Managing the Business During Chapter 11: Reporting and Other Requirements

When a business files Chapter 11, it becomes a “debtor-in-possession” of its own affairs as a fiduciary to the bankruptcy estate. What this means is that management of the business during the Chapter 11 case will remain under the control of its prepetition management and principals, subject to certain duties to report and maintain the business in a manner consistent with the procedural rules of Chapter 11 business reorganization bankruptcy. While these mostly financial and administrative requirements for operating the business during Chapter 11 are relatively straight-forward and generally represent good business practices, failure to follow these requirements can result in an appointment of a trustee to takeover operations of the business or dismissal or conversion of the case to liquidation.

While the business is in Chapter 11 bankruptcy, it has an obligation to file both a comprehensive initial financial report as well as ongoing monthly operating reports. The monthly operating reports provide an itemization of cash receipts and disbursements, profit and loss statement, balance sheet, copies of all bank account statements and other financial information that facilitates an ongoing review of the debtor’s finances while it is in bankruptcy. These monthly operating reports may be reviewed by any party in interest to the case and also form a basis to determine the feasibility of a plan of reorganization. If the debtor continually sustains a monthly net loss as demonstrated on the monthly operating reports, its hope for reorganization may be diminished.

Additionally, the business debtor must also stay current in the filing of all applicable tax returns and payment of taxes, including monthly sales tax and employee withholding tax obligations. This may be a challenge for businesses that do not maintain regular accounting books and records, or may routinely default in the payment of taxes. If the business accounting records and tax reporting is not current or accurate prior to the Chapter 11 being filed, an effort should be made as soon as possible to arrange the resources necessary to ensure that correct and timely tax filing and payments are made as soon as the Chapter 11 is filed. Tax obligations accrued prior to the bankruptcy may be dealt with in the plan, which often means that pre-petitiion sales tax obligations in Chapter 11 are repaid over five years at low interest.

The Chapter 11 business debtor has additional requirements to these, including the requirement to immediately open new debtor-in-possession bank accounts and close all pre-petition bank accounts, to maintain all insurance standard in the debtor’s particular industry, to pay a quarterly fee to the Office of the U.S. Trustee that monitors the debtor’s finances throughout the Chapter 11 proceeding, to attend various interviews and hearings conducted by the U.S. Trustee, as well as adhere to other restrictions on compensation, partner distributions, use of cash and more.

Keep reading for more on the Chapter 11 process, timeline and fees involved in a reorganization.

A qualified Chapter 11 attorney can advise your business of all the requirements and obligations before a Chapter 11 bankruptcy case is filed. Wartchow Law Office provides initial Chapter 11 consultations to review the business liabilities and other circumstances affecting a possible Chapter 11 bankruptcy proceeding, and to advise on possible options and solutions that Chapter 11 can provide to keep a business operating and improve future prospects.

Bankruptcy and Divorce: Some Payments in a Divorce Decree May be Dischargeable in Chapter 13

The rule of thumb is that bankruptcy will discharge most unsecured debts that are not taxes or domestic support obligations (which are two of the most common “non-dischargeable debts” that will survive a bankruptcy). This means that child support, domestic support owed to an ex-spouse and many taxes are never discharged in any form of bankruptcy. However a fine line can be drawn where some payment obligations in a divorce decree can still be discharged, but only in a Chapter 13 bankruptcy.

The divorce obligations that can be discharged in Chapter 13 bankruptcy (but not in Chapter 7) are payments that relate to property settlements such as a cash equalizer. Cash equalizers are common, for example, when there is equity in a homestead that needs to be fairly divided between the spouses when one spouse will stay on deed to the home. The general standard for discharging these types of divorce-related obligations is whether the payment is “domestic support” in nature (non-dischargeable) or is more of a property settlement (dischargeable).

In Chapter 13 cases, payments due to an ex-spouse on account of a property settlement are not allowed in the debtor’s budget since these obligations typically are considered general unsecured debt similar to a credit card. Also like a credit card, the ex-spouse can file a proof of claim in the Chapter 13 case to claim their right to receive a proportionate distribution paid to all unsecured creditors, with any amount unpaid being discharged at the end of a successfully completed Chapter 13 plan. While usually this distribution is only fraction of the amount that is owed, unsecured creditors may nonetheless file a claim.

