Stephen Behrends Law Office Blog | Eugene, OR

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Stephen Behrends Law Office | Bankruptcy | Eugene, OR

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Welcome to my blog

 

This blog is for people who are thinking that they might have to file bankruptcy. I have been helping people work through their financial problems for so many years that I know the concerns that come up again and again. I want to provide practical information that you can use right now in helping decide how to take on these complicated issues.

By Stephen Behrends, May 3 2020 09:48PM

A recent New York Times article discusses this important question:

https://www.nytimes.com/article/small-business-bankruptcy-coronavirus.html?referringSource=articleShare

Experts and small business advocacy groups worry that tens of thousands of small business will be lost in the coming years due to the Coronavirus crisis. Many of them will consider and may be saved by filing bankruptcy. But there are the big questions: When do they need to start to think about it, which chapter of bankruptcy would be best and would the owners as well as the business have to file.

Everyone agrees that a clear sign that the company should consider filing bankruptcy or shutting the doors is an inability to pay the payroll taxes to the state or the IRS. The owners will be personally liable if the payroll taxes are not paid and it also is a definite indication that the business is not generating enough cash flow to cover the ongoing expenses.

Chapter 7 can be filed when it is time to give up or when the owners have no non-exempt assets. But a Chapter 13 or Chapter 11 is needed if there are non-exempt assets to be protected or the business can be reorganized.

Chapter 11 has recently been improved with the addition of Sub-Chapter V (5), which streamlines the Chapter 11 process and makes it easier for the Bankruptcy Court to approve a plan which is not supported by the creditors. Corporations, LLC, partnerships and joint ventures can only reorganize through Chapter 11, so the addition of the sub-chapter 5 is a big deal. Before it came along, there was only regular Chapter 11, which is big, clumsy and expensive, or the sale of the assets of a small corporation owned by an individual or couple, to the owners who then file Ch 13.

If the owners of the company have personally guaranteed the buisness debt, they may end up having to file bankruptcy, whether or not the company has to file. A bankruptcy for the company doesn’t automatically protect the owners. And a bankruptcy isn’t automatically required just because the business is going to be shut down. Sometimes, it is possible to reorganize the business in bankruptcy so that the debt that is personally guaranteed or the payroll taxes for which the owners will be personally liable can be paid.

A business reorganization is essentially a new business and so a new business plan and budget are crucial. Can the reorganized business generate the income needed to survive, even if its debt is restructured? If not, a Chapter 7 bankruptcy may be considered.

An experienced bankruptcy attorney can help sort out all of the questions about whether to file, who should consider filing and which chapter would work best.

By Stephen Behrends, Mar 18 2020 11:25PM

Many people are worried right now because their business or job is threatened. Large numbers of people are already unemployed because of the economic fallout from the Covid-19 crisis. Restaurants, bars, college and professional sports have been shut down and the travel and hospitality industry is grinding to a halt.

Will everyone end up having to file bankruptcy as a result?

The situation is similar to 2008 & 2009 except that what happened over 2 or more years then now took only two weeks! Many people had to file bankruptcy as a result of the crash that started in those years. Most were able to rebuild their credit and their lives, buy homes, start families, build businesses or retire with dignity. So bankruptcy is an important safety net.

But there are some signs that things might be different now. Even though the country is arguably more politically divided than ever, maybe there is going to be bi-partisan support for a stimulus package this time around. There is a chance that people learned from the mistakes that were made the last time. Perhaps it is partly because it is clear that this crisis was caused by the virus and the slow response to it.

So maybe we don’t have the same factors that led some to say in 2008, for example, that the banks and the auto industry should be left to face the free market consequences of their decisions. It doesn’t seems like there is as much talk about how we should be more worried about the effect of a stimulus package on the deficit than the consequences of leaving people to fend for themselves in these unprecedented times.

Also, maybe the banks and mortgage companies learned from the last time that they need to work with people, not leave them behind. It doesn’t do them any good to have people losing their homes and being forced to file bankruptcy. We certainly saw a lot of people get loan modifications as the housing crisis in 2008 and 2009 continued for years afterwards.

So, what are your options? What can you do if you have lost your job or if your small business is facing an indefinite shut down severe restrictions on its operations?

First, I believe that communication is a key strategy. Call your landlord or your mortgage company. See what they can do to allow payment skips or delays. Call the lender on your car loan and your credit card companies. Ask about options for payment skips or reduced payments.

