One must face the realities of life. Normally, bankruptcy should be a last resort. Economic factors such as loss of income due to illness or downturn in business and the prospects for future income and expense must be weighed in any decision to file for bankruptcy or for reorganization.
The main issue in this type of decision is a simple accounting question. Can my business or I continue to operate given the current level income and of ongoing expenses and liabilities?
When current expense exceeds current income, sources of credit are used to meet the negative cash flow. This usually takes the form of mounting credit card or bank debt. Most people in this situation become overwhelmed. They try to make minimum payments or resort to home equity loans or mortgaging exempt property (such as insurance policies, retirement funds or vehicles) in an effort to fend off creditors under the false hope of some future “economic” reversal or miracle. These seldom occur.
The Moral Dilemma – Should I File for Bankruptcy and Not Pay My Debts?
We are all taught to pay our debts. That is the moral thing to do. Yet, when monthly expenses exceed monthly income a severe economic situation results. The issue becomes one of survival. There is only so much of the “economic pie” to go around. Choices need to be made on spending one’s limited funds and resources on necessities such as food, housing and transportation versus making payments to unsecured creditors who couldn’t care less whether one has money to put food on the table and provide for one’s family. Obviously, the survival of the family comes first and one’s unsecured creditors come last. This then becomes the “correct” moral decision.
In a negative cash flow situation, only those creditors who supply necessities (including secured creditors) need to be paid. Not paying one’s mortgage will result in an eventual foreclosure and the need to find another place to live. Not making one’s car or truck payment will also result in a foreclosure and the need to find another means of transportation. Sometimes purchasing a less expensive vehicle with no or lower monthly payments is the prudent step to take given these circumstances. Not paying one’s utilities such as electric, telephone or water will result in the termination of these services. They need to be paid.
Non-payment of unsecured credit cards or unsecured bank loans may lower your credit score or business credit reputation. Such creditors can attempt to collect their debts by sending demand letters, making collection calls and even filing lawsuits. This type of unsecured creditor may harass you or your business and even obtain judgments. Nevertheless, they cannot take one’s exempt property. This is often the best defense. A creditor cannot recover from a person who has nothing other than exempt property.
The Alternatives to Filing for Bankruptcy
If one has “thick skin” and doesn’t mind harassment they might wait until the debts die of old age – that is the running of the statute of limitations (generally four to six years from the date the claim accrues). Another choice is hiring an attorney to fight the creditors and look for ways to avoid or offset the debt due to consumer credit or other statutory violations. A third choice is to file for Chapter 7 Bankruptcy and obtain a discharge of the dischargeable debt. This means that the debt becomes unenforceable upon the entry of the Court’s discharge order.
In the case of a failing business, a decision needs to be made whether to continue to put money into a losing cause or just shut the business down. Sometimes another business can be opened under another entity, yet successor liability rules under the Internal Revenue Code may present problems in this regard and even potential criminal liability.
If the business is no longer viable, then it should be closed. A chapter 7 filing may be considered in such case.
Reorganization (Chapter 11, 12 or 13) vs. Straight Bankruptcy (Chapter 7)
When a business is viable but burdened by excessive debt a Chapter 11 reorganization can be considered. This is an expensive proceeding which rarely succeeds. Good cash flow and/or significant assets which can be liquidated are essential to a successful Chapter 11 plan.
A corporation or partnership is not permitted to file a Chapter 13 proceeding which is designed for individuals to restructure secured debt for up to five years through a Chapter 13 Plan filed with the Court and administered by a Chapter 13 Trustee. The Trustee receives monthly payments from the debtor and distributes the funds to creditors, less his fees and expenses. This Chapter helps individuals deal with IRS or secured creditors when their homes or property is faced with seizure and/or foreclosure. Chapter 12 permits family farmers or fishermen similar relief.
If there is nothing to reorganize, a Chapter 7 should be considered for businesses and individuals. In a Chapter 7, a corporation or partnership ceases operations and its assets become part of the bankruptcy estate to be liquidated by the Chapter 7 Trustee. In the case of an individual or a joint, husband and wife, Chapter 7, the debtors surrender their non-exempt assets to the Chapter 7 Trustee, who liquidates those non-exempt assets with equity and uses the proceeds to pay the creditors in the order and priority set forth in the Bankruptcy Code pursuant to Court order. Most Chapter 7 cases are “no asset” cases in which there are no non-exempt assets for the Chapter 7 trustee to administer so the creditors receive nothing from the Chapter 7 estate.
The author, Laredo Bankruptcy Attorney, Martin Seidler, served as a Chapter 7 Bankruptcy Trustee for 13 years in thousands of cases and has extensive experience in handling this type of case over the past 38 years. He will happy to meet with you and to discuss your business or personal financial situation.