Support obligations are never dischargeable in any form of bankruptcy and a Chapter 13 debtor will be expected to continue making these payments during the course of their Chapter 13. These include child support and domestic support owed to an ex-spouse, but not necessarily property settlements, cash equalizers and possibly other payments owed.

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

What is the Median Income in Minnesota and How Does is Factor into Chapter 7 Bankruptcy?

Qualification for Chapter 7 bankruptcy is largely determined by comparing one’s household income to the median income for their state. Essentially, if your gross annual household income exceeds the Minnesota median income for your family size you may not qualify for Chapter 7 and may be required to file Chapter 13 instead. Therefore, the Minnesota median income is a significant factor in determining whether you may qualify for Chapter 7 bankruptcy or if you may be instead steered toward filing a five-year Chapter 13 repayment plan. As of 11/01/2015, the median income in Minnesota for a household of one person is $51,199, for two people $68,515, for three people $80,804, and $98,447 for four people. The median income adjusts at least once per year and these amounts reflect the median income as last adjusted on November 1, 2015 which will again be adjusted in April of 2016.

If you fall above the median income, it’s important to understand that you may still qualify for Chapter 7 bankruptcy if certain factors are present—this is called “rebutting the presumption of abuse” in bankruptcy. These factors are part of a more comprehensive “means test” eligibility calculation and include such expenses as mortgage payments, tax payments, health care expenses, child care and child educational expenses, child support or maintenance payments, and a host of other variables that may be employed to qualify someone for Chapter 7 even if they are above the median income. In general, the higher over the median income a household falls, the less likely it will be to “rebut the presumption” and qualify for Chapter 7. In this case, your option is to file Chapter 13 bankruptcy, which can still be a good solution (see my blog on why Chapter 13 is not always a gloomy diagnosis in bankruptcy).

While some people seek out some of the unique advantages of Chapter 13 bankruptcy—including the possibility of cramming down a car loan, paying off mortgage arrears over five years or even stripping a second mortgage off a homestead—many people still prefer the ease and speed of Chapter 7. Nevertheless, the means test and the median income establish the threshold criteria for whether Chapter 7 or Chapter 13 may be filed, and usually there is little to no wiggle room from the strict results calculated by the means test.

The means test is complicated and often it’s best to have an experienced bankruptcy attorney calculate your household income based on the last six months of income, compare your number to the median income and prepare the means test calculation to determine what type of bankruptcy you may qualify for.

Wartchow Law Office is a law firm located in Edina, Minnesota with an exclusive practice in Chapter 7, Chapter 13 and Chapter 11 bankruptcy law, representing individual consumer and business clients throughout the Twin Cities of Minneapolis and St. Paul, Minnesota. Contact Wartchow Law Office for a free bankruptcy consultation.

What is Individual Chapter 11 Bankruptcy and Why Would I File an Individual Chapter 11?

The vast majority of individuals who file bankruptcy chose to do so under either Chapter 7 or Chapter 13, which are the most common forms of consumer bankruptcy. However, there are certain individuals that may instead take advantage of the greater flexibility that Chapter 11 can provide, especially when the individual has considerable and/or income-producing assets to protect and distinctive objectives to attain in bankruptcy.

(For other detailed discussions on chapter 11 procedure, common issues and more, be sure to read Wartchow Law’s Chapter 11 Blog.)

Chapter 11 arguably offers greater flexibility for an individual than other chapters of bankruptcy. A successfully confirmed individual Chapter 11 plan can restructure secured debts such as mortgages on rental properties and liens on other assets, yet without the close supervision of an appointed bankruptcy trustee. While some restructuring can be accomplished in Chapter 13, a Chapter 11 debtor maintains a higher level of control and input in the terms of the restructured debts as negotiated with creditors.

Especially for individuals having multiple real estate holdings, Chapter 11 provides an opportunity to protect non-homestead real estate equity which could otherwise be lost in Chapter 7 or Chapter 13, and opportunity to reorganize the underlying mortgages to rewrite more favorable terms including potentially stripping a wholly unsecured mortgage from commercial and rental real estate.

