When the person sitting in your office runs a struggling business, I proposed three initial questions to scope out the bankruptcy options available.  (The first question.) The second question  applies only if the business is operated by an entity ( a corporation or an LLC) How much of the debt it services is the entity really liable for? Dig a bit and you will often find that the corporation is not legally liable for the credit cards, leases, and loans that it pays monthly. Either because of the nature of the credit markets or a mid stream incorporation, it is the shareholder, the manager, the person who thinks he’s the owner, who is legally liable for the debts. And that may be a boon to bankruptcy planning. Vendors Small corporations generally can’t get unsecured credit without the guarantee of the shareholder. That’s often the case with vendors to a retail business.  The account stands in the name of the corporation, guaranteed by the individual. Credit cards But equally often, the credit that is available to fund the business is in the form of a credit card.  And that credit card is assuredly a liability of the individual. Doesn’t matter that the business name is embossed on the plastic.  Your concern is whether the corporation applied with the shareholder for the credit. Because if the corporation is not legally liable, the shareholder may be able to file bankruptcy, default on the debt, and it doesn’t impact the business at all. Who’s on first? If you want an exercise in frustration, just try asking the person across the desk whether the entity applied for the card.  They won’t know or reply that the corporation’s name is there, isn’t it. Neither is useful to you. After twenty years of dealing with small businesses and plastic, I finally hit upon a way to determine, rough and dirty whether the entity is liable.  I have the client call up Card Issuer, tell them he’s the new bookkeeper, CFO, or manager of Corporation, and ask what the balance on the card is. If the records of the card issuer show the Corporation as a debtor, they should respond to a corporate employee charged with bookkeeping. If, however, the only person on the bank’s books who is connected with the account is the individual, the card issuer should not disclose anything about the account to someone who doesn’t purport to be the account holder. Three piles Your goal in pursing the question of who is liable on each debt is to end up sorting each debt in to one of three piles: Debts of the individual only Debts for which corporation and individual are both liable Debts for which only the corporation is liable. Get that sorted out, and you’ll be ready to ask the third question. Next time. Sample these business bankruptcy questions. Image courtesy of Valerie Everett.   

Part Two of this post will focus on the consumer decisions of Judge Leif Clark.    As a bankruptcy judge, Leif Clark dealt with the full parade of humanity.    His opinions reveal a deep understanding of the human face of financial loss as well as the intricacies of the law.BAPCPA Like many judges, Judge Clark did not have kind words for BAPCPA.   Referring to the credit counseling requirement, he stated: The circumstances of this case demonstrate why this extra prerequisite, imposed by the 2005 amendments to the Bankruptcy Code, is so far removed from reality that its imposition is an insult to the dignity of persons whose financial straits, brought on by circumstances beyond their control, force them to seek relief under the Bankruptcy Code. On these facts, budget and credit counseling is a monumental waste of time and money. Yet the Code now requires this extra step, premised on the false notion that most folks, once they realize that they just have to learn how to live within their means, will realize they don't really need to file for bankruptcy protection. For the Peinados,   this extra step is not only unnecessary as a practical matter — there is no amount of "re-budgeting" that these folks can do that will make it possible for them to repay their existing indebtedness — but is also an insult to their honesty and character. In re Peinado, 2011 Bankr. LEXIS 2500 at *2 (Bankr. W.D. Tex. 2011).   However, the Court was more charitable when it concluded that incarceration was a form of incapacity which would excuse the credit counseling requirement in an opinion several years earlier:  (H)ere, the statute is designed to provide a sensible exemption from attending the credit counseling briefing when physical circumstances render doing so impossible. That only makes sense, less the statute itself be rendered an absurdity by imposing an impossibility on the debtor, then denying the debtor access to bankruptcy based on the debtor's failure to do the impossible. The court prefers not to impute perverse motives to Congress. In re Lee, 2008 Bankr. LEXIS 689 at *4-5 (Bankr. W.D. Tex. 2008).In yet another opinion, he questioned the wisdom of credit counseling while ultimately concluding that he was free to disregard the lack of credit counseling if no party moved to dismiss the case and that a pro se party’s failure to know about the credit counseling requirement constituted an “exigent” circumstance excusing the briefing.   In re Navarro, No. 06-51007 (Bankr. W.D. Tex. 2006)(which can be found here).    Leif and DeathWhile the death of a client is a traumatic event, Judge Clark wrote no fewer than six opinions addressing the question of what happens when a debtor passes away during a case.    Where the Debtor passed away between the filing of the case and the 341 meeting, the Court ruled that he could not excuse the deceased debtor from attending the meeting, but that he would not require the impossible.   