Bankruptcy Facts

by Marc Tow

Bankruptcy Statistics:

A huge 50 percent increase in Business Bankruptcies was recorded for 2008. The total corporate filings for 2008 were 43,546, compared with 28,322 in 2007 and this last figure was a 50 percent increase on the previous year. This means that total Business Bankruptcies more than doubled in those two years. In more recent news, Bankruptcy filings rose 20 percent in the 12-month period ending June 30, 2010, according to statistics released today by the Administrative Office of the U.S. Courts. A total of 1,572,597 bankruptcy cases were filed in federal courts in that period, compared to 1,306,315 bankruptcy cases filed in the 12-month period ending June 30, 2009. This is the highest number of bankruptcy filings for any period since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect.

An analysis of the facts behind the statistics shows:

1. Denial and procrastination are consistently the number one causes of bankruptcy.
2. ‘Creative accounting’ and outright criminal fraud played a major role in may of the larger business failures.
3. The vast majority of business filings were a result of the principals either being unable or unwilling to react quickly enough to changing market conditions.
4. Many of these companies did not engage outside help until it was too late.
5. Almost all of the companies seeking court protection would have preferred to remain in business and filing for Bankruptcy was a last resort.
6. Our firm’s Debt Resolution Service would have enabled these businesses to enjoy most of the relief associated with a Chapter 11 Bankruptcy without losing control of the company to the court or suffering extra drawbacks.

by Marc Tow

If you are a landlord who’s tenant has filed for Chapter 11 (Corporate Reorganization) bankruptcy protection, what happens next? This article provides a brief overview of the the landlord’s rights and remedies based on the tenant’s election, and the assumption or rejection process a tenant must follow after a bankruptcy filing.

Assumption or Rejection of Leases
In a Chapter 11 (Reorganization) bankruptcy, all unexpired leases become the property of the bankruptcy estate. After the bankruptcy filing, the debtor must decide to assume or reject its leases and other executory contracts. If the debtor assumes a lease, the lease will remain in effect. If the debtor rejects a lease, the tenant is deemed in breach, which enables the landlord to terminate the lease. The landlord is then entitled to a claim for certain breach of lease damages that are described below. The debtor must make this election within 120 days after the date of the bankruptcy filing, although the period may be extended upon request for 90 additional days. If the debtor does not make any election (or otherwise does not assume a lease) within the 120 (if extended, 210) day period, the lease is deemed rejected.

If the bankrupt tenant remains in possession of the premises for at least the first 60 days after the bankruptcy filing, the landlord is entitled to rent as an administrative expense payable in accordance with the terms of the lease. If the tenant does not make rent payments for at least the first 60 days or any time thereafter that the tenant remains in possession before assuming or rejecting the lease, the landlord can move to dismiss the Chapter 11 bankruptcy case and/or seek to convert the case into a Chapter 7 (Liquidation) case.

Tenant Assumes the Lease
If the tenant assumes the lease, the tenant must promptly cure all outstanding defaults. Generally, all monetary defaults must be resolved and certain non-monetary defaults will also need to be resolved (to the extent they can) by the debtor. What constitutes a “prompt cure” is a matter of judicial discretion, but it usually is an immediate one. If the tenant does assume the lease, the lease will then continue in full effect and any claims the landlord has on the lease for subsequent defaults by the tenant will be entitled to administrative priority (highest priority behind secured creditors) and will not be subject to the statutory cap on damages discussed below.

Tenant Rejects the Lease
If the tenant rejects the lease (or if it has been deemed rejected) the tenant is deemed to be in breach of the lease as of the date of rejection, which, if the bankruptcy court permits, could be retroactive to the date of the bankruptcy filing. Once the lease is rejected, a landlord has no ability to reinstate the lease and is entitled to a claim for the following types of damages under the Bankruptcy Code:

Administrative Claims
For at least the first 60 days of occupancy following the bankruptcy filing, the landlord has an administrative claim for rent and additional rent. The administrative claim is still behind secured creditors, but is ahead of all general unsecured creditors. An interesting issue is whether rent accrued after the 60- day period but before the tenant accepts or rejects the lease is part of landlord’s administrative claim. As a general matter, the landlord is entitled to rent for this period as an administrative claim, but the issue of what is the correct amount of such rent (the contract rate or value to the tenant) is an issue litigated before bankruptcy courts.

Rent Past Due Prior to Bankruptcy Filing
In the bankruptcy proceeding, the landlord has a claim for all rent and additional rent past due for periods before the bankruptcy filing. For these past due rents, the landlord’s claim is an unsecured claim with the same priority as the other unsecured claims. However, if the landlord is holding a security deposit or letter of credit, it may apply to all of its claims. The security deposit or letter of credit should first be applied against the amounts of the landlord’s unsecured claims (and not administrative claims unless the bankruptcy estate does not have sufficient assets to pay the administrative claims in full).

