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Chapter 13 can be used to save a small business provided the business is a proprietorship (not incorporated and not a partnership) and provided the debt limitations of a Chapter 13 are met. A Business Chapter 13 works best if most of the debts are unsecured and those debts that are secured can be repaid within a 5 year period. Restructuring loans on equipment and vehicles can also be accomplished provided the ownership time periods are met.
A Chapter 13 has some limitations which may not make a business chapter 13 your best choice:
- A Chapter 13 plan must be filed immediately with the first payment due 30 days from the filing date. In many cases a business, large or small, needs some time to reorganize internally, such as cutting operating expenses, before addressing creditors and begin paying their creditors back.
- A Chapter 13 plan cannot exceed 60 months. In many cases this limitation prevents a small business from addressing certain issues that need to be addressed to make the Business Chapter 13 successful.
- If a business owner also owns the building and real estate from which the business operates and the loan against the building needs to be adjusted because the interest rate is too high; the value of the building is worth less than the debt or the amortization period is too long, a Business Chapter 13 will not work because any such debt that is restructured in this manner must be paid in full in 5 years or 60 months.
- The equipment or vehicles have not been owned long enough to allow the debt to be modified sufficiently under Chapter 13.
There is an alternative to a Business Chapter 13 - a Small Business Chapter 11 There are now numerous features that cut the cost of a Small Business Chapter 11:
- There is now a form Chapter 11 Plan and a form Chapter 11 Disclosure Statement. This helps reduce the cost of a Small Business Chapter 11.
- Monthly operating reports for a small business have been made simpler than the standard monthly operating report.
- One of the problems for an individual filing a small business chapter 11 is that a discharge is not granted until after the last payment is made. This fact added a significant additional burden because the quarterly reports and quarterly fees had to be paid while the case was open.
- Under limited circumstances to allow a discharge to be entered immediately as part of the Order Confirming the Plan. The fees and expenses for a Small Business Chapter 11 is now a reasonable alternative to a Business Chapter 13.
It's important as a business owner to weigh the benefits and costs of a Business Chapter 13 versus the benefits and costs of a Small Business Chapter 11. As with any important decision be sure to get a second opinion. Many bankruptcy lawyers are consumer - only chapter 7’s and chapter 13’s or a business bankruptcy chapter 11 practice. A Small Business Chapter 11 requires the finesse of both.
Growing up in El Paso and being Hispanic, I was brought up with the mentality that Bankruptcy was wrong. Since I started working at Diamond Law almost 3 years ago, my mentality on Bankruptcy has changed. Bankruptcy to so many people is a scary step to take. After working with so many clients throughout these 3 years I have witnessed the relief bankruptcy (Ch 7 and Ch 13) has brought to them.
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I can’t say all of our clients have experienced relief. It's a shame really, since occasionally I see some clients staying stuck in old patterns - the negative mentality towards Bankruptcy. Why - because they judge themselves as failures and they fear being judged because they judge - shame and embarrassment. This mentality irritates me now because life isn't fair and circumstances kick you in the teeth and you're left without options. It is so unfair to be judged negatively because you made decisions that were in your control when everything else was so out of control.
Many people come into our office in a state of denial. Somehow their finances are all but a nightmare and their expecting to wake up one day and all is well. Now, if you are currently in that mental state - get real - financial miracles rarely come. Honestly, all that denial just adds more stress on yourself and your relationships.
Now, we are not miracle workers at Diamond Law although we really do try. We can only be as much help as our client's allow. No more self sabotage - no more procrastination. This help really comes from within - believing in yourself again, regaining self-worth. Don't let old ideals stand in the way of your financial wellness because we can help you if you let us. Bankruptcy's public policy should be thought as: a fresh start for an honest debtor.
Many clients come into our office hoping that we can lower their monthly mortgage payments. Unfortunately when the house is their homestead we do not have the means to modify the loan within the Bankruptcy. However, many banks are now offering loan modifications to people who are in Bankruptcy. It seems to be a growing trend that these modifications are being approved quicker and with less effort when they are dealing with a person who is in Bankruptcy. What does this mean for you? If you are in financial trouble and find yourself filing for Chapter 13 or Chapter 7 Bankruptcy, you do not need to be discouraged about a possible loan modification. The only thing that the mortgage company will require is a letter from your Bankruptcy Attorney allowing them to contact you directly in order to being the process. We had an instance where the mortgage company actually called our office to inform us of a loan modification opportunity for one of our clients. We then called our client in, they signed the documents and their mortgage payment went down by 33%. Although many see bankruptcy under a negative light this is just one example of new opportunities that bankruptcy may bring to you and your family.
Once a realm where where only the richest dared to dwell, more and more of the other 99% are looking into the world of asset protection.
And rightfully we should, as making money is only half of the battle. Holding onto the money you’ve made is the biggest challenge these days. As we see what little money we have being eaten up by taxes, fees, interest, and even lawsuits, we need to be more and more conscious of how to protect our assets.
Sensing this change, Nevada has taken a giant step forward in becoming the “go-to” place for asset protection.