Instead, he ordered that the personal representative attend in the debtor’s stead.    In re Hamilton, 274 B.R. 266 (Bankr. W.D. Tex. 2001); In re Lucio, 251 B.R. 705 (Bankr. W.D. Tex. 2000).   In ruling on a motion to excuse the debtor from completing a personal financial management course due to disability caused by death, the Court made a theological statement: The debtor's counsel makes the rather common-sense appeal that "death would appear to be a species of … physical impairment" to warrant finding the debtor to be a person described in section 109(h)(4), such that the debtor should be relieved of the obligation to complete the instructional course on personal financial management. The point is well-taken. The court is confronted with the limits of its judicial power--it cannot require the debtor to attend and complete the instructional course, because the court's judicial power does not include the power to resurrect.  In re Robles, 2007 Bankr. LEXIS 4239 at *2-3 (Bankr. W.D. Tex. 2007).   In yet another decision, the Court found that: It is odd to think of death as a "mere disability," but the statutory language (added in 2005) seems not to have anticipated the possibility that debtor might die after filing but before completing the mandated instructional course. Still, the intent of Congress seems obvious at least from its context, if not from its express wording. In re Henderson, 2008 Bankr. LEXIS 1490 at *2 (Bankr. W. D. Tex. 2008).   In both cases, the Court found that the estate of a deceased debtor was entitled to receive a discharge.On the other hand, when a debtor passed away during the pendency of a dischargeability proceeding, the Court found that the case was moot due to the fact that all non-exempt property was already included in the bankruptcy estate and that the bankruptcy estate included the same claims as the probate estate.Finally, the Court considered the effect of a personal guaranty that extended to “the Guarantor’s estate.”    The bank sued the beneficiaries of the deceased guarantor asserting that they were personally liable for the debt, or in the alternative, that they were liable to the extent of distributions from the estate.   The Court found that the beneficiaries were not in privity with the bank and thus could not be held personally liable.   However, the Court found that under the Texas Probate Code, the beneficiaries could be held liable for the property they received depending on whether the proper notices were given.   As a result, the Court declined to dismiss the second ground of the complaint.   In re Seguin Hotel Corp., 2010 Bankr. LEXIS 2332 (Bankr. W.D. Tex. 2010).ExemptionsWhile Texas allows generous exemptions to its debtors, Judge Clark was called upon to define the limits of some unusual claims of exemption.   In the case of In re Schott, 449 B.R. 697 (Bankr. W. D. Tex. 2011), a debtor who did not even like golf claimed a golf course as his homestead.   The Court ruled that the parcel containing the clubhouse where he resided constituted a homestead, while a separate tract separated by a county road did not.In an early decision of the computer age, the Court found that computer software was not exempt as a “tool of the trade,” finding that the Texas legislature contemplated that tools be something more tangible.   In re White, 234 B.R. 388 (Bankr. W.D. Tex. 1999).    Prior to Texas’s adoption of a specific exemption for jewelry, the Court considered whether jewelry was exempt as “wearing apparel.”    In a 52-page opinion containing such headings as “A Rolling Gem Stone Gathers No Debt,” he thoroughly discussed how often jewelry had to be worn to constitute wearing apparel and whether the same item could be both functional and an investment (e.g., a rolex watch), ultimately formulating a ten-factor test.  In re Leva, 96 B.R. 723 (Bankr. W.D. Tex. 1989).    The Court ultimately found that the debtor could exempt a rolex, but not a bracelet or a pinkie ring.    The Texas legislature promptly amended the Property in 1991 to provide for jewelry as a separate category of exempt property not to exceed 25% of the aggregate amount.   No doubt the legislators were concerned that their pinkie rings might be in jeopardy.Shortly after deciding the Leva case, the Court ruled that the proper standard for valuing jewelry was “fair market value.”   In re Mitchell, 103 B.R. 819 (Bankr. W.D. Tex. 1989).   As a result, the debtor’s 6.18 carat diamond ring was valued at $36,000, which exceeded the debtor’s exemption limit, which was $30,000 at the time.Judge Clark also wrote a fascinating treatise on the Texas exemption for firearms in In re Wilkinson, 402 B.R. 756 (Bankr. W.D. Tex. 2009).   Judge Clark’s historical research revealed that prior to 1870, guns were not exempt in Texas even though a person could be fined for failing to show up to the “muster ground” for militia duty without a gun.    Judge Clark ultimately concluded that a gun was a gun, even when it was mounted and displayed on the wall as a decoration and that a debtor could not exceed the statutory exemption of two guns by classifying additional firearms as household furnishings.In a pair of opinions, Judge Clark evaluated how mobile debtors could have their exemptions determined under the law of another state under BAPCPA.   In In re Battle, 366 B.R. 635 (Bankr. W.D. Tex. 2006), Judge Clark ruled that a Texas resident whose exemptions were determined under Florida law could use the federal exemptions notwithstanding Florida’s opt-out statute.   