Bankruptcy & Taxes

As Benjamin Franklin noted, “[I]n this world nothing can be said to be certain, except death and taxes.” It’s good advice when you need some perspective, and when you are filing for bankruptcy. While you’re probably going to want to hire a different lawyer to work with you on the death part of the equation, we work to make sure our clients are ready to handle the tax consequences of a bankruptcy filing.

The first thing to know about bankruptcy and taxes is that most tax debt is not dischargeable. This means you cannot wipe it away by filing for bankruptcy. You will still owe most of the taxes you owed before you filed for bankruptcy after you come through the process.

The only exception to the debt-is-not-typically-dischargeable-rule that is worth noting is that it is sometimes possible to discharge income tax debt that is a few years old. If the taxes came due over three years ago, and you filed your tax returns on time, and you did not commit fraud, it might be possible to have some or all of the older income taxes you owe forgiven. You will, however, still owe any penalties the IRS imposed that are related to the debt.

If you have a lot of non-dischargeable tax debt that you are struggling to pay off, you should ask your bankruptcy attorney about negotiating a settlement or entering into an installment payment plan with the government. This obviously isn’t as helpful as having that debt forgiven, but it can help you get your finances under control so you can move forward without stressing about how you will ever pay off what you owe.

Another tax-related thing that your bankruptcy attorney should help you with is your yearly tax filing. Depending on what chapter of the bankruptcy code you file under, you may need to file a separate tax return on behalf of your “bankruptcy estate.” Your personal return will cover the stuff it usually does while all your debts and assets taken over by the bankruptcy court will be accounted for in the other filing. It is critical that this be done properly or the government can impose harsh penalties.

A Bankruptcy Success Story

Those of us that work at Hanson & Payne firmly believe our bankruptcy system is a force for good. There are of course things we would change about it, but by and large it does what it is supposed to do, and it does it well. It gives people and businesses the promise of a fresh start. The planned opening of three Gander Outdoors stores in the Milwaukee area this year is a great example of what we mean.

Kenosha, Sheboygan, and Waukesha will all see former Gander Mountain stores that closed when that company filed for bankruptcy re-open as Gander Outdoors stores this year.

The turn-around comes courtesy of Marcus Lemonis, who you may have seen on CNBC’s “The Profit,” and the bankruptcy system. Lemonis has built an outdoors adventure and lifestyle empire by acquiring several smaller companies who were struggling to compete with the Cabela’s and Bass Pros of the world. He is presumably gaining market share and expertise through his purchases that will allow him to compete with the big guys. But he wouldn’t have been able to do what he is doing as well as he is doing it outside of the bankruptcy system.

The bankruptcy system gives those who have filed the ability to restructure and rethink. It can minimize financial pressures that stifle innovation. And it allows owners to step back and reflect on how best to move forward.

Our firm works with a lot of companies that are contemplating bankruptcy, so we know that it can be hard to appreciate these benefits when all you can think about is the fact that you might be going out of business. We understand that bankruptcy is not easy or exciting choice when it is your business.

We all mourn a bit for the Kenosha County-founded catalog retailer that grew into that local Gander Mountain store with the white gander flying against a red backdrop. But it is also exciting to consider that instead of being lost to history, the company has been reborn and will continue to serve lovers of the great outdoors in our area.

Americans Are Currently Late On More Than $600 Billion In Bills

Americans Are Currently Late On More Than $600 Billion In Bills

If you are in debt, you are not alone. America is a nation that was literally built on debt, and whose citizens continue to rely on debt to improve their lives. The most recent data on debt shows American citizens are $13.15 trillion in debt, and that over $600 billion of that debt is delinquent.

Debt has been a part of our country’s fabric from the start. It was Alexander Hamilton’s idea to bind the former colonies, now states, to the new nation they created after the American Revolution by having the states’ war debt transferred to the fledgling federal government. And bankruptcy laws were some of the first laws passed by Congress.

After the Revolutionary period, debt became an important tool for our nation’s growth. It was hard to purchase property or start a business without going into debt. The same remains true today. Few people can make large purchases or chart a new course for their life without taking on debt.

The Federal Reserve Bank of New York’s Center for Microeconomic Data keeps a close eye on consumer debt and uses it as an indicator of how well the nation’s economy is doing. The latest data goes through the end of the 2017 calendar year.

