Bankruptcy Facts
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WhatsNew:
Dealing With This Economy
December 3, 2011
We have been busy at the firm helping our clients deal with this difficult economy. We have had some success recently filing Chapter 11's for a few individuals with multiple properties. A recent court ruling from the Middle District of Florida eliminated a major challenge to this type of bankruptcy. We have seen a drop in the number of Chapter 7 cases compared to last year but have been advised by the foreclosure attorneys that the next waive of foreclosures in coming soon. We expect to see a corresponding increase in Chapter 7 filings. Let us know if we can help you with your financial issues.
CurrentNews:
American Airlines Files Chapter 11
December 2, 2011
The parent company of American Airlines filed for bankruptcy protection in late November, seeking relief from crushing debt caused by high fuel prices and expensive labor contracts that its competitors shed years ago. For most travelers, though, flights will operate normally and the airline will honor tickets and take reservations. American said its frequent-flier program would be unaffected.
Recent Events:
The Local Bankruptcy Scene
November 28, 2011
In the Southern District of Florida, our firm has seen an increase in the unwillingness of Chapter 7 trustees to forgo the collection of potential funds. In Florida, an individual's exemptions in bankruptcy are guided by reference to state-not federal-law. An individual is entitled to certain exemptions of personal and real property. Generally, if an individual was over their exemption limit, i.e. having certain property not entitled to exemption, trustees would generally forfeit their right as administrator of the bankruptcy estate to sell the non-exempt asset if the asset was of little value or considered "unsellable." However, our firm has observed a recent uptick in the willingness of the trustee to sell non-exempt assets worth little, seemingly because trustees do not want to lose out on the potential collection of funds. Often, the sale generates funds in an amount that does little more than pay for trustee and professional fees. If you are considering filing for bankruptcy protection, it is imperative to consult with a bankruptcy attorney who can explain your options and offer pre-bankruptcy planning to avoid these common pitfalls.
Bankruptcy Facts
Chapter 7 Chapter 11 Chapter 13
Dischargeability of Taxes Through Bankruptcy
Contempt for Violation of the Automatic Stay
Bankruptcy Facts - An Overview
Filing bankruptcy is an important legal right. Here are some important bankruptcy facts you should know. The Constitution of the United States, Article I, Section 8, Clause 4, provides Congress with the power to establish uniform laws on the subject of Bankruptcies throughout the United States. That provision was included by our Founding Fathers in reaction to the "debtor’s prisons" of colonial times, in which individuals could be imprisoned for their debts. Since the year 1800 this country has had formal bankruptcy laws for the benefit of U.S. residents. Our current bankruptcy code was adopted in 1978, providing a major overhaul of the bankruptcy system. New legislation took effect October 17, 2005 which substantially revised the Bankruptcy Code again. However, most people in financial distress can still file for bankruptcy protection. Please call us with your bankruptcy questions. Our offices in Plantation are convenient to Coral Springs, Fort Lauderdale, Sunrise and Davie.
The Bankruptcy Code provides for six separate types of bankruptcy proceedings. Since Chapters 9 and 12 are available only to municipalities or family farmers, respectively, and Chapter 15 concerns foreign proceedings, they will not be discussed in this article on bankruptcy facts. See our separate discussions on Bankruptcy Planning and Involuntary Bankruptcies. For information on South Florida bankruptcy preference claims see our Preference Page. For more on bankruptcy options for small businesses see our Business Bankruptcy page. For more on complex cases see our Complex Bankruptcy page.
Chapter 7 Bankruptcy Facts
A Chapter 7 liquidation proceeding is available to individuals, partnerships, and corporations. The debtor is allowed to keep exempt assets. For individuals filing bankruptcy in Florida, the exemptions are primarily determined by Florida law. They include the debtor’s homestead, (subject to a cap of $136,875.00 in equity if owned less than 1215 days), a debtor’s interest, not to exceed $1,000.00 in a single motor vehicle, a debtor’s interest in any professionally prescribed health aids, monies paid into the Prepaid Post-Secondary Education Expense Trust Fund, and $1,000.00 per individual in miscellaneous personal property. For individuals who are not claiming a homestead exemption an additional $4,000.00 exemption for any personal property may be available. Certain other assets such as the cash surrender value of life insurance policies, annuity contracts, IRA’s and pension plans may be exempt also. All non-exempt assets must be turned over to the Chapter 7 trustee for liquidation and distribution to creditors or bought back from the trustee through a payment plan.