Communication is especially important or even crucial for small businesses. If you are a small business owner and have a bank loan or line of credit, call the bank and talk to them about your options. Call your landlord and let them know how the shutdown is going to affect your ability to pay your lease.

Follow up on options right away. If you are eligible for unemployment compensation, apply right away. As hard as it will be to do it, check into eligibility for food stamps or other benefits. It might be a while before things return to normal. The Oregon Employment Department has the following website that has some information about unemployment compensation benefits

https://www.oregon.gov/employ/unemployment/pages/default.aspx

Also, this is a good time to follow the news so you can find out about loans, bailout and stimulus packages that will be coming out of Washington DC. The SBA may get money to make loans for small business to survive, with a streamlined and simplified application process. The following website has information on disaster loan assistance and will probably be the first place to have information about emergency relief from the SBA

https://disasterloan.sba.gov/ela

You can always call your representative in Congress or Senator’s local office. They all try hard to help their constituents deal with federal agencies and probably can get answers about what assistance is or may become available for your small business.

Remember that you are not alone. Millions of Americans are facing the economic consequences of the health crisis and ensuing results across the country. Solutions are going to have to be available to avoid widespread disaster and the country’s leaders are working on them right now.

Don’t worry about having to do anything like filing bankruptcy right away, unless you are already, for example, getting garnished or facing a foreclosure. Unless you are already dealing with foreclosure, lawsuits, judgments or garnishments, it is likely that there will be time to figure out your alternatives and wait to see if you really are going to have to file bankruptcy as a result of this crisis. Bankruptcy is a last resort and you probably have time to wait to see if maybe there will be resources or options available to help you avoid it.

Of course, feel free to call or email with your questions. Sometimes, just knowing that the bankruptcy safety net is in place below you makes it easier to survive day to day, even if you never need it.

By Stephen Behrends, Feb 29 2020 11:39PM

Q: Do I have to pay all of my bills in full in Chapter 13? Isn’t it just a Court Ordered Debt Repayment Plan?

A: Only a few Chapter 13 cases require 100% payment to all of your creditors, both secured and unsecured. Most plans pay only a small percentage to their general unsecured creditors. Secured creditors will get potentially different treatment under the plan, and your attorney will be able to discuss this with you as that treatment depends on your individual circumstances.

Q: Do my creditors get a copy of the plan? Can they object to it?

A: Yes, due process requires that the creditors get notice in the form of a copy of the plan and are told that they have an opportunity to object to it. Certain secured creditors will get an additional copy of the plan from your attorney. A certificate of service has to be filed with the Court showing that this was done.

Q: Why do people file Chapter 13? Why doesn’t everyone file Chapter 7?

A: There are three main reasons why people choose to file Chapter 13 rather than Chapter 7, and two reasons why for some people, the only way to get bankruptcy court protection is to file Chapter 13.

The primary reasons people choose to file Chapter 13:

The first, and the most common, reason is to save their home from foreclosure. They can reinstate their mortgage or land sale contract and catch up on missed payments over the life of the plan (3-5 years).

The second is to handle big (but not too big!) tax problems. They get protection for the duration of their plan from the state (ODR) and the IRS while they pay their taxes.

And the third is to retain non-exempt assets that a Chapter 7 trustee might take and sell to pay creditors. Instead of taking assets, the Chapter 13 trustee just takes the payments made monthly through the plan and disburses the money to the creditors himself, while you, the debtor, gets to retain these assets and, depending on what they are, continue to pay for them through the plan.

A few reasons some people can only use Chapter 13 and can’t file Chapter 7:

They have already filed Chapter 7 within the last eight years. You can file Chapter 13 four years after the filing of a bankruptcy case (any chapter) that resulted in a discharge but you must wait eight years before you can file another Chapter 7.

And perhaps the most complicated reason: Too much income! This is measured by something called the means test and has multiple parts.

First, the form requires that you put in your income from the last six full months before the month in which the case is filed and this number is then compared to the median income for a household the same size as the yours in your state.

If you are above that figure, the means test form then requires that you look at the numbers derived from the IRS local and national standards for income and expenses, compare your numbers to them, and see if there is any money left over. And if so, the form then looks at whether that left over income could make a significant payment on the debt.