It reveals, “Aggregate household debt balances increased in the fourth quarter of 2017, for the 14th consecutive quarter, and are now $473 billion higher than the previous (2008Q3) peak of $12.68 trillion. As of December 31, 2017, total household indebtedness was $13.15 trillion, a $193 billion (1.5%) increase from the third quarter of 2017. Overall household debt is now 17.9% above the 2013Q2 trough.”

This means that consumers are taking on debt at pre-recession levels. This is a good thing because it shows that consumers are hopeful about the future, and that banks are willing to lend people money again.

The New York Fed also breaks the debt out into different categories: mortgage debt, home equity lines of credit, student loan debt, auto loan debt, and credit card debt. Another thing the Fed does is look at the amount of debt that is delinquent.

“As of December 31, 4.7% of outstanding debt was in some stage of delinquency. Of the $619 billion of debt that is delinquent, $406 billion is seriously delinquent (at least 90 days late or “severely derogatory”).” This just goes to show once again, that if you have debt you are struggling to pay off, you are not alone.

And you don’t need to face the consequences alone if you fall too far behind on your debt. Our firm helps people and businesses take advantage of the bankruptcy laws, helping prove that debt, bankruptcy, and the recovery process are all perfectly normal.

Is the Milwaukee Area a Hotspot for Bankruptcies?

Milwaukee Area Still A Hot Spot For Bankruptcies

The number of bankruptcies filed across the country continues to decline, but in the Milwaukee area, a lot of families and businesses are still in distress.

Thanks to the Great Recession, more bankruptcies were filed in 2010 than in any other year. Since that year, the number of bankruptcies filed each year have declined, including in 2017. The latest data from the Administrative Office of the Courts reveals 789,020 cases were filed in 2017, compared with 794,960 in the previous year. This number of bankruptcy filings is the lowest for any calendar year since 2006, and the seventh consecutive calendar year that filings have fallen. However, this is a decline of just 0.7 percent from 2016, the smallest year over year decline since the 2010 peak.

The tables below provide a snapshot comparison of 2017 and the previous few years, and a breakdown of filings by Chapter by year. Remember, Chapter 7 is a “clean-slate” bankruptcy for individuals, families, and businesses, where debts are wiped away. Chapter 11 gives businesses the opportunity to restructure their businesses, while Chapter 12 is for farmers. Chapter 13 is a repayment plan bankruptcy for individuals and families that allows many filers to get caught up on their bills over a period of 3 to 5 years.

BUSINESS AND NON-BUSINESS FILINGS,
YEARS ENDING
DECEMBER 31, 2013-2017
Year Business Non-business Total
2017 23,157 765,863 789,020
2016 24,114 770,846 794,960
2015 24,735 819,760 844,495
2014 26,983 909,812 936,795
2013 33,212 1,038,720 1,071,932

 

TOTAL BANKRUPTCY FILINGS BY CHAPTER
YEARS ENDING
DECEMBER 31, 2013-2017
Year Chapter
  7 11 12 13
2017 486,347 7,442 501 294,637
2016 490,365 7,292 461 296,655
2015 535,047 7,241 407 301,705
2014 619,069 7,234 361 310,061
2013 728,833 8,980 395 333,626

Personal bankruptcies continue to outpace business bankruptcies, and there are still more Chapter 7 cases than any other type of case despite the fact that Congress attempted to push people toward Chapter 13 the last time they made changes to the bankruptcy code.

Although the number of bankruptcies are falling across the country, there are still a disproportionately large number of cases being filed in the Milwaukee area.

The table below summarizes the data on bankruptcies in the Milwaukee area and statewide in 2017 by chapter.

TOTAL BANKRUPTCY FILINGS IN THE MILWAUKEE AREA
FOR THE YEAR ENDING

DECEMBER 31, 2017 BY CHAPTER

County Chapter Total
  7 11 12 13
Milwaukee 3,935 3 0 2,646 6,584
Ozaukee 109 1 0 48 158
Racine 447 1 0 265 713
Sheboygan 204 0 0 46 250
Waukesha 508 2 1 334 845
Statewide 12,041 37 45 5,006 17,129

As you can see, almost half of the bankruptcies filed in Wisconsin are filed in the Milwaukee area. Our area is just not recovering as quickly from the Great Recession as the rest of the state and the country as a whole. This is frustrating, but it should also be viewed as a sign to people in the area that are struggling with financial issues that they are not alone – our entire region is struggling.