For individuals filing Chapter 7, most debts, including some tax obligations, are discharged (see discussion below). Some debts, including recent tax obligations, trust fund obligations, child support and alimony generally cannot be discharged. Other debts may not be discharged if the creditor can prove improper conduct on the part of the debtor. A creditor can be held in contempt and required to pay damages for attempting to collect a debt discharged in bankruptcy.
Chapter 13 Bankruptcy Facts
A Chapter 13 bankruptcy, or "wage earner reorganization" is available only to individuals with regular income. It requires that the debtor file a plan providing for payment to creditors over a period of up to five years. The benefits of a Chapter 13 include the ability to reinstate a home mortgage that is in default, stop IRS collection efforts while payments are made, the ability to retain non-exempt real estate and personal assets, and a broader form of discharge.
Chapter 11 Bankruptcy Facts
A Chapter 11 reorganization is available to individuals and businesses. Due to the higher court fees, reporting requirements and legal fees involved in a Chapter 11, it is only used by individuals with combined debts of over $1,000,000.00. However, it may provide individuals and businesses with an opportunity to reorganize their debts and make arrangements to pay all or a portion of the debts, or sell the business, while obtaining protection from creditors. A Chapter 11 generally provides more flexibility than a Chapter 13 reorganization for individuals.
Corporate Bankruptcy
Businesses in financial trouble can seek protection from creditors in Chapter 11 while a plan of reorganization is worked out. For small business a Chapter 11 bankruptcy filing allows the business to reorganize its debts and make arrangements to pay all or a portion of the debts while obtaining protection from creditors.
A small business Chapter 11 also may be used to sell the business as a going concern. In many cases a small business can continue in operation and jobs can be saved by selling the business as a going concern to a friendly group of investors. Our office has filed numerous Chapter 11 cases in Broward County and throughout South Florida and can help you with this process.
If your business has suffered a temporary setback a Chapter 11 may give you the time you need to get caught up on bills. It also provides a forum to negotiate with all creditors in a setting favorable to the business. Call us if you would like an assessment of whether a Chapter 11 can help your business. We work hard for our clients to find the right solution for any business situation. For more on Chapter 11 see our Chapter 11 page or Business Bankruptcy page.
Dischargeability of Taxes in Bankruptcy
Most individuals are unaware that they may be able to discharge some or all of their older income tax obligations in bankruptcy. Dischargeability of these taxes turns on the question whether or not they are "priority" claims. Tax obligations which are non-priority are dischargeable.
The Bankruptcy Code provides that taxes assessed by a governmental agency which are based on income (income taxes) lose their priority status when:
(a) the tax return, with all extensions, was due more than three years prior to filing for bankruptcy protection;
(b) a return was filed at least two years prior to the filing for bankruptcy relief;
(c) the tax obligation was assessed at least 240 days prior to filing; and
(d) the tax payer is not guilty of fraudulent conduct or tax evasion and has not signed an offer in compromise or other settlement agreement.
Certain penalties and interest may also be dischargeable. Penalties designed to compensate the agency for actual loss are non-dischargeable while those which are punitive in nature may lose priority and become dischargeable. Employment taxes are not dischargeable regardless of the age of the tax claims. This is true whether the obligation arose because the debtor was the employer or a responsible officer.
Bankruptcy protection also provides a means to stop IRS collection procedures for a period of time while payments are made. Bankruptcy Code § 362, which grants debtors automatic relief from collection activity, applies to the IRS in the same manner as other creditors. The period of relief depends on many factors, including whether the tax payer files for relief under Chapter 7, 11 or 13. Priority and non-priority taxes can be treated in a Chapter 11 or Chapter 13 plan and paid out over time. The bankruptcy stay remains in effect until the Plan is completed or the case dismissed. This may allow a business which has been seized by the IRS to re-open and operate under a Chapter 11 Plan without interference from the IRS or other creditors. The filing of a Chapter 7 stays all collection proceedings until the entry of a discharge or dismissal of the case See our page on Violation of the Automatic Stay or Discharge Injunction.
This article is not intended as a substitute for competent legal or accounting representation, but merely as a guide to help you decide whether you need the services of a licensed attorney or CPA.
David W. Langley is licensed to practice only in the State of Florida and handles bankruptcy cases in Miami, Hollywood, Fort Lauderdale, Plantation, Pembroke Pines, Pompano, Coral Springs, Deerfield, Boca Raton, Delray and West Palm Beach.