An individual may also opt to file Chapter 11 bankruptcy when they do not otherwise qualify for Chapter 7 or Chapter 13. In Chapter 7, individuals must be below a certain income level in order to be eligible for Chapter 7 pursuant to the “means test”. For higher income earners that do not qualify for Chapter 7, most can still file under Chapter 13, which typically involves a partial repayment plan over five years after which time any remaining debt is then discharged. Chapter 13 has certain statutory debt limits that, while for most people do not normally present a problem, pose a challenge for individuals that exceed those debt limits, in particular individuals that may have multiple real estate holdings with corresponding mortgages which easily aggregate to exceed the debt limits of Chapter 13. As of the date of this post, the statutory debt limits for Chapter 13 bankruptcy are $1,081,400 in total secured debt plus $360,475 in unsecured debt (see the current Chapter 13 debt limits).

As few general consumer bankruptcy attorneys practice individual Chapter 11s, it is especially important to consult with an attorney who has filed individual Chapter 11s before and can guide you through the more rigorous, yet arguably much more flexible process, on an individual Chapter 11 bankruptcy.

Lynn Wartchow provides initial Chapter 11 consultations to review liabilities and assets affecting an individual Chapter 11 bankruptcy proceeding. For more information on how Chapter 11 bankruptcy may impact your situation, contact Wartchow Law Office for a free bankruptcy consultation. Located in Edina, Minnesota, Wartchow Law represents clients in all forms of bankruptcy throughout the Minneapolis and St. Paul metro area of Minnesota.

What Should I Expect at the 341 Bankruptcy Meeting of Creditors?

If you have done basic research into the bankruptcy process, you will know that about one month after filing a bankruptcy petition and schedules there will be a mandatory hearing called the “341 Meeting of Creditors”, which is named after the section of the Bankruptcy Code that requires the hearing.

Clients often ask what to expect at the Meeting of Creditors, what they should bring to the Meeting of Creditors and what creditors will be present at the Meeting of Creditors.

For most people, the Meeting of Creditors is relatively uneventful: it’s typically held at the federal courthouse in a hearing room with people who filed bankruptcy around the same date that you did and their attorneys, all waiting for their names to be called so they can sit for the few minutes of questioning by the bankruptcy trustee assigned to their case. When your name is called, you can expect to go up and sit at the hearing table across from the trustee, and then be sworn in under oath to tell the truth, to confirm your name and address and then to answer some basic yes/no questioning for several minutes. If you have fully disclosed everything to your attorney and on your bankruptcy schedules, there should be no surprises and nothing new that comes up during the Meeting of Creditors. In the vast majority of cases, the trustee’s job is routine and they blandly conduct this hearing to determine if there are any non-exempt assets and to get your required testimony on record.

What should I bring to the Meeting of Creditors? In Minnesota bankruptcy cases, you should plan to bring your driver’s license and social security card, all paystubs received since the date that your case was filed, and also a bank statement that confirms the balance in each bank account on the file date of your bankruptcy case. If the trustee wants more documentation, they will either request it at the Meeting of Creditors or from your attorney.

Who shows up at the Meeting of Creditors? Usually, just you, your attorney and the bankruptcy trustee are present for a Meeting of Creditors. It is rare that any creditor will appear for a Meeting of Creditors, even though all creditors will receive notice of the scheduled time and date at least 21 days prior to the hearing. However, the only creditors who typically show up are ex-spouses or ex-business partners that feel jilted by the bankruptcy or, in some rare cases, individuals who have something to reveal to the trustee that was may not have been fully disclosed in the bankruptcy petition and schedules. Rarely does an everyday unsecured creditor make an appearance at the Meeting of Creditors. Even if a creditor or other party-in-interest shows up for the Meeting of Creditors, they are only allowed to ask questions related to the information contained in the schedules and are not allowed to use the Meeting of Creditors as an opportunity to ask unrelated questions.

