Bankruptcy in Baseball

Today's baseball news seems to be surrounding the Los Angeles Dodgers and their owner's filing of Chapter 11 bankruptcy.  The goal of the Dodgers is not to fold and end as a franchise, but to buy time from what they consider to be a hostile overreaching from Major League Baseball.  The Dodgers are valued at approximately $800 million, with assets estimated at $1 billion, and debts at approximately $500 million.  For those that follow baseball, and are interested in the plight of the Dodgers, their largest creditor as far as baseball personnel is Manny Ramirez.  Mr. Ramirez no longer plays for the Dodgers, but is still owed $21 million.  Aren't the Giants fans glad that he did not choose the Bay Area....???

It sounds like it will be an interesting summer in Dodgerland.  I still am hurt from the Kirk Gibson home run in 1988, so I am not too sad about their case.

As related to consumers, we run across many individuals that simply need time to figure out some issues with their debts.  This may be based on a foreclosure, bank levy, car repossession, or a lawsuit.  Bankruptcy's automatic stay can help those in such a need.

For more information on the automatic stay, or other bankruptcy related questions, please call the Henshaw Law Office today at (408) 533-1075.

Decline in Bankruptcies

According to the Wall Street Journal, bankruptcies are on the decline.  They state:

"The number of consumer bankruptcies filed declined by nearly 14.8% to 114,803 in May from a month earlier, the American Bankruptcy Institute and the National Bankruptcy Research Center said Thursday. Compared to the same month a year ago, filings fell almost 15.7%."

The Northern District of California has reported that bankruptcy filings here in the San Jose area continue to rise, at least as of March 2011. 

The Wall Street Journal's report proclaims that "the worst is behind us."  Let's hope they are correct in their proclomation.

For bankruptcy questions, contact the Henshaw Law Office at (408) 533-1075.

Chapter 13 Valuation of Vehicles

If you are considering Chapter 13 bankruptcy to strip down a vehicle loan, one issue that debtors have to consider is the value that the courts will allow.  In Chapter 13 cases, the value of collateral is defined as “the replacement value of such property … without deduction for costs of sale or marketing."  In the case of vehicles, this is the retail value of the vehicle.  To determine this amount, debtors and their attorney can utilize a couple options, including Kelley Blue Book and the National Appraisal Guides.

The difference between values can be quite substantial.  For example, the retail value of a 2005 Toyota Camry with 50,000 miles is approximately $14,500, while the same vehicle has a private party value of $12,600 (as of 6/2/2011).  Over a course of a three (3) year plan, this amount is equal to approximately $60 a month.  The price a person could really obtain for the vehicle may be significantly less.  However, the Bankruptcy Code regulates that a debtor does not get to simply estimate the value.  These values are regulated. 

Should you have any questions on Chapter 13 vehicle values or other bankruptcy questions, contact the Henshaw Law Office today at (408) 533-1075. 

Student Loans – Can they be Eliminated Through Bankruptcy?

Not to be too simplistic, bankruptcy is to help those people that have spent more than they earn.  With the rapidly changing economic scenario in this country, student loans have become more prevalent.  The question then becomes if, when, and how these loans can be discharged.

For most people, the answer to the first question is that these loans generally cannot be discharged.  Student loans are not dischargeable under the Bankruptcy Code if (i) made, (ii) insured, or (iii) guaranteed by a governmental unit or (iv) made under any program funded in whole or part by a governmental unit or a nonprofit institution.  The rationale behind this provision of the Bankruptcy Code is that lawmakers determined that individuals should not be allowed to take advantage of the benefits of the costs of education without paying for them.  In that same theory, some bankruptcy courts have allowed discharges of student loans where the debtor in bankruptcy is the cosigner, not the student loan borrower.

The one way out of student loans is when continuing the debt would constitute an “undue hardship” on the borrower.  The court is the one that determines what an undue hardship means and whether the situation qualifies under the Code and case law. 

The procedure to attempt to obtain a discharge of student loan debts, after an individual files a bankruptcy petition, begins with the filing of an “adversary action.”  This means that the borrower files a lawsuit, with a corresponding complaint, against the lender. 