Breach of Lease Damages
The final category of damages includes all future rent that would be due under the lease following the date of rejection (the “accelerated rent” under the lease). The Bankruptcy Code (11 USC Section 502) caps a landlord’s damages for breach of lease to the greater of one year’s rent or 15% of the rent due for the balance of the lease. Under California law, the landlord has the obligation to attempt to mitigate damages, and the effect of such mitigation is offset against potential damages. A landlord holding a letter of credit, can apply that amount to the landlord’s breach of lease damage claim and may not be subject to the cap, although it will be credited against the damage claim. Otherwise, the landlord’s claim for breach of lease damages is treated as an unsecured claim with the same priority as the other unsecured creditors.

If Tenant Fails to Vacate
If a tenant does not vacate after rejecting the lease, or post-assumption (but prior to the tenant’s exiting bankruptcy), and the tenant does not pay rent, the landlord will need to seek relief from stay from the bankruptcy court. After obtaining such relief, the landlord can commence and pursue an unlawful detainer action to seek to regain possession of the leased premises.

Conclusion
Some believe the bankruptcy process can be unfair to landlords; however, the process is designed to protect the rights of all parties involved and, in many cases, landlords receive special attention.

1. Tell Them to Stop
Under the FDCPA, you have the right to tell a collection agency employee to stop contacting you. Simply send a letter stating that you want the collection agency to cease all communications with you. All agency employees are then prohibited from contacting you, except to tell you that collection efforts have ended or that the collection agency or original creditor may sue you. You can do this even if the collector is not breaking the law.
2. Document Illegal Behavior
If a debt collector breaks the law, document the violation as soon as it happens. Start a log – and write down what happened, when it happened and who witnessed it. Then, try to have another person present (or on the phone) during all future communications with the collector. In some states, you can record phone conversations without the debt collector’s knowledge. But beware. In a few states this is illegal unless you get permission from the collector or warn him that you are recording the call. Check with your state consumer protection agency to find out if you live in one of these states.
3. File a Complaint
File an official complaint with the Federal Trade Commission (FTC), the federal agency that oversees collection agencies. Ask the FTC to send you a complaint form, or just write a letter. Contact the Federal Trade Commission at 6th and Pennsylvania Ave. NW, Washington, DC 20580, https://www.ftccomplaintassistant.gov Include the collection agency’s name and address, the name of the collector, the dates and times of the conversations, and the names of any witnesses. Attach copies of all offending materials you received and a copy of any tape you made.
Also, send a copy of your complaint to the state agency that regulates collection agencies for the state where the agency is located. To find the agency, call information in that state’s capital city.
Finally, send a copy to the original creditor and the collection agency. The original creditor may be concerned about its own liability and offer to cancel the debt.
Once your complaint is filed, don’t expect immediate results. The FTC may take steps to sanction the agency if it has other complaints on record. The state agency may move more quickly to sue the collection agency or shut it down for egregious violations. Your best hope is that the creditor will offer to cancel the debt.
4. Sue the Debt Collector
If you’ve been subject to repeated abusive behavior, consider suing the collection agency. But don’t bother if the illegal behavior was annoying but nothing more. For example, if the collector called three times in one day but never again, you probably don’t have a case.
You can represent yourself in small claims court, or hire a lawyer and go to regular court. (The other side may have to pay your attorneys’ fees and court costs if you win.) You’re entitled to any actual losses – for example, your pain and suffering, or the amount you paid to switch to an unlisted number to avoid harassment – and an additional amount (unrelated to actual losses) up to $1,000.
In truly outrageous cases – especially if the abuse inflicted on you was substantial and you have reports from therapists and doctors documenting your suffering – consider hiring a lawyer to represent you.
For more information Call me at 949-975-0544.

Q. What happens if I do nothing?
A. This depends on the creditors, you and whether the debt obligations are secured or unsecured.

Q. What is the worst they could do?
A. Take everything you own including your house, your cash, your car and if that doesn’t satisfy the debt they can still come after you again.

Q. What is the best that could happen?
A. They leave you alone forever and you never pay a penny.

Q. That’s quite a range, what is realistic?
A. If you have a creditor with a first priority interest in a secured asset you can be pretty sure that if you continue to do nothing you will lose that asset. In common cases this means if you do not make mortgage payments you will lose the house to foreclosure. If you fail to make car payments you will lose the car in a repossession.