Many people understandably feel nervous about their upcoming Meeting of Creditors, and inevitably all feel much relief once it is favorably concluded without incident. As long as you have fully disclosed all information in your petition and to your attorney, and you have the required documents and IDs on the hearing date, then the Meeting of Creditors should pose no concern. If you still feel anxious, just ask your attorney to spend a little more time helping you prepare for the Meeting of Creditors and/or provide a list of the sample questions asked at the Meeting of Creditors.

Keep reading for the Typical Questions Asked at the Chapter 7 Meeting of Creditors

Wartchow Law Office is a bankruptcy law firm located in Edina, Minnesota with  an exclusive practice in Chapter 7, Chapter 13 and Chapter 11 bankruptcy law,  representing individual consumer and business clients throughout the Twin Cities of Minneapolis and St. Paul, Minnesota.

Foreclosure in Minnesota: Know the Process, Timeline and How Bankruptcy Can Help

Home foreclosures in Minnesota are common and arguably are even on the rise despite an improving real estate market. In April 2012, the Star Tribune reported that while foreclosures were slightly down during the first quarter of 2012, signs still point to an 11 percent increase in Minnesotans facing foreclosure, adding that one in 312 Minnesota homeowners have received some sort of notice of foreclosure.

Home foreclosure in Minnesota happens via one of two legal proceedings: either the lender forecloses by advertisement or the lender forecloses by action. This post only discusses foreclosure by advertisement, which is the more common of the two Minnesota home foreclosure processes.

In a foreclosure by advertisement, the defaulting homeowner will typically receive one or more pre-foreclosure notices that warn of their lender’s intent to start the foreclosure process if payments are not brought current within a specified time. The time between the first default in mortgage payments and a homeowner’s receipt of the pre-foreclosure notice can be one to three months or more, depending on the lender and any efforts the homeowner may be making to do a workout with their lender. After the pre-foreclosure notice has gone out and the homeowner still has not brought their mortgage current, the lender will then serve the homeowner with a notice of sheriff’s sale. While the Minnesota laws governing service of process in a foreclosure proceeding are detailed, most homeowners are served in-person with the foreclosure papers at their home address. The Notice of Sheriff’s Sale, sometimes also called the auction notice, will provide the date, time and location of the upcoming sheriff’s sale, usually to be held six weeks after the date of service and at the county sheriff’s office. Once the sheriff’s sale has come and passed, ownership of the home transfers to the winning bidder (which is usually the lender for the first mortgage on the home) and the homeowner then has his or her redemption period to reside in the home before vacating it permanently. The length of the redemption period varies according to circumstances, but is most often six months from the date of the sheriff’s sale.

Chapter 13 bankruptcy can help a homeowner save their home from foreclosure by providing an avenue to repay the mortgage arrears over three to five years in a Chapter 13 plan. In fact, mortgage arrears is one of the most Common Reasons for Filing Chapter 13 Bankruptcy in Minnesota. If the homeowner can afford to make the monthly Chapter 13 plan payments, their mortgage may be brought current at the end of the Chapter 13 plan, in addition to the discharge of other debts allowed in bankruptcy.

Chapter 7 can stall the foreclosure process for two or more months and, like Chapter 13 bankruptcy, can also serve to discharge any deficiency owed on the second mortgage. While Chapter 7 bankruptcy will not help to resolve any mortgage arrears owed so that the homeowner can save their home, it can buy more time in the house before the homeowner must leave.

Keep reading for more information about How to Postpone a Sheriff’s Sale in Minnesota.

While Minnesota law governs the foreclosure process, the terms of a mortgage also govern a homeowner’s rights and a lender’s ability to foreclose. For more information on the foreclosure process in Minnesota and how Chapter 13 or Chapter 7 bankruptcy may help, contact Wartchow Law Office for a free bankruptcy consultation to understand your options.

What is the “Means Test” and Why Does it Matter in Bankruptcy?

The “Means Test” was one of the major and most controversial additions to consumer bankruptcy law that occurred as part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”). Part of the congressional intent of BAPCPA was to limit a person’s ability to obtain Chapter 7 relief and instead direct them into filing Chapter 13. While there are many reasons why some consumer debtors actually prefer to file Chapter 13 bankruptcy, Chapter 7 is still widely available and common, only now with a few additional hurdles to pass.

