File Bankruptcy to Protect Your Wages and Other Earnings from Garnishment

From the moment that a bankruptcy petition is filed, the “automatic stay” is invoked and this automatic stay of legal proceedings affords many protections from collection activities, including wage garnishment on W-2 income, other income levies such as from 1099 income–usually earnings of self-employed persons or independent contractors–and bank account levies. In other words, the filing of chapter 7 bankruptcy effectively puts all collection activities and legal proceedings on immediate hold due to the automatic stay. Depending on the circumstances, the automatic stay can be lifted for various reasons but rarely, if ever, so that a creditor can continue wage garnishment or bank account levies. (One of the more common reasons for the bankruptcy court to allow the automatic stay to be lifted is for the foreclosure of a homestead that is in default and for which there is no proposal to cure the arrearages, for example through a Chapter 13 plan.)

Wage garnishment is a collection remedy that is usually only, but not always, available after a judgment has first been obtained or at a minimum after you have not responded to a summons and complaint previously served on you several weeks prior. If you have been served with a summons and complaint in a collection lawsuit and/or a judgment has been entered, you are likely also aware that a wage garnishment is headed your way. While most employees will receive notice of the wage garnishment prior to the garnishment taking effect via the next payroll, employers do not always provide prior notice of the upcoming garnishment and availability to claim potential exemptions from garnishment. While a debtor often has advance notice of a wage garnishment, you almost never receive notice of a bank levy until after it has already occurred.

For most people in Minnesota, a wage garnishment means that 25% of your net (“take home”) earnings will be garnished each payroll until the underlying debt is paid off. There are exemptions to wage garnishment available to some individuals meeting certain criteria.

Even if you are a self-employed or contract worker, 1099 non-wage income can still be garnished, especially if the garnishing creditor is aware of such income from previous disclosures made to them including in credit applications.

Bankruptcy puts an immediate stop to wage garnishment and all other collection tactics. In some cases, the last 90 days of wages garnished from you can be refunded by the garnishing creditor within weeks after the bankruptcy is filed.

Located in Edina, Minnesota, bankruptcy attorney Lynn Wartchow represents clients in all Chapters of bankruptcy in Minneapolis, St. Paul, Ramsey and Hennepin County, and throughout Minnesota.

Commercial Leases and Chapter 11 Reorganization: The Requirements and Timelines under the Bankruptcy Code

Problems with commercial leases of real property are one of most common precursors to a Chapter 11 Business Reorganization bankruptcy filing, at least in this attorney’s experience. What a lessee can and cannot do with a problematic commercial lease is something that should be fully considered before a Chapter 11 bankruptcy is filed. It is essential to have careful course of action regarding a commercial lease since timelines are short and monetary obligations come quickly once the Chapter 11 is filed. This article intends to give a comprehensive yet general enumeration of the timelines and lease options under the Bankruptcy Code that a debtor-lessee (i.e., the tenant) can expect with regard to their commercial lease of real property. Note: Leases of personal property have different timelines and requirements than leases of real property.

(For other detailed discussions on chapter 11 procedure, common issues and more, be sure to read Wartchow Law’s Chapter 11 Blog. including What Partners and Shareholders Should Know about Personal Exposure When Putting Their Business in Chapter 11.)

Terminated Leases and Expired Leases may not be Assumed in Chapter 11

What has transpired as of the date that a Chapter 11 is filed—also called the ‘date of the order for relief’—is determinative of the rights of both the debtor-lessee and the lessor (i.e., the landlord) and what course of action may be undertaken in the Chapter 11 proceeding. If the lease has expired or terminated under its own terms and/or under state law prior to filing the bankruptcy proceeding, the lease is unlikely to be resurrected in the bankruptcy except by agreement with the lessor. While the filing of Chapter 11 bankruptcy may stall an eviction proceeding and generally buys more time for the debtor-lessee to negotiate terms of a lease with its lessor, bankruptcy cannot ‘un-ring the bell’ of a lease that has already terminated or expired prior to filing. Simply stated, a terminated or expired lease cannot be assumed in the Chapter 11 proceeding except by voluntary agreement with the landlord. Bankruptcy also will not restore the rights of an already evicted tenant.

