Monday, April 21, 2014

Bankruptcy Filings Fees to Increase June 1, 2014

Starting on June 1, 2014, the court filing fees for bankruptcy cases will increase as follows:

Chapter 7: $335

Chapter 9: $1717

Chapter 11: $1717

Chapter 12: $275

Chapter 13: $310

Chapter 15:$1717

Adversary Proceeding: $350

Wednesday, June 5, 2013

Federal Personal Injury Exemptions in Bankruptcy

Personal injury claims can often be protected in bankruptcy.  However, it is important to know and use all the available sections of the Bankruptcy Code to exempt a debtor’s right to receive money from a personal injury claim.  In Massachusetts, multiple federal exemptions can be "stacked" in different ways to protect as much of a personal injury case as possible.

The most straightforward federal exemption is 11 U.S.C. section 522(d)(11)(D).  This section allows the exemption of $20,200 of proceeds for personal injury claims in bankruptcy.  However, it will not protect payment “for pain and suffering or compensation for actual pecuniary loss.” This exemption has been interpreted in Massachusetts to permit exemption for “bodily injury” and “loss of freedom or function.” See In re Martinez-Whitford, 199 BR 74 (Bankr D.Mass. 1996).  This includes settlement proceeds for fractures, scarring and partial disability, but not compensation for pain and suffering.

There are other, less-obvious sections in the Bankruptcy Code that can be used to exempt proceeds related to personal injury cases.

Section 522(d)(11)(E) provides an exemption for payments for the loss of future earnings, to the extent needed for the support of the debtor or the debtor’s family.  If you are considering bankruptcy and have a pending personal injury case, it is a good idea to retain a bankruptcy lawyer to work with your personal injury lawyer.  This is because the settlement agreement matters.  The way a settlement agreement is drafted can make a big difference in how settlement funds will later be treated in a bankruptcy.  This exemption can be used to protect some personal injury settlements meant to compensate the debtor for lost future wages.

Section 522(d)(11)(B) permits an exemption for wrongful death awards.  This is limited to the amount of money needed for the support of the debtor or the debtor’s family.

Section 522(d)(10)(C) allows an exemption of the debtor’s right to receive a disability, illness, or unemployment benefit, with no limit on the dollar amount.  This can be used to cover insurance benefits if based upon the debtor’s inability to work after an injury.

Of course, there is also the “wild card” exemption of Section 522(d)(5) of the Bankruptcy Code, which can be used for anything, and so also for personal injury awards.  However, the dollar cap of this exemption is about $11,000.


Monday, January 9, 2012

Do I Still Have to Pay Debts that are Charged Off?


Someone recently wrote me and asked if he had to pay an old debt that was charged off and sold to a debt collector. This is what that depends on. The key points:

1. The tough news is that after a debt is charged off, you still owe it. Charging off a debt is an accounting practice meant to give a fair picture of the value of a business (by taking bad debt off the books). Charging off an account does not affect the legal obligation to pay it, and the business must account for any money obtained once they sell the debt to a debt buyer. Often there will be a gap between when the debt is charged off and when a debt buyer emerges to contact you for payment. This is where the "zombie debt" term comes in, i.e. you think the debt is dead, but then it resurrects and attacks you.

2. The (possible) good news is that gap is sometimes too long, and the debt too old, to make it collectible in a court of law. Just because a debt is sold to a zombie debt buyer, it doesn't mean that the statute of limitations revives if it has already lapsed. Generally, the statute if limitations in Massachusetts for debt collection is six years from the date of the original default. If you make any partial payments later, this will usually re-start the clock, but if you don't the six-year rule usually will apply.

3. If the debt is still good once it's in the hands of a debt buyer, you must pay it, settle it, or file bankruptcy. We specialize in affordably accomplishing the last two options for Massachusetts consumers and small to medium-sized businesses. Give us a call, send us an email, or visit our web site if you would like our help with a debt law issue.