Nevada enacted 2 laws that provide greater asset protection than you will find in most states, according to Mass Lawyers Weekly. The first law contains a provision that allows trusts set up in other jurisdictions to be moved to Nevada without re-starting the applicable statute of limitations. The second law makes charging orders the exclusive remedies for creditors against certain corporations, LLCs and LPs.
While it is not uncommon for states to recognize spendthrift trusts even though the settlor remains a discretionary beneficiary, the updated Nevada law broadens the type of spendthrift trusts available to explicitly include a charitable remainder trust, a grantor retained annuity trust and a qualified personal residence trust. In addition, the new law extends that protection to trusts from other jurisdictions so that the spendthrift trust property is protected from future creditors after the two-year statute of limitations period has run, no matter what state the trust was established. Moreover, under the new law, grantors can avoid any estate tax implications by excluding the trust from their estates because their self-settled spendthrift trust is viewed as a completed trust gift.
Second, the other, new law makes charging orders the sole remedy for creditors against Nevada LLCs, LPs and some corporations (non-public S and C corporations with one or more shareholders but fewer than 100.). Charging orders are basically liens on the membership interests in LLCs and LPs and are usually worthless. In addition, the new law does not give judges to option of issuing an equitable remedy. Equitable remedies, like a constructive trust or a reverse veil piercing, allow a judge to do an end-run around statutes like the Nevada’s, because they make the entity’s assets available to the plaintiff where they would not have otherwise been available.
One caveat: Courts in other states are usually more inclined to use the laws of their states in interpreting the protections of the Nevada trust or LLC. Nevertheless, Nevada’s law may reverberate across the country.
Earlier this month there was a great deal of hoopla by both politicians and the banking industry about the changes being made so that people facing foreclosure could deal with their situation better; either by refinancing, modifying their home loan or in extreme cases making an orderly transition when the homeowner needs to surrender the property back to the Lender.
On the way to work this morning I was listening to the news which featured a story about a woman faced with foreclosure who was assigned to a specific person to speak to regarding her mortgage. Every time she called the lending institution and dialed her loan number she was automatically routed to this individual. The only problem was that this individual never answered the phone and never returned a phone call. She must have been frantic since there is a short window of time to seek action before foreclosure actually takes place. There did not seem to be anyway around this employee. When reporters contacted the lending institution all of a sudden this homeowner was given someone new to contact and the lending institution said they were taking disciplinary action. Seems to me that it shouldn't take a call from a national news organization to get this lending institution to help one of it's customers and speak to a live person.
Multiple banks and multiple states have entered into a settlement agreement over how the banks handled foreclosure or were in the process of handling foreclosures. Finally many Banks being made accountable for their actions. The settlement appears to be for a significant amount of money. This settlement should provide money to be used to refinance or modify home mortgages (what is purported to be a large number of homeowners) and compensation for those folks who had their homes improperly foreclosed. This settlement has been trumpeted by the states, the banks, the media and even the president of the United States.
The one firm dollar amount that has been announced for those people who lost their homes is a grand total of $2,000. How would $2000 ease the loss of your home? It seems to me $2,000 is far from fair considering the alleged predatory conduct of the banks and so it makes me wonder just how far the modification and refinancing will really go. If the effect is anything close to the compensation being paid to those who lost their homes not much is really going to happen. Once again there appears to be this strange disconnect between those folks advancing the cause of homeowners and what is happening in the real world.
Filing for Bankruptcy was something that I never dreamed would “happen” to me. I worked hard to pay my bills and seldom even had a late payment. My husband made a good salary. Life was good.
Then one day I found myself in the middle of a messy divorce and learning about my soon to be ex-husband’s gambling problem. I ended up with $15,000 in credit card debt (my half) and only one income. I had 2 small kids and made just enough to pay the mortgage, utilities and keep food in the house.
For 5 years after the divorce I paid the bare minimum to the credit card companies. That got me nowhere… I paid nothing but interest and the balances seemed to grow instead of shrink. We had no disposable income. I ended up selling my house because I just didn’t make enough to pay everything. My parents had to start helping me make ends meet by buying 
school clothes for my kids. I stopped answering the phone because it was always a bill collector on the other end - and they were nasty. I felt like something was going to give… me. I felt hopeless. I was never going to be able to dig myself out of this.
Then someone suggested Bankruptcy Chapter 7. I was horrified. But after much thought and a consultation with a bankruptcy lawyer I realized that it was not only a good option; it was my only option if I wanted to get my life back on track. It was a difficult decision, but putting my pride aside - filing was the best decision I ever made. Just a couple of months after filing I was able to start rebuilding my credit and my life. I had a fresh start. I will never regret my decision to file.
I realized that Bankruptcy did not mean I was an irresponsible person. This experience showed me I had the courage to take action, to resolve a huge problem. Bankruptcy gave me my life back.
Practicing bankruptcy law in the greater Washington, DC area, we often get this question from nervous government employees and defense contractors: "If I file bankruptcy, will I lose my security clearance?"
The answer is: It's not the bankruptcy itself that is the problem. It's the underlying circumstances leading to the bankruptcy that is the determining factor.