A pending eviction proceeding does not necessarily imply that the lessor has also terminated the lease or that the lease has already expired and a tenant in midst of an eviction proceeding may nonetheless still have a lease that may be cured and assumed in Chapter 11. This is why it’s imperative to know the precise status of the lease—terminated, expired and/or evicted—in order to determine what opportunities may be presented by a Chapter 11 filing. For more information on eviction and Chapter 11, see Chapter 11 Bankruptcy: Can it Stop Eviction under a Commercial Lease?

“Post-Petition” Rent and Other Lease Obligations are Timely Due after Filing

Assuming the debtor-lessee is operating under a non-terminated and unexpired lease, the Bankruptcy Code requires that once a Chapter 11 is filed all obligations under the commercial lease must be timely performed. Typically this means that as soon as a Chapter 11 is commenced, the next payment of rent is still due and owing on the regular rent due date under the terms of the lease. Some lessors may even push for the balance of the current month’s rent to be paid on a prorata basis, and in this case the Chapter 11 debtor will pay the prorated rent due from the file date of the Chapter 11 case to the end of that first month of the bankruptcy proceeding and all subsequent months’ rent when those become due. For this reason, a Chapter 11 business debtor should be confident in its ability to pay all normal rent going forward as well as anticipate the timely performance of all other obligations under the lease including any tax payments that may be due after filing Chapter 11 as well as most non-monetary lease obligations.

The Chapter 11 Debtor-Lessee has 120 Days to Assume the Commercial Lease

The Bankruptcy Code specifies that a non-residential real property lease must be either assumed or rejected within 120 days of the Chapter 11 case being filed, with one extension of this deadline available for good cause. Lease assumption is essentially a reaffirmation of all terms of the commercial lease along with whatever changed terms may be negotiated between the parties. Lease assumption requires that the debtor-lessee cure monetary and non-monetary defaults under the lease and provide adequate assurance of future performance. Adequate assurance may take the form a replacement deposit particularly if the former lease deposit has already been set-off by the lessor prior to filing Chapter 11. Generally, the bankruptcy court will approve a lease assumption even over a lessor’s objection if the lease is not terminated or expired, a full cure of defaults can be immediately made, additional adequate assurance will be provided if needed, and there is the likelihood that the business can reorganize under Chapter 11.

If a commercial lease is not assumed within 120 days, the lease is deemed rejected under the law and the debtor-lessee must immediately vacate and surrender the property to the lessor. If a lease is rejected, the lessor may also be entitled to rejection and termination damages as claims that can be reorganized.

Rental Arrears and Other Defaults must be Cured in Full for the Lease to be Assumed

In addition to the timely payment of post-petition rent, if there has been a default under the lease, that default must be cured at the time the lease is assumed, i.e., 120 days after the case is filed at the earliest. The cure of the pre-petition date default may involve both monetary compensation for unpaid pre-petition rent as well as unpaid real estate taxes due under the lease and sometimes compensation for the lessor’s actual expenses such as attorney fees. The cure required upon lease assumption may also mandate the debtor-lessee’s actual performance of other, non-monetary defaults under the lease such as operational restrictions and an affirmative responsibility to improve or repair the premises. Note that the act of filing of bankruptcy itself is not an event of default under the law that must be cured even if the lease says otherwise. Such anti-bankruptcy provisions are sometimes called “ipso facto clauses” and are rarely enforceable with the bankruptcy court. Once a commercial lease is assumed, the debtor-lessee’s rights under that lease are fully resurrected (except as may be altered by the terms of the lease assumption) including future lease renewal options.