To show undue hardship courts have accepted a number of tests.  One such is a mechanical test wherein the bankruptcy court evaluates a number of factors, including the number of the debtor’s dependents, and their ages and needs, health of the debtor and his or her dependents, access to transportation, level of education attained by the debtor, day-to-day living expenses, marketability of the debtor's job skills, current income, and other sources of wealth.

Another test courts have looked at is whether the borrower has made good faith attempts to pay of the educational loan as well as obtain and retain employment.  One last test bankruptcy courts use is to look at the “totality of the circumstances” to determine what is most equitable under the given situation.

As stated above, in the great majority of cases, student loans will not be discharged.  However, because each case is different, and the courts do allow for discharge in limited circumstances, call the Henshaw Law Office today to see whether your case may be one of those where an undue hardship may be found.

Moving Office

Due to the growth of the Henshaw Law Office, we are relocated to a new office on April 15, 2011.  Our new address will be 1101 South Winchester Boulevard, Suite F-166, San Jose, California 95128.  The new location will be more convenient for a majority of our clients.  We look forward to the benefits of the new office and our increased space.  We hope to see you in the office soon.

Business Sales Tax Dischargeability

One issue recently came up on the dischargeability of taxes in bankruptcy.  If you have studied bankruptcy much, you likely know that income taxes owed can be discharged so long as the tax return was filed at least three (3) years prior to the debtor filing a bankruptcy petition.  However, for many small businesses, an issue of sales taxes can come up in their bankruptcy filings.

A 1986 Ninth Circuit Court of Appeals case (In re Shank) reviewed whether sales taxes can be discharged.  In that case, Shank ran a business in the State of Washington.  For each of his sales, Shank was to collect sales tax and remit the funds to the State as sales tax.  Shank, in turn, failed to remit the funds and ultimately filed bankruptcy five (5) years after the business ceased operations.  He sought to discharge the debts in the bankruptcy.

The court reviewed the rule that certain tax debts can be discharged after three (3) years.  However, a law was enacted under the Bankruptcy Code in 1966 wherein certain tax liabilities would not be dischargeable, no matter how much time had passed.  One such tax was “trust-fund tax.”  The case went on to review the history of the legislation enactment through both the United State House of Representatives and the United State Senate. 

The court’s ruling presented two separate forms of sales tax liability: “[1] those owed personally by a retailer and [2] those incurred by a retailer’s customers which are collected by the retailer under the authority of the state, held in trust, and then remitted by the retailer to the state.”  To understand the difference between the two taxes, a Seventh Circuit Court of Appeals case determined that a 5% occupation tax on the gross receipts was not considered a “trust fund tax.”  However, Shank’s obligation to remit the sales tax he collected for his sales, did fall under the trust category, and could not be discharged.  Another court reasoned that if the tax is paid by the purchasers of goods or services, it is likely that the tax is part of a trust that will not be discharged.

If you own(ed) a small business an are considering bankruptcy to relieve yourself of debts, contact the Henshaw Law Office to determine whether your tax liabilities can be discharged.

Chapter 13 vs. Chapter 11 vs. Chapter 11 “Small Business”

In general, most people filing, or interested in filing, bankruptcy as a small business owner would likely choose between Chapter 13 and Chapter 11.  Chapter 7 bankruptcy is usually not a welcome option for the sole proprietor.  The main reason is that Chapter 7 bankruptcy would likely require that the business be shut down.  With that said, most business owners would prefer the relative simplicity and ease of a Chapter 13 case rather than the complexity of Chapter 11.  Additionally, the higher cost of Chapter 11 usually creates an additional incentive to utilize the benefits of Chapter 13.  However, for some business owners, particularly those looking to adjust secured debts, Chapter 11 may be the best option, even with the added cost.  Lastly, the creation of the “small business” Chapter 11 can help those business owners with limited liabilities with a streamlined process.

Eligibility for each Chapter

Chapter 13

To be eligible to file for bankruptcy under Chapter 13, the individual must have “regular income.”  This requirement means that the debtor maintains sufficient income to make payments under the Chapter 13 plan.  In addition, the Bankruptcy Code limits a Chapter 13 debtor to unsecured debts of $360,475 and secured debts of $1,081,400.  Should the individual’s debts fall outside this level, the debtor must file for Chapter 11.  This debt level limitation is equally applicable in cases of joint (married) debtors. 

