Monthly Archives: April 2010

Small Business and Bankruptcy

Clients call me about filing for bankruptcy, and they own a small business.  It may be a retail store, a restaurant, a trucking company, a temporary employment agency — you name it.  The businesses vary, the nature of the problems vary, the business may be a success and other things are the problem, there is only one constant.  I have never had a small business owner walk in and know all of the things I needed to know to help him sort out his options with respect to his debts.  Never.  Not once.

So, here is a list:

  1. Is the business a separate entity, i.e. corporation, LLC, partnership, sole proprietorship (d/b/a) or something else?
  2. Assuming that the business is a separate entity, what does it own?
  3. What creditors have liens against business assets and which assets do they have liens on?
  4. What debts does the business have and which of those are you also liable for?
  5. Is the business viable or does it need to be shut down?
  6. If it needs to be shut down, what is the best way to realize value from the remaining business assets and is any particular creditor entitled to that value?
  7. Which creditors need to be paid first and why?
  8. How have you been paid for running the business?
  9. How have you contributed money to the business to keep it afloat (contributions to capital, loans)?
  10. How is the business taxed (does it file its own return, is its income reported on your return)?
  11. What business records exist and where are they?

This is certainly not an exhaustive list, and there may be a question or two that don’t apply to every scenario (especially to a scenario where the business is a viable concern).  However, these are all things that every business owner really should know.

I intend to flesh out this list over the next few weeks.  So, check back.  I will create a new category for Business Bankruptcy to make additional posts easy to find.


Bankruptcy, States and Exemptions

It used to be simple.  If you lived in Oklahoma there was a certain list of property that you could claim as exempt (meaning that nobody can take it away from you as long as you have paid for it and paid your taxes).  It didn’t matter if you were filing for Bankruptcy.  It didn’t matter if you were not filing for Bankruptcy, but you had judgment creditors trying to get paid.  It didn’t matter how long you had lived here, what phase the moon was in, how much the property was worth, how much you owed on it or much of anything except total acreage and business usage.  Those were the good old days.

I have now talked to two people in two days who have both moved here from California in the last two years.  They both need to file for Bankruptcy.  Now, what makes both of these stories really entertaining is that they both have very little equity (if any) in their homestead; but they both have other property that they could not claim as exempt in Oklahoma.

Riding to the rescue?  The California homestead/wild card exemption!  Say, what?  The California homestead exemption SUCKS!  It protects a very small amount of value.  Own a house with $100,000 in equity?  In California you are screwed.  In Oklahoma — no problem.  However, cash in the bank, real estate other than your homestead — these are problems in Oklahoma.  Not in California where a Debtor can use a wild card exemption in lieu of a homestead exemption.  That means you can protect a certain dollar figure of property — regardless of what kind of property it is.  Voila!  Money in the bank?  No problem.  Real estate that isn’t homestead?  Taken care of.

Of course, the really fun part of using another State’s exemptions is that the Trustees don’t get it.  They probably should be seeing this fairly often under the new Act.  From the looks I get from Trustees, they aren’t seeing other exemptions much at all.

I will never forget the first time I used a wild card exemption (which we don’t have in Oklahoma) to protect an unreceived tax refund from a Bankruptcy Trustee.  It was early in 2006.  The 2005 amendments (including the choice of law provisions for exemption statutes) were brand new.  I had to explain it.  The Trustee looked at me like I had snatched food from his starving jaws and then slapped him.  It is one of my most cherished memories of practice.


BK and the Supremes

BK and the Supremes is not a 50’s (or 60’s) nostalgia group.

Instead, this title is a reference to a simple fact. The 2005 Bankruptcy Reform Act is finally wending its way through the Court system to the U.S. Supreme Court.

This year the Supremes are hearing at least three consumer Bankruptcy cases. I can’t remember the last time they heard more than one in a year (commercial bankruptcies maybe, but not consumer). Yesterday they granted cert on a consumer Bankruptcy case for next year.

What makes all of this so interesting is that a lot of these issues are really pretty basic, which is surprising for Supreme Court level stuff. During the last five years there have been a lot of fundamental questions about how to interpret and apply this badly written statute. Different courts have found different solutions. This variance has created different rights and liabilities for debtors depending on which part of the Country they are filing in. Bankruptcy is supposed to be uniform — the U.S. Constitution says so. At this rate, in a few years it might actually get there.