Because Florida only prohibited its “residents” from using the federal exemptions, Judge Clark concluded that a Texas resident whose exemptions were determined under Florida law could use the section 522(d) exemptions.   Judge Clark’s position was upheld in the subsequent Fifth Circuit decision of Ingalls v. Camp (In re Camp), 631 F.3d 757 (5th Cir. 2011)(I was the losing attorney in the Camp case).   However, in In re Fernandez, 445 B.R. 790 (Bankr. W.D. Tex. 2011), Judge Clark ruled that a Texas debtor could not claim a Texas homestead as exempt under Nevada law only to be reversed by the District Court, Fernandez v. Miller (In re Fernandez), 2011 U.S. Dist. LEXIS 86528 (W.D. Tex. 2011).    Property of the EstateOne of Judge Clark’s most important rulings considered whether ownership of a claim for malpractice in a chapter 7 bankruptcy proceeding belonged to the individual debtor or to the bankruptcy estate   Swift v. Seidler (In re Swift), 198 B.R. 927 (Bankr. W.D. Tex. 1996), aff’d, No. 96-50910 (5th Cir. 1997).    In an exhaustive discussion of the intersection of section 541 and Texas law, Judge Clark concluded that in order for a cause of action to be property of the estate, it must have legally accrued, which required that the debtor incur damages.  Where the debtor was not damaged with regard to loss of exemptions and his discharge, the claims accrued post-petition and were not property of the estate. (Disclosure:  I have a case presently under appeal which relies heavily on the Fifth Circuit opinions affirming Judge Clark).    DischargeabilityIn an unusual case under section 523(a)(6), Judge Clark denied summary judgment that claims for Rule 11 sanctions awarded against an attorney for filing a frivolous class action suit constituted a willful and malicious injury.  Mann Bracken, LLP v. Powers (In re Powers), 421 B.R. 326 (Bankr. W.D. Tex. 2009).   In the particular case, an attorney had filed 39 class action suits in his career without ever having a class certified.    The U.S. District Judge was particularly caustic in granting the sanctions, finding that the attorney was a “danger to putative class members.”    However, the Bankruptcy Court found that the District Court’s findings fell short of those required to support non-dischargeability. Here, by contrast, Judge Sparks did not make the requisite specific findings that would permit the court to find collateral estoppel should apply. Judge Sparks’ orders do not state that Powers knew or should have known that by filing the Certification Motion he would injure the Plaintiffs, or, even that Powers was motivated by an improper purpose. Judge Sparks states that “Powers represents a very real danger to putative class members…,” Rule 11 Order at 3; but the putative class members are not the Plaintiffs. In the Rule 11 Sanctions, Judge Sparks stated that “it is appropriate to sanction Powers under Rule 11 in order to deter his dangerous and wasteful behavior and future baseless filings.” Rule 11 Sanctions, at 4. These are worthy purposes that justify the imposition of sanctions under Rule 11. They do not, of themselves, also satisfy the elements for nondischargeability under § 523(a)(6). There is simply no indication in Judge Sparks’ findings that Powers – either subjectively or objectively – actually intended to harass or otherwise injure the Plaintiffs or the legal process by filing the Certification Motion. Powers indeed may have intended to harass the Plaintiffs by filing the Class Action Suit, but Powers was sanctioned for filing the Certification Motion.) Although Judge Sparks very strongly admonishes Powers’ failure to investigate either the law or the facts, this court does not believe that either the Rule 11 Order or the Rule 11 Sanctions contain finding sufficient to support the conclusion that, by filing the Certification Motion, Powers’ intended to willfully and maliciously injure the Plaintiffs. Thus, the court denies the Plaintiffs’ Motion for summary judgment on the basis of collateral estoppel. Id.at 340.    After trial, Judge Clark did find the sanctions to be non-dischargeable.   The decision shows Judge Clark’s restraint in not granting summary judgment on what would have been a very close call, but instead allowing the record to be developed at trial.   (Disclosure:   Manny Newburger and Kevin Bowens of my firm tried this case).   In an example of the maxim that “equity is as long as the chancellor’s foot,” Judge Clark took judicial notice that certain purchases by a debtor did not qualify as luxury goods and services under 11 U.S.C. Sec. 523(a)(2)(C). The court happily takes judicial notice that La Fogata is a Mexican restaurant that is a converted Dairy Queen,  that the USPS is the U.S. Postal Service (selling stamps and delivering letters for 39 cents an ounce), that HEB Grocery is a large grocery chain in Texas, comparable to Krogers and Albertsons, that Target is the main competition for Wal-Mart, that Exxon is a major gasoline retailer with gas stations selling gasoline at competitive prices, that Consultants Pain Med is an entity that sells pain therapy for people in pain, that PetsMart is a chain that sells pet food and supplies to middle America, that Walgreens is a drug store selling pharmacy products and the like to middle America, that Calico Corners is a local store selling bedding supplies, that Alamo Barber Shop & Beauty Salon is a barber shop and beauty salon, that North Park Lincoln is actually a Lincoln-Mercury dealership (selling more Mercuries than Lincolns), that Hertz Rent-A-Car  rents Ford Motor products and other fine cars, that Whataburger is a fast food outlet similar to McDonald's, and that Regal Cinemas is a movie chain where one can go to watch a movie for under $ 10. The court can only shake its head in bemusement at plaintiff's suggestion that these merchants would be described as "high end luxury retailers" that "only sell such goods and provide such services" (i.e., luxury goods and services). Capitol One Bank v. Zeman (In re Zeman), 347 B.R. 28, 30 (Bankr. W.D. Tex. 2006).   