The determination that a payment could be make a meaningful reduction in your debt is a determining factor for the requirement that some people have to file Chapter 13 versus Chapter 7.

Q: Who determines the amount of the Chapter 13 plan payment?

A: The debtor and the debtor’s attorney propose the payment amount in the plan and the trustee responds to that proposal.

Q: How much will my plan payment be?

A: There are three tests to determine how much the proposed plan payment has to be:

The best interest test: This test says that you have to pay your creditors as much as they would have received in a hypothetical Chapter 7 case. So, for example, if you had assets that could have been sold by a Chapter 7 trustee to pay back your creditors (after any expenses associated with the sale are deducted, as well as any applicable exemptions as to that asset), then whatever that net amount the creditors would have received in the Chapter 7, they must now also receive in Chapter 13.

The best effort test: This test says that you have to pay all of your income above your reasonable and necessary expenses into the plan.

The feasibility test: This test requires that the plan payments must be sufficient to pay what has to be paid through the plan. This includes mortgage arrears or back taxes the trustee’s commission, additional attorneys fees for your lawyer, priority claims, other secured claims being paid through the plan, including interest, and the best interest test number to the unsecured claims.

Q: What if my income or expenses change a great deal? Can the plan payments be adjusted?

A: Under the best effort test, if your income goes up more than 10% you are required to tell the Court and then you and your attorney will probably have to prepare an amended plan to increase your plan payments. The payments probably won’t go up dollar for dollar the same as your income increase, but they will likely go up.

On the other hand, if your income goes down, you may be able to decrease your payments but only if the plan still meets the feasibility test. So if there are priority claims, secured claims or a best interest number that has to be paid, your payments have to stay high enough to pay them all even if your income goes down.

By Stephen Behrends, Feb 26 2020 04:49AM

Q: Do you have to have bad credit to be able to file bankruptcy? We have pretty good credit but can’t afford to pay much more than the minimum payments on our credit cards. They spiked when my wife was ill and our insurance didn’t fully cover the costs of many of her medications. We’d like to buy a house but we can’t save money for a down payment because of the payments on the credit cards and it will take years to pay them off. Can we file bankruptcy even though we have good credit scores?

A: There is no requirement that you have bad credit to file bankruptcy. The better your credit is going into bankruptcy, the easier it will be to rebuild it afterwards. Bankruptcy might be a reasonable and responsible solution to your situation.

Q: I have decided that I have to file bankruptcy. I talked to an attorney for a free consultation and was thinking of hiring him. I had a question about whether I should still pay the payment on my credit cards while raising the money to file. It would take six months if I keep making the payments but only a couple of months if I stop. But I didn’t know if I would get in trouble with the bankruptcy court if I stopped making my payments and used the money to pay for the bankruptcy lawyer. I left a few messages but never got a call back. It turned out that he works out of another city and only comes to my town when he has court hearings. So I was hoping I could get the answer from you!

A: Once you have decided for sure to file bankruptcy, it is ok to stop making the payments on your credit cards and other unsecured debt. Of course, you should keep paying your car payments and student loans. Stopping the payments will make it slightly harder to rebuild your credit since you will get some negative marks on it from not making the payments but on the other hand it will help you file your case much sooner.

Q: I have heard that it takes 10 years to rebuild your credit after a bankruptcy. Is that true?

A: Most people find that they can rebuild their credit after a bankruptcy in two and a half to three and a half years. You should plan on taking active steps to rebuild your credit. These are things like taking advantage of small opportunities to get and use credit, including secured credit cards or a modest car loan. Sometimes it helps to start an account at a local credit union before your file bankruptcy and then try to use that relationship to help build your credit afterwards.

Q: How long after I file bankruptcy can I get a home loan?

A: The answer depends on whether you lost a home to foreclosure in the past and whether you have the income to qualify for a home loan. If you have had a foreclosure, it can take 4 to 6 years longer than if you did not. Most people find that if they have regular income, they can qualify for a home loan in two and a half to three and a half years after a bankruptcy if they don’t have a foreclosure on their credit record. Of course, the better your credit is going into bankruptcy, the easier it is to rebuild it afterwards.