These “hurdles” to qualify to Chapter 7 that were added in 2005 as part of BAPCPA are collectively referred to as the “Means Test”. In actuality, the Means Test is an 8-page calculation that determines one’s eligibility for Chapter 7 using criteria such as the debtor’s income (as based on the last six months), household size, expenses and any special circumstances that may justify relief under Chapter 7 bankruptcy. While many of the numbers used are drawn from IRS standard allowances for food, utilities, and similar routine expenses, a person’s actual payments made monthly on secured debts such as mortgages and car loans are included to reduce their income. Generally speaking, if a person has no disposable income remaining at the end of the month after payment of all these standard and actual expenses, they may qualify for Chapter 7.

However, if when the last six months of income is annualized (i.e., doubled) and the person falls above the median income for their household size and state, they are instead steered toward filing Chapter 13, which includes a monthly repayment plan. As of 11/01/2015, the median income in Minnesota for a household of one person is $51,199, for two people $68,515, for three people $80,804, and $98,447 for four people. The median income adjusts at least once per year and these amounts reflect the median income as last adjusted on November 1, 2015 which will again be adjusted in April of 2016.

Even if someone is above the median income for Minnesota, they may still qualify for Chapter 7 (also referred to as “passing the Means Test”) based on other circumstances.

One job of your bankruptcy attorney is to give you all your bankruptcy and non-bankruptcy options, including calculating the Means Test for you and advising you on whether you qualify for Chapter 7 or if you may want or need to file Chapter 13 instead.

Wartchow Law Office is a law firm located in Edina, Minnesota with an exclusive practice in Chapter 7, Chapter 13 and Chapter 11 bankruptcy law, representing individual consumer and business clients throughout the Twin Cities of Minneapolis and St. Paul, Minnesota.

 

The Fair Debt Collection Practices Act and How It Protects You

The Fair Debt Collection Practices Act (“FDCPA”) is pro-consumer legislation that was originally enacted in 1978 for the purpose of protecting consumers from the aggressive and sometimes abusive collection tactics often used by third party collection agencies. Among the its lengthy list of prohibited acts and conduct, the FDCPA makes it illegal for debt collectors including collection agencies, lawyers, forms writers and other third party collectors to do the following:

  • State information that is false, deceptive, or misleading
  • Threaten to take any action that cannot legally be taken or that is not intended to be taken
  • State that a legal process such as a lawsuit has begun when in fact it has not
  • Represent that collection documents have been authorized or approved by a court, official, or an agency of the government
  • Threaten to unlawfully repossess property
  • Claim that the consumer has committed a crime
  • Incessantly call on the phone or engage in repeated telephone conversations
  • Call the consumer at their place of employment when the collector knows that the employer prohibits such communications
  • Discuss the debt with a third person, such as an employer or family member
  • Call the consumer if they know they are represented by an attorney

There are several requirements that must be met before a consumer’s claim for an FDCPA violation arises, including that the underlying debt must have been incurred for personal, family or household purposes as opposed to for business reasons. Damages for successful FDCPA violations include up to $1,000 plus the cost of attorney fees for bringing the action. Additional damages may be available if the consumer can prove emotional distress or that they suffered an out of pocket expense due to the violation.

If you believe that you may have a claim under the FDCPA, you should tell your bankruptcy attorney about the claim as this could be a potential asset in your bankruptcy case.

Wartchow Law Office provides free bankruptcy consultations to discuss options in Chapter 7 and Chapter 13 bankruptcy in Minnesota as well as non-bankruptcy debt relief alternatives. Located in Edina, Minnesota, Wartchow Law Office represents clients throughout the Twin Cities of Minneapolis, St. Paul and surrounding areas.

What is the “Credit Counseling” Requirement to File Bankruptcy?

A credit counseling course must be completed before an individual can file bankruptcy. This course basically goes through your budget and educates on how to prioritize certain expenses, save money and manage a household budget.

While every individual who files for Chapter 7, Chapter 13 or even Chapter 11 bankruptcy is required to complete this credit counseling course before filing bankruptcy, this class is relatively simple and some even find it useful.