Q. Are there exceptions?
A. Yes. If the secured position involves a negative asset. I have also seen cases in some states where creditors sue on the note and guarantee, ignore the secured asset and go directly after other more liquid assets of the debtor get get debt repayment.

Q. What constitutes a negative asset?
A. Imagine a $100 piano that costs $300 to move, something where the creditor would loose money if they tried to sieze it. This might even happen with a house where the value dropped so far that renovations required exceed it’s worth.

Q. How long will it be until I lose a valuable asset?
A. In some cases only a few months from the first missed loan or credit card payment. Other times I have seen many years go by.

Q. Credit Cards? I thought no one could take what I bought with a credit card?
A. While in most cases credit card companies have no right to take back goods you bought with a credit card you need to read the credit card agreements and know what they say. For example Sears cards can give Sears a secured interest in what you buy and I have seen them come after large items like appliances right down to smaller items like golf clubs and car batteries.

Q. What particulars of my debt situation will be good predictors of what creditors will do?
A. Before you become delinquent it’s a wild guess. After you miss a debt payment or two you’ll get a good idea of how hard you will be pursued. For mortgages, foreclosure laws vary by state.

Q. When would doing nothing be best way to deal with debt?
A. Doing nothing as a debt solution should be strongly considered in the following cases:
Statute of limitations cases
Where more time is needed to establish the correct course of action
Where legal asset protection must be done before fighting a creditor

Q. What is a Statute of limitation?
A. Most states have laws establishing if a creditor does not bring an action to collect on their debt within six years of the last payment by the debtor they may not ever bring an action in court. A few states have statutes of limitations down to three years. My favorite “do nothing” client may have a debt they have already ignored for over five years. They are concerned about the debt but have not heard from the creditor. By doing nothing the debt will become unenforceable in a few more months.

Q. The debt just goes away after six years?
A. No, just the creditor’s right to collect it in court. You still owe the money, it will even stay on your credit report for until seven years from the last debt payment. Collectors may still pursue you in hopes you do not know they have no legal way pursue you in court. The fact, however, is they have no interest in wasting their time. Once you make them aware of the fact that you know the statue of limitations has run out and you do not intend to make any payments on the debt they will likely leave you alone.

Q. How do they track time for the Statue of Limitations?
A. From the last transaction YOU made. This means any transaction, so be aware of debt collectors who ask you for a payment so tiny it might be easy to make. The small payment will not really make a dent in your debt and it may reset the Statute of Limitations clock back to zero. Note that transactions on the creditor side do not count to turn back the clock, so if they sell your account or charge it off these events have nothing to do with the running of the Statute of Limitations.

Q. When might someone need more time to know what to do?
A. Imagine a case where a client has lost a property to foreclosure and doesn’t know if he will be pursued for the deficiency yet. The other options would be premature, wait for them to start collection activity unless your asset or income picture will be improving. Sometimes the debtors future remains too unclear to elect the right course of action. An example might be someone between jobs or someone still in the hospital accruing medical bills. In these cases the plan involves doing nothing for a short period of time just until the future gains clarity, not forgetting about the debt situation.

Q. Can you do pre-bankruptcy planning and asset protection?
A. If done right I would consider it malpractice not to do bankruptcy planing. If done wrong it could be illegal. Here again you need good debtor representation by a bankruptcy attorney.

Q. I’ve already missed three mortgage payments while ignoring my financial problems, do I have to continue a do nothing strategy?
A. No, from a do nothing start you may move to any of the numerous debt or foreclosure avoidance options, if its not too late. Of course, if the goal is losing the house keep it up. Seriously, in some cases people want to loose a home or have no ways left to avoid foreclosure, in those instances debtor need to evaluate foreclosure vs. bankruptcy.

Q. When is it too late?
A. It depends on each creditor, but especially with secured creditors, the sooner a problem gets dealt with the easier it can be solved; in most cases.

Q. I still haven’t heard from the bank. Should I just continue to do nothing?
A. Ignoring a mortgage or credit card debt can be a very dangerous idea. First make sure you are working with an experienced debtor’s attorney. If you don’t have one you may want to consider a mortgage negotiation expert or credit card debt settlement professional. Second don’t spend the money you should be saving.

Q. What money?
A. Lets presume a mortgage payment of $800. The first month you only had $600. You didn’t know what to do so you did nothing. The next month $1600 is due you only have $1400, now you are really scared so you do nothing. To make matters worse, you spend the $1400 you had on other things. The third month you have $800 for one payment but three are due. This cycle goes on, sometimes for years. I have seen clients come in after not making mortgage payments for two or three years and have no money saved. For more on this read “Who to pay when you can’t pay everyone”.