Saturday, December 24, 2011

Unfair and Deceptive Mortgage Practices in Massachusetts

Chapter 93A of the Massachusetts General Laws prohibits the use of unfair or deceptive practices in trade or commerce. I am going to highlight one way this comes up in the context of foreclosure. Mortgage foreclosure is a two-track system. The first track is managed by the loss mitigation department at the mortgage servicer, and the other is managed by an outside law firm that is hired to handle the nuts and bolts of the foreclosure. The same law firms usually handle all the foreclosures in Massachusetts, like Harmon Law Offices, Korde and Associates, and a few others. As I'll explain, the two different groups, i.e. the loss mitigation people and the lawyers, can give very different messages to the consumer.

The loss mitigation people are employees of the servicer and are charged with communicating with often-frantic consumers about loan modifications, work outs, and forbearances.  These individuals have a tough job, and some do it well and some do it poorly.  However, the bottom line is that you will often hear from these folks that "everything will be fine," "we have your application and are processing it, everything looks good," "we aren't really going to foreclose," or "you have plenty of time to work through this with us."  But all at the same time, another group of people at the mortgage company has hired a law firm to foreclose on your home.  The law firm has no idea what you've been discussing with the mortgage company and has no reason to care: They were hired to do a job and until they are called off, they'll do it.

So what's the problem here?  It's mixed messages.  They are deceptive and can cause harm to a consumer if the loan modification or forbearance doesn't go through and the homeowner has been told not to worry and sits on their hands.  Often a consumer will figure this all out in time, however.  When you get an official court notice that a foreclosure is happening (under the Servicemembers Relief Act) and/or see an ad in the paper advertising your home for sale, it usually starts to seem unreasonable to rely on the phone statements of a mortgage employee.  Often this is when people investigate their bankruptcy options in earnest, but sometimes (but not often) due to the need to come up with money to file, it too late.

Who's to blame? The mortgage servicer mainly is. It is the entity that employs the loss mitigation people and establishes the policies they work under. The mortgage servicer also hires and sets the parameters of the job for the law firm to carry out. If the misrepresentations are bad enough, that is why the mortgage servicer is the most natural party to be sued under 93A if the consumer suffers significant financial damage as a result of the violations.

Wednesday, December 21, 2011

Liquidating in Chapter 11 versus Chapter 7

So you have a business that needs liquidating?  What's the best way to do it?  There is the classic Chapter 7  route, which after all is the liquidating chapter of bankruptcy, but there is also something known as a "liquidating Chapter 11" bankruptcy. Why would anyone choose to use the reorganization chapter of bankruptcy to wind down a business?  The answer is that sometimes there is more value for everyone when business assets are sold off as part of a going concern rather than at a bankruptcy garage sale by an trustee in Chapter 7.

First the basics: if you do it correctly, Chapter 11 allows the existing business owners to stay in control while the business is marketed for sale. Business owners often like this because they can remain in control and keep existing employees on staff (including themselves).  The advantage to creditors is that the business owners are often the only ones who can really run the business as a going concern.  Chapter 11 is premised on the concept that there is sometimes more value in an operating business than in a sale of its parts.  That's why reorganization exists in the first place.   If this is true in a particular case, that's why selling all the assets of business in a Chapter 11 is permitted: the net proceeds, even after factoring the increased costs of case administration, are greater than a straight liquidation.

The process of selling the assets of a business in Chapter 11 includes many challenges.  Here are some:
  • Any blanket lien holder, like a bank with an interest in cash collateral, must be dealt with.  Usually it's necessary to convince such a lender that Chapter 11 route will result in full payment of their claim.
  • The business may need cash to operate after filing bankruptcy.  In which case, debtor-in-possession financing must be obtained.  This is sometimes comes from the proposed buyer of the business assets.  However, there obviously timing issues at play when a business is running so low on cash that basic operations are imperiled.
  • A buyer must be found and the procedures for counter-bids must be fair.
  • The price for the assets must in most cases must pay off all secured debt.  That is because of, among other things, credit bidding, but there is a possible exception for sales via a confirmed Chapter 11 plan.  
  • The debtor may have to negotiate a deal with the committee of unsecured creditors to pay them a partial dividend from the sale or the sale may be tied up in litigation in the bankruptcy court.
  • The estate must be administratively solvent.
This is just a quick treatment of some of the issues involved in selling a business through a Chapter 11 plan. If a business has real value it makes sense to consider this option. In the right case, everyone can benefit.