What you should know about the credit counseling course:

  • You can take the course online, over the phone or in person.
  • The course usually costs around $25 if you take it online or over the phone.
  • Once completed, you will be issued a Certificate of Credit Counseling, which you must provide to your bankruptcy attorney for filing with the court.
  • Have your attorney’s email address handy when you take the course so the agency can forward the certificate directly to your bankruptcy attorney.
  • A Certificate of Credit Counseling is only valid for 180 days. If you do not plan to file for bankruptcy for another six months or more, you may wish to hold off on taking the class until closer to the file date.
  • It must be taken from an approved credit counseling agency in Minnesota (for Minnesota bankruptcy filers).
  • You will also have to take a second course after you file bankruptcy but before you get a discharge. This second course is called “Debtor Education” or “Financial Management” and the process is similar to taking the first course. This second certificate must be filed with the bankruptcy court before you can receive a bankruptcy discharge. You do not have to take the second course from the same agency that you took the Credit Counseling.

A list of the approved Credit Counseling and Debtor Education agencies can be found on the US Department of Justice website at www.justice.gov/ust/eo/bapcpa/ccde/index.htm.

Lynn Wartchow represents clients in Chapter 7 and Chapter 13 in Minneapolis, Edina and Twin Cities Minnesota consumer bankruptcy proceedings. Consultations are free.

Common Reasons for Filing Chapter 13 Bankruptcy

For some people, the bankruptcy code and rules may dictate that you simply do not qualify for Chapter 7, in which case the alternative is to file Chapter 13 “wage earner’s plan”. However, there are reasons why someone may actually choose to file a Chapter 13 rather than Chapter 7, even when they have the option of filing for the more common “straight discharge” Chapter 7 bankruptcy.

Possible circumstances when you must file Chapter 13 (i.e., do not qualify for Chapter 7):

  • Your household income exceeds the applicable median income for the state of Minnesota and you do not have enough other certain expenses to reduce your disposable income in order to qualify for Chapter 7. If your income is too high, you will need to file Chapter 13 instead of Chapter 7. This calculation is determined by the “Means Test”.
  • Regardless of your household’s income level, you still have disposable income every month after payment of all your monthly living expenses. In Chapter 7, you cannot have significant disposable income or your case could be dismissed or converted to Chapter 13.
  • You filed a previous Chapter 7 within the last 8 years so you do not qualify for another Chapter 7 at this time. Chapter 7 can only be filed once every 8 years. Note: a previous discharge in any chapter of bankruptcy will prevent a discharge in subsequent bankruptcy filed within 8 years, meaning that if you file a Chapter 13 within 8 years after a prior Chapter 7, the new Chapter 13 plan must propose a 100% repayment to creditors (i.e., no discharge is allowed in less than every 8 years). Other bankruptcy protections and tools, such as the automatic stay and ability to repay mortgage arrears to fend off foreclosure, are still available in a subsequent Chapter 13 filed within 8 years after a prior Chapter 7 bankruptcy.

When you may choose to file Chapter 13 bankruptcy over Chapter 7:

  • You need to repay mortgage arrears and/or default payments on your car loan in order to prevent foreclosure or repossession of the collateral. In Chapter 13 bankruptcy, you can repay home mortgage arrears over 3 to 5 years in the Chapter 13 plan.
  • You have assets which would be non-exempt in a Chapter 7 filing and would either face surrendering or paying to keep if you filed Chapter 7. In Chapter 13, you can “pay to keep” any non-exempt assets over 3 to 5 years of a Chapter 13 plan.
  • You want to see that your creditors receive some money despite the bankruptcy and even if it means they still won’t get paid in full. Most Chapter 13 bankruptcy plans provide for the proportionate repayment of unsecured creditors anywhere from pennies on the dollar to 100%.
  • You have non-dischargeable debts that you want the flexibility to repay over five years with low or no interest.

Lynn Wartchow is a Minneapolis / St. Paul area bankruptcy attorney representing clients in Chapter 7 and Chapter 13 consumer bankruptcy proceedings in Minnesota since 2005. Call for a free bankruptcy consultation to understand your options in Chapter 13 bankruptcy.