Think about it. If you got a very serious illness and racked up a million dollars in medical bills you could not pay, and needed bankruptcy relief to stop the collection calls, lawsuits and garnishments, does the bankruptcy -- in any way -- reflect upon you personally as a security risk? Was the illness your fault? Is it evidence of a personality defect that would make it more likely you would breach security? I think you know the answer.
Where the circumstances leading to the bankruptcy were financial irresponsibility, then that's another matter. But then, the late charges, delinquencies, high credit balances, judgments, tax liens, etc. would already exist on your credit report. If anything, the bankruptcy would actually show you acting responsibility by exercising your legal right to "wipe the slate clean" and get the "fresh start" the law allows.
The US Air Force Academy's website discusses this issue and provides some interesting guidance: (The highlighted text is mine.)
Will Bankruptcy Affect My Security Clearance?
The status of your security clearance can be affected, but it is not automatic. The outcome depends on the circumstances that led up to the bankruptcy and a number of other factors, such as your job performance and relationship with your chain of command. The security section will weigh whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident, or by financial irresponsibility. The security section may also consider the recommendations and comments of your chain of command and co-workers. This is an issue that can be argued both ways, so as a practical matter your security clearance probably should not be a significant factor in making your decision about whether to file bankruptcy. The amount of your unpaid debts, by itself, may jeopardize your clearance, even if you don't file bankruptcy. In that sense, not filing for bankruptcy may make you more of a security risk due to the size of your outstanding debts. By the same token, using a government-approved means of dealing with your debts may actually be viewed as an indication of financial responsibility. Eliminating your debts through bankruptcy may make you less of a security risk. There is no hard and fast answer here, with one exception: it never hurts to have a good reputation with your co-workers and your chain of command.
Call us and make an appointment. We'll analyze your situation, and discuss all options to address your problem in person.
Filing bankruptcy will not, in and of itself, cause a person to lose his/her security clearance.
Generally, it's not the bankruptcy that creates a problem for Authorities as much as the events leading up to your bankruptcy. If the filing was caused because of blatant irresponsibility - this could be viewed as a negative factor. On the other hand, if the facts demonstrate that events leading up to the filing were beyond an individual's control such as large medical bills- this situation should not be viewed as a negative factor.
El Paso is home to a large number of Military, Border Patrol, DEA and ICE. I have addressed security clearance issues with our soldiers, Border Patrol, DEA and ICE personnel. For the most part bankuptcy does not cause a problem. Addressing your financial situation in a responsible manner, including filing for Chapter 7, 11 or 13 should not result in the loss of one's security clearance.
The opposite is also true, not addressing an out of control financial mess can lead to the loss of a one's security clearance. Why?? The answer is simple. A person drowning in debt has a higher probability of accepting a bribe.
Everyone in their lifetime will make poor choices. Don't confuse poor choices with fraudulent behavior and irresponsibility. Poor choices are forgiven.
Tis the time for resolutions. As an attorney specializing in the financial woes of small businesses and the self-employed in DC, VA and MD and drawing from my 22 years of experience, here are three tips to consider as you draw up your list for 2012:
1) Keep books. It's that simple. So many of the financial problems of small business could be solved simply by keeping regular books, including:
- Cash flow problems. This is almost certainly the leading factor causing a bankruptcy filing. Often, the business will actually be profitable or have positive net value, but because the managers have not managed the finances to maintain liquidity, they cannot pay bills on a current basis. This, in turn, leads to the debt enforcement actions that force the business to seek bankruptcy court protection so that it can reorganize its finances. It might have been avoided if the managers kept regular books and knew where they stood in terms of cash, account receivables and payables.
- Tax problems. Without keeping books, business may rely solely on what is in the bank account as a gauge of how they're doing. Unfortunately, the balance in the account does not take into account non-cash accruals that have built up during the year, the most critical being taxes. At year end, they don't have cash enough to pay the tax bill.
- Getting loans or selling your business. Persons evaluating the business as purchasers or lenders will not give you financing or top dollar unless there are regular books showing the business' performance over time or its ability to service the debt. (By the way, as a business owner you need to look at your business as a asset for eventually sale and not merely as a job provide you solely with income.)
Also, keep separate bank accounts for your business and personal life. This is a corollary to the first rule. If you're keeping books for your business to track your business' performance, you will have to create a separate business bank account.
2) Watch how you pay the people who work for you. Again, this is near the top of the list of small business problems seen by our DC-based tax and bankruptcy law firm. Know how the tax law distinguishes "independent contractors" from "employees," and how that law requires the business owner to withhold taxes and contribute to Social Security and Medicate for the latter, or face personal fines -- basically equal to that amount -- for NOT doing so. It's not fun.
3) Get help from professional accountants and business lawyers. No one wants to pay for advice at the front end, but when the problems hit, the cost can be much, much more. It's a cliche, but true: An ounce of prevention is worth a pound of cure.
If you are looking for an accountant who will give you such all-important business advice, as well as accounting services, we recommend Business Wise Consulting, Inc., led by Dave Parikh, an MBA and CPA, based in Silver Spring, MD and serving small businesses in the Washington, DC area.
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