Scam Alert

For many people and businesses, getting a threatening phone call about an outstanding debt or fine is par for the course. Debt collectors are persistent, they don’t care if you have already paid or a debt is fraudulent because you are on their list. They are often nasty and full of threats, up to and including imprisonment. When one is threatening or harassing you, you should feel free to hang up and report them to the authorities. And you should definitely take these steps if you think you are being scammed about a fake debt.

Right now, the federal courts and the U.S. Marshals Service are warning people that scammers have started to impersonate court personal, so we want to make our clients aware that this is another debt scam threat that is out there. These fraudsters are claiming that the victim has missed jury duty, and now must pay a fine or face jail time.

The callers are convincing because they are a bit more sophisticated than your average scammer. They are spoofing their phone numbers to make it look like they are calling from a courthouse or other government building. And they have done their homework and looked up the names of real judges and the addresses and names of real courthouses so they can drop those into the conversation to make themselves sound legitimate. Some of them even give out fake badge numbers since they are pretending to be U.S. Marshals.

The important thing to remember if you get one of these calls is that the courts do not call people like about jury duty. Initial communications about jury duty or a missed jury duty are made via mail. The only reason court personal might call you is if you are involved in a case, and even then, they are probably going to call your attorney instead of contacting you directly.

Furthermore, although it is true that missing jury duty can result in a fine or imprisonment, no court will take a payment over the phone. And it is especially fishy if they want the payment via gift card or pre-paid debt card as some victims of the scammers are reporting.

If a jury scammer gets you on the line, hang up immediately and report them to the authorities. Don’t just contact the local police, report the incident to your local U.S. Marshals Service office and to the Federal Trade Commission (FTC). The FTC has the ability to detect patterns of fraud from the information collected and share that data with law enforcement. The U.S. Marshals hope the information collected by the FTC will lead to possible arrests.

If you have question about the validity of a legal-related communication you have received, the attorneys in our office would be more than happy to take a look at it for you. Scammers are getting more sophisticated every day, so there is nothing wrong with being extra cautious.

 

The Clock Is Ticking

On December 1, a new bankruptcy rule that all creditors need to know about whet into effect. The rule shortens the time period during which a creditor can file a claim against a bankrupt debtor to 70 days, and subjects secured creditors to the rules other creditors have previously had to follow.

For years, creditors in bankruptcy cases have had 90 days to announce that they have a claim against someone who has filed for bankruptcy under Chapter 7, in which debtors liquidate assets; Chapter 12, which enables family farmers and fishermen to restructure their finances; or Chapter 13, which is sometimes known as the wage earner’s plan because it enables qualified individual filers to reschedule and make debt payments, allowing them to keep their homes and other property. Creditors now only have 70 days to make such a claim.

This new time limit also applies to secured creditors. Secured creditors were not previously mentioned in the text of Rule 3002 and that led to some confusion about when and how they should present their claims. Courts in different parts of the country had even set different timelines in different cases. The new rule provides clarity, which is a good thing, even though some secured creditors do not like the fact that the court is exerting more control over them.

Both changes to Rule 3002 are intended to make bankruptcies faster and more efficient.

The rule went into effect after a three-year rulemaking process during which comments on the proposed changes were solicited from the public. Now, we, and every other bankruptcy firm around the country, will be monitoring the new rule to see how it works in the real world. If it doesn’t do what was intended, or there are some unintended consequences, we will notify the courts and perhaps ask for additional changes to the rule.

We foresee some creditors missing the new deadline because they are not aware that it exists. Fortunately for them, the courts are allowing creditors to petition for an extension of the deadline. Hopefully judges will be liberal in granting these extensions if the creditor has a good reason for needing more time.

In Focus: Post-bankruptcy Credit Repair

Although filing for Chapter 7 bankruptcy can eliminate most of your debts and allow you to make a fresh start, it will also have a long lasting impact on your creditworthiness. Did you know that a bankruptcy discharge will remain on your credit report for ten years? Nonetheless, an experienced bankruptcy attorney can advise you on all of your options. In the meantime, this article is a brief discussion on the steps you can take to restore your credit rating.