This was a case where the New York lawyer who filed the motion for summary judgment clearly was not conversant with San Antonio fine dining scene.ReaffirmationsJudge Clark his duty to review reaffirmation agreements seriously.   Judge Clark repeatedly denied motions to reaffirm Texas home equity loans on the ground that the debts were non-recourse as a matter of law.    Judge Clark explained: The subject of the agreement is a home equity loan. Such loans are non-recourse loans, as a matter of Texas law. There is thus no personal liability on the part of the debtor to USAA Federal Savings Bank. USAA’s remedies prior to this bankruptcy being filed were limited to recourse to the property in the event of nonpayment and failure to cure. The bankruptcy changed nothing with regard to the nature of this liability. The debtor’s discharge has no impact at all on USAA’s claim because discharge only affects the debtor’s personal liability on a debt, and the debtor never had any personal liability on this debt, even outside bankruptcy. With nothing to  discharge, there should be nothing to reaffirm either.Yet USAA now wants a reaffirmation agreement from the debtor anyway. Why? To what end? Surely not because USAA fears that without such an agreement, its efforts to enforce this debt might contravene the discharge injunction. That is a red herring if ever there were one. Enforcement of a nonrecourse debt never violates the discharge, as a matter of law. Then for what reason does USAA want this reaffirmation agreement? To get the debtor to create personal liability by in effect waiving the protections of the Texas Constitution? One would certainly hope not. Lacking disclosure of such a waiver in its communications with the debtor or in the agreement itself, the effort to obtain such a waiver smacks of fraud. Certainly USAA is not intending to perpetrate a fraud, one would hope.*** Perhaps USAA seeks the reaffirmation agreement out of habit, or out of ignorance of the law, or by error. This is the only explanation that makes sense to the court, and the one that least requires the court to conclude that the lender had a nefarious intent. There is no reason for a reaffirmation agreement in this case, and plenty of reasons why it is not a good idea. For this reason, the reaffirmation agreement is denied. In re Brown, 2009 Bankr. LEXIS 835 at *1-2, 3 (Bankr. W.D. Tex. 2009).Judge Clark also provided guidance to the debtor whose reaffirmation agreement should not be approved but who did not want to lose his property. The court disapproves the reaffirmation agreement between the debtors and Colonial Savings, F.A., because the debtors no longer wish to proceed with reaffirmation, after considering the precautionary comments of the court. The debtors are current on their indebtedness to the creditor. In an uncertain real estate market, reaffirmation is not wise, because the debtors would be surrendering their discharge and be exposed to personal liability for any deficiency in the event of a foreclosure.Notwithstanding such denial, the court finds and concludes that the creditor holds a valid and enforceable in rem claim. The creditor is accordingly expressly authorized and permitted to enforce the obligation of the debtors to the creditor as an in rem obligation, such enforcement to include the right to notify the debtor of payments that are or are to become due, the right to demand payment when such payments are not made (either in full or in part), the right to threaten resort to in rem remedies in the event of non-payment, the right to accelerate the indebtedness, the right to give notice of foreclosure sale, and the right to conduct and complete such foreclosure sale, so long as all of the foregoing are conducted in accordance with the terms of the indebtedness, and further in accordance with applicable non-bankruptcy law. None of the foregoing shall ever constitute a violation of the discharge injunction entered in this case pursuant to section 524(a) of title 11.Further, the creditor is authorized and permitted to communicate with the debtor regarding the status of the account, either orally or in writing, and the debtors are authorized and permitted to obtain information from the creditor, either orally or in writing, regarding the status of the account. The creditor is authorized and permitted to afford to the debtors the same services with respect to this account as they would enjoy had there been no bankruptcy, including as applicable internet access to the account, the use of electronic funds transfers as a means of payment, the right to receive regular billing statements, and regular escrow updates. The provision of all such services shall never constitute a violation of the discharge injunction entered in this case pursuant to section 524(a) of title 11.Further, the creditor is authorized and permitted to renegotiate the terms of the indebtedness with the debtors (provided that such renegotiated indebtedness shall remain as an in rem liability of the debtors), to provide payoff amounts for the purposes of any refinancing with a third party, or for the purposes of a sale of the underlying property. The provision of any of the foregoing shall never constitute a violation of the discharge injunction entered in this case pursuant to section 524(a) of title 11.Once the creditor has enforced its in rem remedies, the creditor is barred by the discharge injunction from taking any steps to further enforce the obligation, as an in personam liability of the debtors, either directly or indirectly, by judicial action or otherwise. In re Gamboa, 2009 Bankr. LEXIS 61 at *1-3 (Bankr. W.D. Tex. 2009).VenueWhile presiding over cases in the El Paso division of the Western District, Judge Clark had occasion to rule upon motions to transfer venue involving residents of New Mexico who resided closer to the bankruptcy court in El Paso than the bankruptcy court in Albuquerque.    