Friday, December 2, 2011

Fraudulent Transfers and Closing a Business

I previously wrote about closing down a small business in Massachusetts. One of the point I alluded to, I am going to expand on a bit here. What happens to the assets of the business when the small business folds? There is a temptation for the business owners to just keep the assets for their personal benefit after closing the doors and leaving business debts unpaid. This is what is called a fraudulent transfer, and a business creditor can make you personally pay the value of these assets over to them if you just keep them in this manner. The reason for this is the Massachusetts Fraudulent Transfer Act. The big picture is that the law does not permit giving away the assets of a business that can't pay its debts: the business creditors are entitled to get the value of those assets before anyone else does. It usually makes sense to administer and distribute assets to creditors in a fair and transparent manner, such as via a business bankruptcy. However, not all transfers of assets to business owners are problematic.

In Massachusetts, generally, an insolvent business can transfer assets to a business owner if the owner pays a fair price in cash to the business. Any such transfer and accompanying valuation must be well documented and supported, and the "payment" to the business must not simply be debt forgiveness by the business owner. It is also important to document transactions of this type because if the insolvent company ends up in bankruptcy, the trustee can sue the owner to recover the value of the assets if they are sold for less than reasonably equivalent value.


Thursday, December 1, 2011

Winding Down a Business in Massachusetts

There are many reasons why you might want to close a business. It may just be the time in your life to move on. However, if there's no way to sell your business and there's not enough money to pay the debts off, what do you do? This "insolvency" can create challenges in winding down a business in a way that allows you to move on.

Here are a few key questions to consider:

1. Have you personally guaranteed business debts?
This is a key consideration. Any debts you, your spouse, or partners guaranteed will have to paid by the guarantor(s) should the business close without satisfying these debts. Business credit cards are typically personally guaranteed by the owners. The same with most bank debt. Trade credit (vendor debt) usually is not personally guaranteed, but sometimes it is. Personal guarantees are common and can end in the bankruptcies of individual business owners if these debts cannot be paid. I call these business-personal bankruptcies and have written a bit more about them here.

2. If there are no personal guarantees or the personally guaranteed debts have or will be paid, does the business have valuable assets?
Some examples of assets include inventories, equipment, cash, and accounts receivable. If the business has assets, it can't just close its doors and leave debts unpaid. Where would the assets go? The business owner can't just keep them. In theory at least, these assets must be distributed equitably to creditors before the business owner can just take a dividend. So, if the business is operating in the red and there is not enough money to pay all the debts, who should get what? Lien holders should receive their collateral or its value. Taxes and employees should be paid in full. (It is important not to leave employee wages unpaid in Massachusetts). But after the secured and priority creditors receive their share, who should be paid what if there is money or assets left over? The answer to this depends on the goals of the business owner and the extent of the assets, but it may at this point make sense to file bankruptcy for the business so that the assets can be distributed fairly to creditors by a trustee. Whether to do this or not depends on a few factors, like the exposure of the business owners to suit by the trustee (like if they have unpaid debts to the business), but it sometimes is the best way to clear the assets in a transparent fashion so that creditors get their satisfaction and stop pursuing the business and its owners for the unpaid debts. Once this bankruptcy process is finished, the business can be formally dissolved with the Secretary of the Commonwealth and the matter can be put to bed. The cost of bankruptcy usually comes from the business assets.

3. What if there are no business assets?

If the business has not assets, you still need to make sure you deal with personally-guaranteed debt and any priority debts, like taxes and wages. Once you do this, an old legal maxim comes into play: you can't get blood from a stone. Creditors will try, however, and many an asset-less business winds up in bankruptcy just to satisfy the creditors that there are indeed no assets to be found. However, this is not always necessary. Blood can truly not come from stones and so, although annoying and time-consuming, dunning efforts by angry business creditors will come to naught if the business has nothing. In this case, letting the business die a natural death (non-payment of debts and administrative dissolution by the Secretary of the Commonwealth) should be considered.

It's probably obvious, but it makes a lot of sense to retain an attorney to guide you through the process of winding down a business in Massachusetts. There are several strategic options to consider that will affect the speed of the process and the overall cost to the business owners.