Chapter 11

In general, any “person” who may be a debtor under Chapter 7 may also be a debtor under Chapter 11.  Although most people think of the various, large corporate cases, Chapter 11 can also be used for small businesses, sole proprietorships, and individuals.  A husband and wife may also be eligible to file a joint Chapter 11 petition.

Small Business Chapter 11

Recognizing that many small business owners do not qualify for Chapter 13, but want to be able to reorganize such small business debts, the Bankruptcy Code now allows for streamlined procedures in Chapter 11 for certain business entities.   A small business, for Chapter 11 purposes, is a person or business engaged in commercial or business activities whose total debts do not exceed $2,343,300.  This designation of a “small business” must be stated in the initial bankruptcy petition. 

Benefits of Each Chapter

Chapter 13

Overall, Chapter 13 gives the individual debtors, including small business owners, the same opportunity to reorganize their debts that large business have under Chapter 11.  However, this reorganization is completed through a less complex and expensive procedure.   As with Chapters 7 and 11, all debtors that file for Chapter 13 bankruptcy are afforded the benefit of the automatic stay.  This stay prevents any collection, foreclosure, lawsuit, or garnishment activity against the Chapter 13 debtor.   While the Chapter 13 debtor must file a reorganization plan, it is only the debtor that may propose and create the debt repayment plan.

Also, in Chapter 13, like Chapter 11, the individual debtor maintains possession and control of any business interests.  As such, the debtor has the exclusive right to sell, lease or otherwise use business assets, as long as such actions are in the normal course of business operations. 

Unlike Chapter 11, in Chapter 13 a creditors’ committee is not appointed.  Also, the plan does not require that any creditor consent to the reorganization plan in Chapter 13.

Many individuals are attracted to Chapter 13, if not forced out of a Chapter 7 because of a failed means test, because of the ability to alter secured debt.  For example, a car loan can be altered if the borrower is behind on the car payments to allow for (1) repayment of past payments owed and (2) restructuring the loan to conform to market value even when the loan balance far exceeds the true value of the car.  Similarly, on home loans, Chapter 13 allows the debtor to make up past due payments over the term of the plan (3-5 years).  However, in Chapter 13, like Chapter 11, a debtor cannot adjust the terms of a loan secured by the debtor’s principal residence.  As to non-primary-residence property, the Chapter 13 plan can restructure the debt so long as full payment is made within the plan period (3-5 years).

As to claims, unlike Chapter 11, a Chapter 13 debtor does not have to obtain approval from its creditors to approve a plan.  The debtor simply has to provide a plan that the court approves.

Chapter 11

In Chapter 11, a sole proprietor is able to continue business operations, and run the business as previously done.  The debtor is able to obtain financing, sell assets, lease property, and do all that the business normally would do, but for the bankruptcy.  While Chapter 11 can be quite expensive due to the extensive reporting, filings, and other procedural matters involved, one real benefit unavailable to Chapters 7 and 13 debtors is that secured debt can be adjusted extensively.  For example, a rental property that that has a principal balance far below the current market value (quite common in this economy) can be adjusted to conform to that market value.  The payment terms do not have to fall within a 3-5 year plan window.  Again, while Chapter 11 can be expensive, this simple ability to adjust non-primary-residence secured debt may be worth the additional expense.

Small Business Chapter 11

The benefits of the “small business” Chapter 11 is strictly procedural.  Congress has simplified the procedure to allow for companies that are not Blockbuster or GM to partake in all the benefits of Chapter 11.  The advantages include a simplified plan form for most courts, not requiring a committee of creditors in most cases, a shortened monthly operating report, and an extended exclusivity period to file a plan (180 days vs. 120 days).

Conclusion

In most bankruptcy cases where an individual business owner is considering whether to file a Chapter 13 or Chapter 11, the decision is clear.  Chapter 13 will be most beneficial due to the increased costs and procedures of Chapter 11.  However, in cases of a qualified “small business” with real property outside of a principal residence, the small business Chapter 11 may be a benefit that can save the business owner substantial money over the course of the bankruptcy and in the future.

If you have any further questions in small business bankruptcy, contact the Henshaw Law Office today at (408) 599-1305.