In the first case, the Court ruled that it had the discretion to retain a case which was filed in an invalid forum “in the interest of justice and for the convenience of the parties.”    In re Lazaro, 128 B.R. 168 (Bankr. W.D. Tex. 1991).    The Court elaborated: Transfer to Las Cruces would not be convenient for any party (not even the IRS, whose officer in Las Cruces would also have to drive the 225 miles to Albuquerque for regular hearings), nor would it serve the interests of justice, given that El Paso is a mere 30 miles away from Las Cruces, cash collateral and lease renewal issues have already been resolved by agreed orders in this court, counsel for the debtor is a local El Paso attorney, the cost and time of travel to Albuquerque would impose an unnecessary administrative burden on the estate, making it that much more difficult for the Debtors to apply their efforts to working their way out of this bankruptcy, and creditors are spread nationwide and can get to El Paso more easily than they can get to Las Cruces. Id.at 175.Several years later, however, the Court acknowledged that “some of the court’s assumptions regarding the Las Cruces docket have proven to be unfounded.”    In re Brown, 184 B.R. 741, 742 (Bankr. W.D. Tex. 1995).     Judge Clark explained: The bankruptcy courts for New Mexico service that docket as regularly as the docket requires (they will go there monthly if that is what is needed -- which is the same frequency with which the El Paso bench is also covered by a judge who travels from San Antonio). The chapter 13 trustee in New Mexico conducts first meetings of creditors in Las Cruces monthly. The "drain-off" of New Mexico debtors who file in El Paso is not a significant percentage of the El Paso overall filings, but it is a significant portion of the Las Cruces filings. If more cases were filed in New Mexico, the resulting increase in the docket would both encourage the development of a local bar and increase the frequency and number of hearings in Las Cruces. What is more, the additional filings would make a significant monetary difference to the chapter 13 trustee, who would then be able to justify greater expenditures to service the Las Cruces and surrounding area. Id.   These two venue cases demonstrate that Judge Clark was willing to consider the practical effects of a decision and was not afraid to admit when he was mistaken.RecusalWhile the speakers at Judge Clark’s recent retirement reception spoke tellingly of his reputation as a giant in the bankruptcy field, some parties did not want to have him as their judge and requested that he be recused.    Bankruptcy Judges are placed in the unenviable position on having to rule on a motion for themselves to be recused.    In one instance that Judge Clark tried to refer the motion to the U.S. District Court, he was rebuffed.    Judge Clark found that neither making a ruling adverse to a party, In re Pease, 2010 Bankr. LEXIS 1466 (Bankr. W.D. Tex. 2010), alleged bias based on prior court proceedings, In re Swift, 126 B.R. 725 (Bankr. W.D. Tex. 1991) or the Court’s presence at a meeting referenced in testimony, In re Lieb, 112 B.R. 830 (Bankr. W.D. Tex. 1990), were grounds for recusal.Pro Se PartiesOne of the challenges of bankruptcy courts everywhere is dealing with pro se parties who may have unique ideas about the law.   In just such a case, Judge Clark dealt with a party who sought to pay his appellate filing fee with a “Certified Money Order” drawn against his social security account with the United States Treasury.    After patiently explaining why the self-drawn instrument was not adequate to pay the filing fee, Judge Clark concluded: Mr. Pease clearly has some strongly held beliefs about the role of government, the legitimacy of the monetary system in the United States, and perhaps even the legitimacy of government itself. The court will not waste its time attempting to dissuade Mr. Pease of his strongly held beliefs. Suffice it to say that this court does not subscribe to those beliefs.A filing fee must be paid using the recognized currency of the United States. The “Certified Money Order” submitted by Mr. Pease does not qualify either as recognized currency or a legal document that would result in the payment in the recognized currency of the United States. The document submitted is a complete work of fiction or fantasy at best, and a fabrication and a fraud at worst. In all events, it is ineffective as a means of payment. In re Pease, 2010 Bankr. LEXIS 771 at *3 (Bankr. W.D. Tex. 2010).

Chapter 7 bankruptcy, known as the fresh start bankruptcy, is a way to get out of debt.  However, student loans are not eliminated under a Chapter 7 except in extreme hardship cases.  In my experience, an extreme hardship case is almost impossible to find.  You must be in a position where you can no longer+ Read MoreThe post Can I put my student loans in bankruptcy? appeared first on David M. Siegel.