Q. Why will I need money?
A. Many debt workouts need cash. The further in arrears you get the more cash it might take to avoid a foreclosure. It’s easy to dig a hole you can’t get out of and it’s sad because most times it could be avoided.

Q. How can I avoid it?
A. Follow these steps:

BEFORE you miss a payment contact the creditor. Let them know what’s happening and why. You will be surprised, but they will most likely be understanding and offer constructive suggestions. This advice works best with short term problems like someone out of work because of an operation where things will return to normal after they recover. I would not try this in cases where little or no hope exists to cure the situation such a case where the main wage earner just left to start a life sentence in prison and no one else in the household holds any job skills.
If for whatever reason you are not making payments, save as much as you can.
As soon as you are over your head, consult with an experienced debtor’s attorney.

Q. When should I be calling an attorney?
A. When the FIRST of the following occurs:
Any payment gets more than two months late.
You used a cash advance from a credit card to pay another credit card.
You needed a credit card to pay for basic living expenses like food because you had no cash or money in a checking account.
Any loan is “called” or accelerated by a creditor.
You receive a foreclosure notice.
You have drawn down your savings for daily living two months in a row.
You have experienced a disastrous financial setback, such as having major surgery without medical insurance.
You are experiencing some of the “grief” symptoms discussed in the lifestyle section, from your debt situation.
You see trouble on the horizon even if you are current with everything.
You think perhaps you should.
Q. I know I should see an attorney, but I’m so ashamed and embarrassed by my situation I can’t talk to anyone about it.
A. That’s like saying I can’t go to the doctor because I’m sick. Debtor’s attorneys deal with these situations every day. They should be very understanding of both your financial and psychological problems. Their job is helping people exactly like you.

Q. What if they make me feel stupid?
A. Use someone else. Just because you speak to one attorney doesn’t mean you will have to use them. Talk to a few and go with the one who makes you feel comfortable based on their experience with these matters as well as how they relate to you personally.

Q. How do I go about finding the right attorney?
A. First decide what type of attorney you need. A bankruptcy attorney, a workout attorney, a civil litigator or some other specialty might be right for your situation. I prefer to deal with a specialist. Attorneys who advertise they handle personal injury, divorce and a list of ten other items will likely end up doing a worse job on your bankruptcy than someone who spends most of their time doing bankruptcy work for debtors. Similarly, most bankruptcy attorneys have little or no experience with debt workouts.

Q. Can you help point me in the right direction?
A. Yes, we can perform a personal debt evaluation for you and then either work out the problem for you or refer you to a local attorney from your area we have selected based on our criteria and interviews.

Q.  Does the Bankruptcy court view student loan debt in a different way than either credit card debt or mortgage debt?
A. Yes. Bankruptcy courts treat student loan debt in a special way. Credit card debt, mortgage debt, medical debt or almost any other debt does not rate the special treatment that bankruptcy courts afford to student loan debt.

Q. Why does student loan debt warrant that kind of attention from the bankruptcy court?
A. Debtor protection from the Bankruptcy court and the power of the Bankruptcy court to relieve the debtor from obligations he or she legitimately incurred through a chapter 13 bankruptcy derives from powers granted to the Bankruptcy court by the United States federal government. It just so happens that the United States federal government also guarantees student loans.

Q. So you cannot make the Federal Government forgive a debt that you owe the Federal Government by using a debt relief program like the United States Bankruptcy court against themselves?
A. Yes.

Q.What about debt from a private school or a student loan debt from a private scholarship fund?
A.Sometimes student loan debt with no link at all to Federal student loan programs may be treated by the bankruptcy court in a manner much more like credit card debt or medical debt than student loan debt. Loans from non-profit organizations must get the same treatment as those guaranteed by the Federal Government.

Q.What would be an example of a student loan that would not be discharged in a bankruptcy court?
A.Through your school you arrange a loan that goes through a large national bank, with the obligation to the bank guaranteed by the Federal Student loan agency known as Sallie Mae.

Q.What would be an example of a student loan that would be discharged in a bankruptcy court?
A.The United Organization of Semi-Professional Tidily Winkers, a for-profit association, makes you a loan to study Tidily Winking at the University level.

Q.I see, strength and size of the organization granting the student loans dictates how it is treated.
A.No, not at all. The key element revolves around the true source of the money and the guarantee, if any. If the Tidily Winkers had gotten their money from a Federal Grant and had given you a student loan guaranteed by some agency in the Federal Government, it might not be dischargeable in bankruptcy. On the other hand, a student loan made from funds provided through a private endowment through a major University not guaranteed by anyone would likely get discharged by a bankruptcy court.