Q: I have lived in Oregon my whole life. I have a lot of credit card debt, approximately $45,000.00 from the period of time when I was in a relationship and had a good income. I also have a lawsuit against me from a car that I purchased with my girlfriend. I wasn’t able to make the payments after we broke up and so it was repossessed. The lender sold it and there wasn’t enough to pay the balance we owed. The only thing I have now is a couple of years old Ford F-150 that is free and clear. It is worth about $16,000.00 or $17,000.00 if I tried to sell it. I would like keep it because I use it for my job in construction. My brother said that I should transfer it to him or to my dad before I file bankruptcy so that, when I do, I won’t have anything for the bankruptcy court to take. Is this a good idea?

A: No, it is definitely a bad idea. If you transfer it, the bankruptcy trustee can sue your brother or your father for its value. If you didn’t transfer it but instead still had it when you filed bankruptcy, you could claim it as exempt under the Federal Bankruptcy Exemptions. There is a $4,000.00 exemption for a vehicle and a $13,900.00 catch all or wild card exemption that can be added to the vehicle exemption to cover your truck. Under those circumstances, the bankruptcy trustee couldn’t take it. But if you transfer it, you can no longer claim the exemption, so the court could get it or its value from your brother or your father.

Q: The IRS is taking 15% of my husband’s social security for personal income taxes on our 2014 returns. We filed the in 2015 when they were due. We owed a lot on them because we had to take money out of a 401(k) to help our daughter. I am still working and am being garnished by the State of Oregon for the same tax year. They are taking 25% of my net pay. We don’t have a lot of other debt and we live in a manufactured home that we own outright. It is worth about $20,000.00 and is located in a mobile home park. I heard from one friend that you can’t file bankruptcy on taxes and that we would lose our home if we did anyway. But my sister, who had to file bankruptcy a couple of years ago, said that her attorney told her that her home was protected up to a value of $50,000.00. She also said that her accountant told her that once taxes are more than three years old, they can be discharged in a bankruptcy case. Is she right about these things?

A: Yes, she is, with one possible exception. It is true that taxes that were due more than three years ago and filed more than two years ago can be discharged in bankruptcy. She is also correct that your homestead exemption is $50,000.00 for a couple and $40,000.00 for an individual under Oregon law. So your home is safe. However, if the IRS filed a tax lien with the Secretary of State, it might have a lien against your home. Bu the IRS wouldn’t try to take your house or try to sell it even if they had a lien. You would just have to pay them if you sold it within 10 years from when the lien was filed, even if you filed bankruptcy. If they filed with the County Deeds and Records, the IRS wouldn’t have a lien against your MH because you don’t own the land. The bankruptcy would help your monthly budget a lot because it would stop the garnishment of your check and the 15% coming out of your husband’s social security.

Q: My brother co-signed on a car loan for his son and his wife. The car was totaled in a wreck and it turned out that there wasn’t any insurance because their check had bounced. Now they are going to file bankruptcy. My friend said that the bankruptcy would wipe out the debt so that it couldn’t be collected from my brother either but that doesn’t sound right to me. Will he still be responsible for what the credit union doesn’t get from selling the wrecked car?

A: Yes. Bankruptcy will only take care his son and his wife’s liability on the loan; it doesn’t wipe out the debt or eliminate your brother’s responsibility for it. He would either have to file bankruptcy himself or try to work out a settlement or payment plan with the credit union.

Q: There is a foreclosure sale set on my house for June 1, 2020. I am 68 years old and I just can’t afford the payments on my social security of $1,464.00 per month. My house is worth about $235,000.00 and I only owe $67,000.00. Realtors keep calling and knocking on my door but I don’t want to move. I heard that Chapter 13 could stop a foreclosure and save my home. Would it work for me?

A: No, because in Chpater 13, you would have to be able to make the payments after the case was filed. Otherwise, you would have to plan on selling it yourself either before or after the bankruptcy was filed to stop the foreclosure. There is only one real alternative that might be able to keep you in your home and that is a reverse mortgage. Generally, we don’t like them because they can eat up all of the equity in your home but they do work well to eliminate mortgage payments while letting you stay in your home. However, if you are thinking of looking into reverse mortgages, call around and ask a lot of questions because the terms and the costs can vary widely. And don’t forget that you still have to pay the homeowners’ insurance and the property taxes yourself, even if they were being paid out of your monthly mortgage payment before. But it it gets to be too close to June 1st and you need to stop the foreclosure sale, you can always file Ch 13 to buy the time to get the reverse mortgage in place.

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