Mitt Romney famously insisted that corporations are people.  We can disagree about the nature and quantum of rights that gives them relative to human beings, but for the purposes of a business bankruptcy analysis, Mitt was spot-on. A corporation is a legal person separate from the individuals who own the stock in the corporation. When the human across the table from you uses the first person pronoun to describe the state of the business, you have to stop them and ask: Who is “we”? Is the struggling business we’re talking about owned and operated by a corporation?  If so, we  head in one direction. If, however, the business is a sole proprietorship, we have different choices of destination. Corporate business Tell me that your business is incorporated and I need to pin down, before the interview is over, whether the individual or the corporation is my client.  Their interests may be different.  Even if there is no apparent conflict, good practice suggests you get a waiver of conflicts from each entity. What’s possible if the business is an  entity separate from the shareholder?  Most importantly, the bankruptcy of  either one doesn’t involve the other. The corporation could file a Chapter 7 without pulling the shareholder into a bankruptcy. Conversely, the shareholder could file a bankruptcy, and his estate includes the shares in the corporation, but not the business itself. Is there a meaningful distinction there?  Damn right.  An incorporated business can continue to operate as usual when the shareholder files a personal bankruptcy. Chapter 7 trustees are instructed to shut down a business operated by a Chapter 7 debtor.  The articulated concern involves post petition liabilities that might acrue to the bankruptcy estate as a result of continuing to operate. The “rule” is applied with less vigor and more variation as the business trends toward a consulting or personal services business.  But if there are employees, business premises outside the home, or activities with significant risk involved, the trustee will  generally want a Chapter 7 debtor to cease doing business. Not so, usually, if the individual is only the shareholder.  The estate has the benefit of the net value, if any, of the shares, but the trustee isn’t accountable as directly for the activities of the corporate business post petition. Depending on your goals for the client, you can consider either incorporating a business before filing, or dissolving the corporation before filing. Sole proprietorships When the business is nothing more than a dba,  the bankruptcy decision is an all or nothing proposition.  The bankruptcy of the individual brings with it the business assets and business operation.  The Code doesn’t provide for a bankruptcy that deals only with the business assets and business debts of the client. A Chapter 7 filing will address and discharge the business debts.  It will probably require a business shut down. A Chapter 13 filing gives you and your client the option.  You can close the enterprise or continue to operate since §1304 expressly allows the debtor to continue to engage in business. We’ve counted heads, now, around the conference table and know how many “people” we’re dealing with.  Next time, we’ll look at other facts we need to extract before planning bankruptcy relief. There’s more about business bankruptcy issues on Bankruptcy in Brief. Image courtesy of Geograph.

Twenty-five years ago, the Fifth Circuit appointed a former Lutheran minister who had been licensed a scant seven years to the bankruptcy bench in San Antonio.   With the retirement of Judge Leif M. Clark on October 20, 2012, another long-serving Western District judge has moved on to a new stage of life.  While Judge Clark may be departing the bench, he leaves practitioners with a body of work which can be characterized as thoughtful, controversial and occasionally irreverent but never dull.          To do justice to Judge Clark would require me to quit my job and write for at least a year.   Since I have a family to feed, I will focus on just a few highlights here.   I am sure that others can add to what I have written and I encourage them to respond in the comments section.    Personal HistoryLeif Clark (pronounced “Lâfe” not “Leaf”) earned a Masters of Divinity degree from Evangelical Lutheran Theological Seminary in Columbus, Ohio and served in specialized ministries for the American Lutheran Church.   He graduated from the University of Houston School of Law (where he graduated with honors and was an editor on the law review).   He went to work for Cox & Smith in San Antonio.In 1987, the Fifth Circuit appointed Judge Clark to the Bankruptcy Court for the Western District of Texas.   Over the course of his judicial career, he sat in San Antonio, Austin, Waco and El Paso.  Judge Clark has written approximately 400 opinions according to LEXIS, but the total is probably higher.  He helped to design and administer a judicial training program for USAID, training judges in Ukraine, Poland, Latvia and Romania.    For sixteen years, he taught American constitutional law to foreign students as part of the International Masters of Laws Program for McGeorge School of Law in Salzburg, Austria.    He was actively involved in helping to develop international insolvency law. Judge Clark also served as an adjunct professor teaching bankruptcy at the University of Texas Law School.Judge Clark sang in Judge Richard Schmidt’s band, including such hits as “I Can’t Get to Confirmation” and a song about the 1111(b) election.   Although Rule 9037 would not allow me to say this in a document filed with the Bankruptcy Court, according to his biography for the National Bankruptcy Conference: Judge Clark takes special pride in what he deems his most important accomplishments - his son, Harrison (born in 2003) and his daughter, Carson Renee (born in early 2006). And he values the love, partnership, and support that he enjoys with their mother and his wife, Rochel Lemler-Clark, who is a practicing commercial litigation attorney. They all live in happy chaos in San Antonio, Texas. Since leaving the bench, Judge Clark has opened a solo practice for mediation and arbitration.   He can be reached at moenson@me.com.     Sun Country DevelopmentOne of Judge Clark’s earliest contributions to Bankruptcy jurisprudence came while he was still a practicing attorney.   