The bottom line: A Chapter 11 business debtor-lessee should fully expect to pay all ‘post-petition’ rent as it becomes due immediately once a Chapter 11 case is filed. Additionally if the debtor wishes to keep operating the premises under the lease, they also must cure all pre-petition defaults including rental arrears within a short period after filing bankruptcy or otherwise plan to vacate the premises within this same short period of time. While commercial leases are often are renegotiated in the course of a Chapter 11 proceeding with a cooperative landlord, sometimes the most that a debtor-lessee can expect is for Chapter 11 to provide a relatively short window of opportunity to either make good on a defaulted lease or move into another suitable property without the immediate threat of eviction.

You should always consult an attorney regarding your specific rights under your particular circumstances. Lynn Wartchow of Wartchow Law Office is an experienced Chapter 11 attorney with a track record of successful Chapter 11 reorganizations in MinnesotaContact Wartchow Law for a consultation.

Received a 1099-Misc on Cancelled Debt? You May Qualify for Exclusion from Taxes if You Were Insolvent or Filed Bankruptcy

Generally, when a debt is owed and at least $600 of the debt is canceled, forgiven or settled for less than the full amount owed, this amount forgiven is treated for income for tax purposes. Cancelled debts often arise after a home is foreclosed with a deficiency still owed. Cancelled debts also occur when a credit card goes unpaid for the statutory period or the balance is settled for less than the full balance owed. In these common cases, the person receiving the benefit of the debt cancellation may receive a Form 1099-C or 1099-Misc., requiring them to report income and possibly also pay income tax on the amount forgiven/cancelled.

For a more detailed discussion on tax debt and other tax resolution issues, be sure to read Wartchow Law’s Tax Blog.

Cancelled debts are reported on a Form 1099 and not always in the year that the debt is cancelled. Form 1099s can be sent up to three years after the debt was cancelled, which may result in your having to amend that year’s tax returns. Once reported on a 1099, you are required by law to report this income on your tax returns and both the IRS and state includes the amount of cancelled debt as taxable income. Accordingly, this additional taxable income may result in taxes owed at the same rate that income is taxed.

However, there are exceptions to being taxed on cancelled or forgiven debt if you were insolvent immediately before the debt was cancelled or otherwise if you received a discharge in a Chapter 7 or Chapter 13 bankruptcy proceeding. While both insolvency and a discharge in a bankruptcy proceeding may provide an exception for some types of cancelled debts (particularly regarding residential mortgages), insolvency by the IRS standards does not require that you actually file bankruptcy. You can be insolvent according to the IRS without actually filing bankruptcy. If you qualify as “insolvent” according to the IRS standards, you must still report the Form 1099. income on your tax returns however you can separately file Form 982 is you qualify to exclude this income from your taxable income

A common example of cancelled debt is when a credit card balance is settled for less than the full amount owed, thus resulting in an amount which is “forgiven” or cancelled by the credit card company. Under federal law, the credit card company is required to report the amount of the cancelled debt as taxable income to the credit card holder.

As another example, if a personal vehicle was repossessed and then later sold by the lender after repossession, the amount owed on the loan would be reduced by the sale proceeds however usually a “deficiency” is still be owed. In this case, your lender may send you a 1099 for the difference owed which is “cancelled” by them. Unless you file bankruptcy or were insolvent immediately before the cancellation of the deficiency, you may owe income tax on that deficiency.

You should not receive a Form 1099 on debs that were previously discharged in a bankruptcy occurring prior to the issuance of the 1099. In fact, bankruptcy is usually an all-inclusive exclusion from taxes for cancelled debts, however you must still report the 1099 income on Form 982 and attach to your federal tax return. Note that the IRS Form 982 refers to a bankruptcy discharge as a “discharge of indebtedness in a title 11 case” since the Bankruptcy Code is under title 11 of the United States Code.

More information on the taxation of cancelled debts is available at and in the IRS Publication 4681.

Also see Received a Form 1099 on Foreclosed Home? You May Qualify for the Mortgage Forgiveness Exclusion to Cancellation of Debt Income.

Located in Edina, Minnesota, attorney Lynn Wartchow represents clients in all Chapters of bankruptcy in Minneapolis, St. Paul, Ramsey and Hennepin County, and throughout Minnesota.