Sheriff’s Sale Pricing

I have been watching the bidding habits at Sheriff’s Sales lately.  The first thing I noticed was that I thought some of the appraisals were a bit optimistic.  Then, I realized that Sheriff’s Sales sale prices are higher than market.  Yep, read that one again.  Sheriff’s sale prices are higher than market.

So, who are these lucky bidders who are paying more than appraised value and well above market rate for these houses?   Why, the mortgage companies, of course!

The most extreme example is a case I was watching where the property was appraised at a whopping $16,000 — probably a pretty fair price, actually.  That means bidding opened at around $11,000.  The mortgage company wound up with it — for $87,000+.  No, that is not a typo.  That is extraordinary, but I am seeing fairly regularly the major mortgage companies bidding up to the total amount of their judgments, even if that is more than the property is worth.

Without getting into why on Earth these companies are doing this, to me, as a consumer lawyer this means two things:

1.  No potential for additional liability against the former home owner; and

2.  The possibility that if the mortgage company has improperly padded their judgment amount (and yes, I think it has happened), then, the home owner might be able to force the mortgage company to actually kick back a little cash — would kind of like to try this actually.


FHA Loans and Loss Mitigation

It occurred to me after I put up the post about VA loans, that not all servicers are complying with FHA requirements either.  So, if you have an FHA loan, that loan is in foreclosure, about to be, in default or just in trouble; you probably want to read the FHA rules for loss mitigation (i.e., how mortgage servicers are supposed to deal with loans in trouble).

The FHA regs are also on my website.  Check out the Foreclosure page, left hand panel, towards the bottom.

As usual, I don’t do mortgage workouts.  If you need help, contact someone who has been trained by the FHA as a mortgage counselor or a lawyer who is well-versed in FHA regs.


VA Loans and Foreclosures

I do not represent people in loss mitigation negotiations involving mortgage loans.  I do, however, represent people in Bankruptcy who frequently are having problems with a mortgage.  So, I see a lot of mortgage issues.  One thing that I am seeing a distressing amount of is people who have a VA mortgage, get into trouble, wind up talking to their mortgage servicer and are never offered VA loss mitigation procedures.

I am not claiming to be an expert on VA loss mitigation.  However, if I had a VA loan and I was having trouble making the payments; I would be reading two things.  One is a 30-page publication put out by the VA called their Servicer Loss Mitigation Program.  The latest version I have found is dated July, 1997.  If anyone finds a newer one, please let me know.  In the meantime, you can download a copy from my website’s Foreclosure page. You will find a link to it in the left-hand panel towards the bottom.

The other thing that I would be reading is essentially a memo put out by the VA describing the “VA Making Home Affordable Program” dated January 8, 2010.   I found this at the VA’s own web site.

If you have a VA loan, are having trouble making the payments and are getting workout or mitigation procedure communications from your mortgage servicer that don’t include the words “Veterans Affairs” or “VA”, you need to contact the VA or somebody who knows a lot about VA loss mitigation.  Make sure that you are getting everything you are entitled to as a Veteran with a VA loan.


I Love Creditor Calls

I just got a call from a creditor asking if my client was going to reaffirm a debt secured by some personal property. I asked if they were offering any concessions, like a reduction in interest rate, in exchange for the reaffirmation agreement. The creditor’s rep. said that no, they only agree to a reduction in interest rate in Chapter 13’s, not in Chapter 7’s.

She didn’t get why I was laughing. The only reason they “agree” to a reduction in interest rates in a Chapter 13 is because the law requires it. They can either go along (or “agree”) or get sued for contempt of court and violation of a confirmation order. She really thought that this was some magnanimous deal her company did of its own free will for people who filed a chapter 13.

Creditors — you gotta love ’em.


Bankruptcy, It Ain’t Always the Answer

I spent a long time on the phone this afternoon with another lawyer.  His client has a lot of complicated problems.  At least one of those problems is a very aggressive creditor who wants a lot of money from the client — and is doing a pretty good job of going after what it wants.

Anyway, my point was that a bankruptcy filing would solve nothing; and, frankly, it would really create more problems for this guy than he already has.   Now, part of the problem is that there were businesses involved.  Frequently, small business owners consider a bankruptcy filing without really understanding how the business will (or in many cases won’t) be affected.   When a bankruptcy isn’t the solution is a complicated question, and the only simple solution is not to be afraid to call a good Bankruptcy lawyer and ask.  Be up front asking if there is a fee for that consultation.  There wasn’t in my office today.