In Matter of Sun Country Development, Inc., 764 F.2d 406 (5th Cir. 1985), the Fifth Circuit made the rather unremarkable statements that good faith depends on “the totality of circumstances” and that it is satisfied when a plan is proposed “with the legitimate and honest purpose to reorganize and has a reasonable hope of success.”   However, the seminal line in the opinion, one which effectively put an end to the doctrine of artificial impairment in the Fifth Circuit was: Congress made the cram down available to debtors; use of it to carry out a reorganization cannot be bad faith. Id.at 408.   I am told that this line came from Judge Clark’s brief and it has been cited by numerous cases over the years.Judge Clark’s Love of Colorful AnalogiesJudge Clark had a love for the colorful analogy which he used to great effect in his opinions.   In Mahoney v. Washington Mutual, Inc. (In re Mahoney), 368 B.R. 579 (Bankr. W.D. Tex. 2007), Judge Clark gave an extended dissertation on whether sacrificing a goat to Mercury could be an act to collect a debt which would violate the discharge.   He wrote:A creditor, smarting from the write-off of his loan, privately sacrifices a goat to Mercury, the Roman god of merchants, believing devoutly that Mercury will see to it that the debtor repays the creditor in full. The creditor takes no actions to publicize his sacrifice. He has no reason to believe that the debtor believes in Mercury, or cares about goats. Certainly, the sacrifice is an intentional act, and it was subjectively intended to collect the debt. Indeed, it might be easy to show that the creditor, "with malice aforethought," had every intent to violate the dickens out of the bankruptcy discharge. But so what? All the intention in the world would not convert the creditor's sacrifice into "an act to collect, recover, or offset" the debt in question.  Intentionally performing a useless and ineffective act cannot violate section 524(a) because a useless and ineffective act will not count as a proscribed act within the meaning of the statute -- regardless of the avowed "intent to violate the discharge injunction."***Our goat sacrificing example above is a helpful, if fanciful, illustration of this principle. Most reasonable people will readily agree that goat sacrificing is not an act likely to be effective in collecting, recovering or offsetting the debt in question. But let's suppose that, before the fated sacrifice, the creditor first sends a photo of the unfortunate goat to the debtor with a note saying "Pay me or the goat is cabrito!" These additional facts are enlightening, but we still do not know whether they are sufficient to count as an act to collect, recover, or offset the debt, because we cannot yet gauge the likely impact of this threat on the debtor. If, however, the facts also showed that the debtor is also a devout believer in Mercury -- or a deeply committed animal rights activist -- then we might have enough facts to suggest that the note and the photo count as an act to collect on a debt -- even without the actual sacrifice. This final fact shows the coercive impact of the missive, sufficient to fairly describe the act as likely to be effective to collect a debt. We can now say, on these facts, that sending such a missive to such a debtor could work as a collection device. On the other hand, if the evidence showed that the debtor believes that all Mercury worshipers are idiots, and couldn't care less about killing goats, then the creditor's threatened sacrifice, and its publication of that threat to the debtor still lack coercive impact, and so would not likely count as an act to collect a debt.Id. at 587, 588.In another opinion, Judge Clark used a personal example to demonstrate the lack of utility of multi-part tests.A person is sent into a crowded room with directions to find Judge Clark by applying the following multi-factor test: (1) tall, (2) blond hair, (3) angular features, (4) dressed stylishly, and (5) having a resonant voice. The person returns with David Bowie in tow. If the person had simply been given a recent picture of Judge Clark (which would have been worth far more than all the factors one could write down on a piece of paper), chances are he would have quickly returned with the judge, not the singer.Official Committee of Unsecured Creditors v. Grant Thornton (In re Schlotzky’s, Inc.), 351 B.R. 430, 435, n. 9 (Bankr. W.D. Tex. 2006).   I don't know.   When Judge Clark wasn't wearing a robe, I might have had trouble distinguishing him from David Bowie.On another occasion, Judge Clark used the Brooklyn Bridge to explain why claiming an exemption is not sufficient to grant title to the object claimed, even in the absence of a timely objection. Just in case there is any confusion, let’s suppose I claim an exemption on the Brooklyn Bridge, and you fail to timely object to my exemption claim. Is the sainted bridge thus exempt? Technically, section 522(l) says it is. But of course, what difference does my exemption claim make if Hizzoner, Mayor Bloomberg, comes to court and successfully establishes that, in fact, the Brooklyn Bridge is not my bridge to claim, but is safely still the property of the City of New York, safely untarnished by my exercise in hubris? None at all you correctly reply, none whatsoever.In re Rendon, No. 06-52501 (Bankr. W.D. Tex. 2006)(available here).   Finally, although Judge Clark insists that he does not want this to be his legacy, he once cited an Adam Sandler movie in denying a pro se motion “for being incomprehensible.” Or, in the words of the competition judge to Adam Sandler’s title character in the movie, “Billy Madison,” after Billy Madison had responded to a question with an answer that sounded superficially reasonable but lacked any substance, Mr. Madison, what you've just said is one of the most insanely idiotic things I've ever heard. At no point in your rambling, incoherent response was there anything that could even be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.Deciphering motions like the one presented here wastes valuable chamber staff time, and invites this sort of footnote.Factac v. King (In re King), No. 05-5171 (Bankr. W.D. Tex. 2006)(available here).   In Part Two, I will focus on some of Judge Clark's more substantive opinions.