Q.I heard that if you have an unusual hardship you can still have these special kinds of student loans discharged, isn’t that true.
A.Yes, there does exist a special exception for “undue hardship” cases.

Q.My story is pretty sad so I should not have to worry about any of this, right?
A.No, not at all. The cases that fall under this exception are likely well beyond anything you have experienced or could even imagine.

Q.Give me an example of when a student loan debt that might not be eligible for discharge in a normal bankruptcy case would be dischargeable under the bankruptcy court’s undue hardship category.
A.Imagine that you got into a car accident and needed both legs amputated.

Q.Wow, that’s pretty extreme! Something that bad would have to happen?
A.No, I was just getting started. A double amputation would not be bad enough if you could still work without your legs in a field of study that you had used the loan to pursue. A chemical engineer, for example, could still work from a wheel chair.

Q.What if they had a million dollars in uninsured medical bills from the accident?
A.It does not matter. The court may want linkage between the undue hardship and the purpose of the loan, not linkage between the undue hardship and the reason you need bankruptcy protection.

Q.So when would the person in this example get their student loan debt discharged?
A.Imagine now if the person with the student loan debt had incurred all of the student loan debt to study ballet at the local university and furthermore had been employed as a professional ballet dancer for several years.

Q.So a ballet dancer who used the money to study ballet and could no longer pursue both the career for which they had studied been employed in because of a terrible hardship could get the special exception on their student loans?
A.Maybe, they could still teach ballet, which would be working in their field. Now if that person also had their arms cut off so they could not write about ballet and lost their voice box so they could not talk about ballet, that might be a case where the bankruptcy court would allow forgiving the student loan under the undue hardship exception. Note I said cut off and not broken, horrible injuries no matter how bad might not qualify if at some point in the future they might heal and allow the person work once more.

Q.That sounds insane. With a standard like that, in reality the hardship exception does not really exist.
A.Yes, the standards for the bankruptcy courts undue hardship forgiveness for student loans has a bar set so high it might as well not even exist for the vast majority of people with both student loans and special hardships.

Q.Are there any other ways for the bankruptcy court to wipe out or reduce student loan debts.
A.You could argue that they should reduce or eliminate a student loan debt where the school closed before you could complete the studies you had taken the loans to pay for and in cases where the loan was induced by some sort of fraud or criminal act by the school or the entity that set up the student loan. You might also try the undue hardship exception if the undue hardship affects one of your dependents as opposed to the debtor who took the student loans. Imagine perhaps that a dependent child had an accident that would require so much money for uninsured medical care, forever, that paying student loans created an undue hardship. Once again, these are unusual cases and very hard to get a bankruptcy court to approve.

Q.Then how should I approach the issue?
A.You may want to find a bankruptcy lawyer and briefly investigate or research the situation, but understand that winning a discharge of your student loan debt under the undue hardship exception or disputing the balance due remains a very unlikely possibility.

Q.So what should I do with my student loan debt?
A.If you are filing for bankruptcy anyway, you may as well discharge any of the student loans eligible for bankruptcy relief. For the rest, you can consolidate those student loans to ease the payments or try to settle the loans outside of the bankruptcy court. In some cases there may be so many student loans of the variety that may qualify for discharge that it makes sense to file a bankruptcy just to extinguish those debts.

If you have any questions feel free to contact me at 949-975-0544.

Thank you,

Marc Tow

My name is Marc Tow and I can help you understand the pro’s and cons of a bankruptcy. According to Gina’s analysis it looks like you would be a good Chapter 13 bankruptcy candidate. Chapter 13 bankruptcy is for people that want to keep their assets and that have regular income.

In a Chapter 13 bankruptcy you can keep your cars and home as long as you continue to make the loan payments. So the main risk is that if you don’t pay your loan payments you stand to lose the property. As for unsecured debt, you will be paying a percentage of it through a payment plan to the court. So you take all of your unsecured debt, i.e. credit cards, unsecured personal loans, medical bills and your unsecured second mortgage and you total it up. Let’s say that your total unsecured debt is $100,000. A plan is structured around your monthly income. It’s an equation that is done on the computer, but on average most of our plans have come out to 1% to 10%. If yours were to come out at 10% that means you’d be paying back $10,000 to your unsecured creditors over 3 to 5 years. Once you’re done with the plan payments your debt gets discharged, including your second mortgage.

We try to make the bankruptcy process as stress free as possible. Most clients feel very relieved once they have filed because they know that they’ll be keeping their property. If you have any other questions feel free to email me or call me directly at 949-975-0544.

Thank you,

Marc Tow.