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WHAT YOU NEED TO KNOW JUST IN CASE: BANKRUPTCY

May 11, 2020 | Category: Corporate and Taxation, Firm News

COVID-19 is turning out to be the “black swan” of our lifetimes.  Ask yourself, what are you going to do if the pandemic goes on for another year or two?  Will you put money into your business in an effort to save it? What happens if you use up your liquid assets, max out your credit cards, and still come up short?

We have decided to do a series of articles on bankruptcy. Many of you never contemplated this, but, just in case, we will give you helpful hints so that you do not make common mistakes which could cause you to lose assets or fail to get a fresh start. 

These articles will discuss the following issues:

  • Chapters 7, 11, and 13 Bankruptcies.  What is my desired outcome?
  • Creditor Exemptions in Bankruptcy for Florida Residents.
  • Which State are you a Resident of?  The 730-Day Residency Requirement.
  • Possible Limited Homestead Exemption in Bankruptcy.
  • Attorney-Client Privilege and how to include your CPA as part of the privilege.
  • Charging Order Protection for LLCs and Limited Partnerships; Executory Contracts; Leases
  • Discharge of Debts; Tax consequences.
  • Super Creditors and Exception Creditors.  IRS problems.
  • Preferential Transfers and Guarantees.
  • Fraudulent Conveyances and Loss of Dischargeability. 
  • Involuntary Bankruptcies.
  • Self-Settled Trusts and Domestic Asset Protection Trusts. 
  • What to do and not do with a problem business.
  • How do you restart a failed business through a new entity without being liable for debts of the old business? 
     

Today, we will discuss the different types of bankruptcies.  

There are really only two types of bankruptcies. Chapter 7, which is a liquidation, allows the debtor to keep his exempt assets and use the non-exempt assets to pay off the creditors.  Chapters 11 and 13 involve a full or partial repayment plan.

In Chapter 7, the court appoints a trustee to take over the debtor’s non-exempt assets which become the “bankruptcy estate.” The bankruptcy estate is mainly fixed as of the date of filing.  In most cases, income and assets acquired after filing are not part of the bankruptcy estate.  However, inheritance, death benefits received from a life insurance policy, and assets received from a judgment of divorce or martial settlement agreement within 6 months of filing, become part of the bankruptcy estate.  

Chapter 7 works well for someone who has mostly exempt assets.  It is only the non-exempt assets that are vulnerable. The benefit of Chapter 7 is that future income of the debtor is not used to pay off discharged debts.

Usually, the debtor receives a “discharge” for his debts, keeps his exempt assets and receives a “fresh start.” However, there are certain debts that are not dischargeable, such as debts for certain taxes, debts arising from fraud, intentional torts, etc.  

If the debts are primarily consumer debts - those that are personal, family or household debts - and certain other requirements are met, the Court will convert the case to Chapter 13.  Chapter 13 is also known as a “wage-earner plan” and is available only to individuals. This requires payment usually over five years. However, under the CARES Act, this has been extended temporarily to 7 years.  If the debtor meets his obligations under the plan, the debtor receives a discharge for his debts, with exceptions.  

While Chapter 13 allows the debtor to keep all of his assets, the debtor is burdened with using future income to pay off old debts.  A typical Chapter 13 filer is someone who has adequate income, can afford the mortgage on his/her home, but is tired of being harassed by creditors. Chapter 13 filers can have no more than $394,725 in unsecured debts and $1,184,200 in secured debts. 

Because of the CARES Act, payments received by a debtor under the National Emergencies Act with respect to COVID-19 are excluded from the computation of how much the Chapter 13 debtor is obligated to pay.  

Finally, Chapter 11 is primarily for businesses. Sometimes an individual with many assets files for this as well. In most cases, there is no trustee and the filer becomes a “debtor-in-possession.”  This means that the debtor remains in possession and control pursuant to a plan which is agreed to by the debtor and the creditors or mandated by the Court.  The hope is that the business survives, and the creditors are at least partially paid.

The CARES Act changed the maximum debt limit for a streamlined Chapter 11 procedure known as Subchapter V from $2,725,625 to $7,500,000. This too, expires in one year.

The next article will discuss Federal and State law exemptions and residency requirements to use the generous Florida exemptions. 


Be well. Stay safe. 

We are all in this together! We will get through this, together!

 

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