will be in trouble. Even more troubling is the thought that Congress will resolve its differences on the pending Bankruptcy Reform Bill and send it to the President for his signature and its enactment into law.
The Bankruptcy Reform Bill is currently stuck in the House and Senate Conference Committee, to reconcile the differences between the House and Senate versions passed last year before September 11. If the differences are worked out and the President signs it, the Bill provides a six month window before it is effective. The President must sign it before the current term of the House of Representatives ends.
The Reform Bill will make it more difficult for consumers and small businesses to file for protection under Chapter 7 of the Bankruptcy Code. Chapter 7, simply, allows individuals, partnerships, corporations, and other business entities, to seek protection from their creditors, while having their assets liquidated by a Court appointed Chapter 7 Trustee. For individuals, a Chapter 7 is not necessarily a free ticket out of debt. Debt arising from alimony, support, and maintenance are all excepted from a Chapter 7 discharge. Also excluded, and therefore payable, notwithstanding the filing under Chapter 7, are judgment liabilities for criminal restitution, student loans (with minor exceptions), taxes (with some exceptions), and liabilities arising from intentional acts causing injury, fraud, and breach of fiduciary trust. In total, there are 16 exceptions to a Chapter 7 discharge. The Reform Bill intends to make it even more difficult to qualify for a Chapter 7 by imposing a Needs Test or a Means Test (depending upon which version of the Bill you read), that would compare the individual’s monthly living expenses to the IRS regional average, and compare the average annual income to the median income for the region. If the actual monthly living expenses or average annual income exceed the regional statistics, there will be a presumption that the filing under Chapter 7 is in bad faith. The Court will have the discretion to determine on a case by case basis whether the individual can get relief under Chapter 7 or must seek relief under Chapter 13.
A Chapter 13 Bankruptcy Case is only for individuals with a regular income who have sufficient disposable income on a monthly basis to propose and pay installments on a Chapter 13 Plan. Also, their secured debt must not exceed $807,750, and unsecured debt does not exceed $269,000. If the Reform Bill forces the Needs/Means Test analysis on individuals, and it is determined they should not be filing under Chapter 7, they will have the most difficult task of formulating a Chapter 13 Plan based upon statistical averages they must comply with, rather than actual dollar amounts. So, an individual may be faced with the possibility they do not qualify under Chapter 7 because of statistical anomalies, yet unable to confirm a Chapter 13 Plan because they do not have the actual disposable income. If the individuals secured debt or unsecured debt exceeds the limitations under Chapter 13, the individuals must file under Chapter 11. If the debtor is not an individual, a Chapter 13 is not an option for consideration.
With this brief overview in mind, what should Harry and Harriet Homeowner do to protect the best financial interest of their family? First, the Homeowners may want to consider doing some financial planning before considering filing for a bankruptcy case. They should consult with an experienced set of professionals, including an accountant to assist them with their business financial plan, and an experienced bankruptcy attorney with a business background to work closely with them and the accountant to devise a long range plan and strategy. Second, it may be recommended that the Homeowners incorporate, if they have not done so already, so that their business liabilities and assets are protected from their individual problems. Also, generally speaking, Chapter 13 trustees prefer a bankruptcy filing by individual wage earners, over sole proprietorships, even if they own their own corporation. On the other hand, a Chapter 7 trustee may consider the stock in the corporation an asset to be sold, and California state exemption laws do not provide the Homeowners with protection otherwise given to tools of the trade. In essence, planning and careful consideration cannot be replaced or overlooked.