  Rule 3002.1 was added to the Federal Rules of Bankruptcy Procedure in April 2011, effective December 1, 2011 in order to insure debtors who complete chapter 13 plans are not burdened with undisclosed mortgage fees and costs.  The problem was well described in In re Sheppard, 2012 WL 1344112, Bankr. E.D.Va, 2012). Bankruptcy Rule 3002.1 was adopted to resolve significant and often hidden problems encountered by Chapter 13 debtors who utilized § 1322(b)(5) of the Bankruptcy Code to cure mortgage defaults in their confirmed plans.5 While debtors could cure an arrearage on their principal residence under § 1322(b)(5), they often incurred significant fees and other costs as a result of postpetition defaults or from interest or escrow fluctuations under the terms of the original loan documents. Fearful that any attempt to address these fees and charges could be construed as a violation of the automatic stay, many creditors would not inform debtors that these charges had been incurred until after the Chapter 13 case was closed. As the fees and charges were postpetition obligations not included in the plan and thus not discharged at the conclusion of the case, these debtors would emerge from bankruptcy only to face a substantial and previously undisclosed arrearage. This outcome was inconsistent with the goal of providing debtors with a fresh start.Subsection (c) of this rule requires mortgage companies to give notice of any fees within 180 days of the date the fee is incurred.  (c) Notice of Fees, Expenses, and Charges. The holder of the claim shall file and serve on the debtor, debtor’s counsel, and the trustee a notice itemizing all fees, expenses, or charges (1) that were incurred in connection with the claim after the bankruptcy case was filed, and (2) that the holder asserts are recoverable against the debtor or against the debtor’s principal residence. The notice shall be served within 180 days after the date on which the fees, expenses, or charges are incurred.  One issue arising from this, which does not appear to have a reported case on it, is when the fees were incurred. The notice itself filed by the creditor will likely have a date the fee was allegedly incurred, but there is no explanation of how this date was determined.  Likely, this will be the date the creditor actually paid the bill.  However, given the purpose of the rule, to prevent 'surprise' charges after completion of a case, it would seem an appropriate interpretation of the statute would be to require the notice within 180 days of any services for which the debtor is ultimately charged.  Otherwise, mortgage companies could simply not charge the account or pay the bill until the case is over, and again deal with debtor's who are no longer represented by counsel. One would presume the fees are incurred no later than the filing of the claim if the claim is filed by counsel, and if no other activity is done in the case.  As an example in a case pending now a notice under Rule 3002.1 was filed on 10/29/12 alleging a fee of $425 in a case purportedly incurred on 5/15/12.  However, the only action in the case was the filing of a claim by the mortgage company (showing no arrearage) on 4/12/12.  If the 5/15/12 date was correct, the notice was filed 167 days following the charge.  If the 4/12/12 date is the date the fees were incurred, the notice was filed 200 days following the charge.  This difference would affect whether the charge was allowable under Rule 3002.1(c).  Note there is a separate issue whether any fees are reasonably incurred when there were no arrearage in the case.

The tax break protecting homeowners from phantom income when their homes are foreclosed was reauthorized in the  last minute fiscal cliff bill. The problem is rooted in the tax code provision that treats debt that is cancelled as if it were income. While debt cancelled in a bankruptcy case is an exception to the rule, homeowners who lost their homes and had debt cancelled as  a result were exposed to the inclusion in their gross income of money they never saw. The bill that has protected homeowners outside of bankruptcy for the past four years was set to sunset December 31. The extension will protect homeowners in certain circumstances from cancellation of debt income.  Become familiar with the requirements. And check your state tax codes to see if state tax law mirrors the federal law. Other pitfalls This federal tax provision is not the answer to all problems at the intersection of tax and foreclosure. Remember that the safe harbor doesn’t cover refinances or second homes and rental property. If a property that doesn’t qualify for the exception is foreclosed before a bankruptcy is filed, the tax consequence is not mitigated by the later filing of bankruptcy.  (The insolvency exception may help, but note that it includes retirement assets in the balance sheet test.) Further, foreclosure is a sale for the purposes of capital gains taxes.  Since the capital gain is measured by comparing the tax basis with the sale price (not the sale proceeds), those who suffer foreclosure may still have a capital gains tax to deal with. Image courtesy of RyanLerch.  

A Chapter 13 plan often sounds like a great idea at the time you file for bankruptcy.  But three to five years is a long time, and it is not uncommon for people to lose their jobs or face other financial hardships during that time.  If you lose your job during the course of your [...]

For years, healthcare has been a major subject of discussion in the United States.  Costs are ever-increasing, and many claim there is no clear solution, while others propose very different solutions to the problem.  But it should come as no surprise that medical debt has become a larger and larger factor leading to bankruptcy, according [...]

It is one of the oddities of life:  a business can file for Chapter 11 and remain respectable, while those who file for Chapter 7 or 13 are ashamed and embarrassed.  Is bankruptcy really something to be embarrassed about, and is there a difference between a corporate bankruptcy and a personal one? The main reason [...]