The Basics of Bankruptcy [Podcast]
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Today’s show is brought to you by the Internet law lawyers at Traverse Legal, PLC. This is Matt Plessner and today we’ll be discussing bankruptcy. Bankruptcy hits tons of Americans all the time, and we here at Lawyers.com want to educate you on what to do in the event of bankruptcy. We’re here with California attorney and bankruptcy law specialist, Mark Markus. Mark, thanks for joining us today.
What is Bankruptcy?
Mark: To be bankrupt basically means that you’ve filed a bankruptcy case. There are different reasons one would file, and there are different options available, depending on what your eligibility is and what you need to accomplish. A lot of people file bankruptcy because they simply can’t afford to pay their debts. That’s the most common reason, that essentially the amount of debt that they have is more than the amount of income or assets that they have available to satisfy them. Technically, this is termed as being “insolvent” but not everybody who is insolvent needs to file bankruptcy.
Matt: Is there a minimum amount that someone needs to have, or maybe a minimum income that one must be making to file bankruptcy?
Mark: Absolutely not. There’s no minimum amount of income. There’s also no minimum amount of debt that they need to have.
Possible Bankruptcy Pitfalls
Matt: If you find yourself bankrupt, you’re going to file bankruptcy for whatever reason; what steps do you take?
Mark: The first step would be to have a consultation with an experienced bankruptcy attorney. You can file a bankruptcy without an attorney but the horror stories that I hear on a regular basis from people who have done that are just heart wrenching at times. The best answer I can give you is that the first step is to contact a bankruptcy attorney.
Matt: What are some of these consequences you’re talking about? If you decide against your better judgment to file alone, what are some of these heart-wrenching cases?
Mark: There are so many things that can go wrong in a bankruptcy case. Don’t get me wrong, you can file a bankruptcy by yourself, have no problems at all, and go through it. But there are literally hundreds, if not thousands of potential things that can go wrong in a bankruptcy case ranging from not taking the proper exemptions on assets that you have and then finding out that you are no longer going to be able to keep those assets after you file a case, to not getting a discharge of your debts because either you thought they were dischargeable and they’re not, or there’s something you needed to do in order to get them discharged and you didn’t do it.
There are all kinds of rules and procedures that need to be followed in any given bankruptcy case, requirements for pre-filing credit counseling courses, for example, and then there’s a post-filing debt management course that has to be taken and then filed with the court. Just to name a very few off the top of my head. There are so many different things that can go wrong.
One good example I give that’s not published anywhere is if you happen to have a bank account, for example, with Wells Fargo Bank, and you file a bankruptcy case, regardless of whether you owe them any money or not, Wells Fargo will freeze the funds that are in your bank account on the date your case is filed. This is something that any experienced bankruptcy attorney knows, but it’s not something anybody else would know, because there’s just no reason they would. There are steps you can take to prevent that from being an issue in your case but again, these are all just anecdotal comments about things that can go wrong in a bankruptcy. We could spend five hours doing nothing but listing the potential problems that could happen.
Matt: How long does it usually take to file bankruptcy?
Mark: It depends on which chapter they’re filing. A Chapter 7 case is generally about a four month process from filing until the discharge is entered. With Chapter 13, you’re doing a repayment plan. It’s usually 36 to 60 months, depending on a number of factors. Your discharge is entered at the end of that period, assuming you’ve made all your required payments and complied with all the rules and regulations during that time. Then Chapter 11 is a lot more complex and probably not something that a lot of individuals will ever have to deal with, so I’ll avoid that for the moment.
Personal Bankruptcy and Business Bankruptcy
Matt: We can get into that later. Now, Mark, as I’m in this seat as well as a business owner, are there differences between personal bankruptcy, where it’s just you filing under your own name and your own money, and a business bankruptcy where it has to do with the money the business is making?
Mark: This is the question I always ask when clients ask me that very good question. Is the business a corporation, partnership, or is it simply a sole proprietorship that’s a DBA (“doing business as”) of the individual?
Matt: Me personally. I’m sole proprietor, yes.
Mark: If you’re a sole proprietor, there’s no difference between your business and yourself individually. The bankruptcy process is not any different, the results are not different, and what you file is not any different in that scenario than it would be if you didn’t have a business. Of course, there’s more paperwork, and you have to go through more analysis of income and expenses because a business doesn’t make a fixed amount every month or every period. You have to do more of an analysis of the income and there are more expenses associated with self-employment than a typical wage earner who only has taxes withheld. However, the process is exactly the same. There’s no difference. If you’re running a business that’s a sole proprietorship, all of the debts and the assets of the business are the same as yours individually.
Matt: One final question before we wrap it up. Is there a difference when the business is run by a partnership?
Mark: Partnerships are very different and a little complicated to get into. Corporations are different in that they are a separate entity, so you have to decide what it is you want to file the bankruptcy for. With a corporation, you’re basically going to have two choices: either you’re staying in business, or you’re going out of business. If you’re staying in business and you need a bankruptcy for the corporation, your only option is really going to be a Chapter 11 case. That is basically a business reorganization where you propose some kind of a repayment plan to the creditors. How you do that is very complicated, way beyond the scope of this podcast. The other option for a corporation would be a Chapter 7 if they were going out of business. Chapter 7 is never necessary for a corporation it’s just an option that it can use under certain circumstances to accomplish certain things. Corporations do not receive discharges of debts in a Chapter 7 case, so the main benefit a corporation would get from filing a Chapter 7 would be if it had a lot of assets that needed to be liquidated. It allows an independent trustee to be appointed to sell those assets and pay the creditors. It basically, just takes the owners of the corporation off the hook for having to do that, so that nobody can come along later and say, “Hey, you didn’t sell these for the highest value” or all this kind of stuff. That’s one of the main reasons for filing a Chapter 7 for a corporation.
Matt: Well, Mark, thank you very much again for giving us a basic overview of bankruptcy. We’ll give the Lawyers.com listeners some more depth in later shows, but for now, I want to thank you very much for being here, Mark.
Mark: You’re very welcome. It was fun.
Matt: I’m Matt Plessner and thank you again for listening to Lawyers.com radio. Today’s show is made possible by Traverse Legal Office of Traverse City, Michigan. Whether you’re an attorney, or just someone trying to protect his or her legal rights, Lawyers.com has the answer for you.