Credit Restoration: 101

Although there are many reasons why people go bankrupt, including loss of a job, divorce, and unexpected medical crises, people who are facing insurmountable debts often spend beyond their means. With this in mind, it goes without saying that it is crucial to develop and maintain better spending habits.

It is worth noting that those who intend to file for bankruptcy are required to attend and complete credit counseling through a court-approved program. These courses provide information and training on creating a budget and understanding income and expenses.

While you are in bankruptcy, it is crucial to live within you means and maintain a budget.
By tracking your spending, you can figure out ways to cut your expenses. Some of your options include using coupons, purchasing generic or bulk items, and most of all, curtailing unnecessary shopping.

Once you’ve established a budget, it is important to start saving money. In short, the rule of thumb is to save 10 percent of your income. The objective is to create a “rainy day” fund to cover living expenses for 6 months in the event of unexpected events, such as a job loss, sustaining an injury in an accident, or suffering a serious illness.

Finally, it may be possible to start rebuilding your credit by obtaining a secured credit card. Generally, these cards require that you deposit money as security, with the amount of the deposit being the amount of the credit line. By carefully using the secured card and making monthly payments on time, you can begin rebuilding your creditworthiness.

The Takeaway

In the end, filing for bankruptcy is a serious consideration that requires the advice and guidance of an experienced bankruptcy attorney. Nonetheless, you can get back on your feet before your bankruptcy is discharged by taking steps to rebuild your credit rating,

What’s Going on at Toys “R” Us?

Last month we blogged about the Toys “R” Us bankruptcy and explored how one company’s bankruptcy can ripple through an entire industry. This month we are checking in on this interesting bankruptcy again because the company’s general counsel has resigned, and the company is asking the bankruptcy court for permission to pay out big bonus to its top executives.

Resignation

Earlier this month, Toys “R” Us announced that is general counsel was stepping down after just 10 months on the job. It is not unusual for high level executives to move after a bankruptcy filing, but this departure is raising some eyebrows.

Bonus Season

One of the common misconceptions about the bankruptcy process is that it limits executive pay. While there are limitations are the amount of money that can be offered to top executives to get them to stay with the company while it goes through the bankruptcy process, there are basically no other restrictions.

It was recently revealed that Toys “R” Us paid CEO David Brandon $2.8 million as a retention bonus just before filing for Chapter 11. That money is not being clawed back, and the bankruptcy court is being asked to approve even more bonus money. The company is asking the court to green light end of the year bonuses of over $90 million. It plans to give Brandon another $12 million, give 16 other top executives $20 million, and give its lower level employees $60 million.  

There is no reason to think the bankruptcy court will not approve this plan if the company has the cash to make it happen. Bonuses are a part of doing business, even when business isn’t doing well.

The Rumor Mill

It is going to be interesting to see how Toys “R” Us and the rest of the toy industry do this holiday season since things have been so unsettled for the last quarter. All the companies have been staying positive, which is important since negative rumors pushed Toys “R” Us to file sooner than it probably would have otherwise.

As the Financial Times reports, Toys “R” Us had to rush to file for bankruptcy after word got out that it was having financial trouble and its suppliers stopped shipping some orders or asked for cash on delivery just as it was preparing for its busiest season. This goes to show you just how important it is to work directly with suppliers if you are having financial trouble. Nobody wants to find out that a business they work with is on the brink of bankruptcy from a talking head on cable tv.

Get Help

If you need help steering your business through a financial crisis, don’t hesitate to reach out to an attorney as well as to your financial advisors. Our firm regularly helps businesses navigate staffing issues and renegotiate contracts or debts. We are also relied on by business owners who are trying to figure out if they should file for bankruptcy.

Are You Sure You Know The Priority Of Your Debt?

In Monty Python and the Holy Grail, some villagers claim to have found a witch, which they would like burn at the stake. They ask Sir Vladimir for permission to burn her, but he wants to know how the villagers know the woman before him is a witch before he consents to her burning. After a bit of prodding, the villagers admit the dressed the woman up like a witch and made her wear a fake nose. But they insist she does have a wart.

A bit of “scientific reasoning” then takes place, and it is determined that the woman weighs the same as a duck, so she can float on water, and thus is made of wood, which we all know is what witches are composed of since they burn.

We were reminded of this scene when reading a recent bankruptcy opinion from the 2nd Circuit Court of Appeals. There is a lot of other stuff going on in the case, but since we frequently work with creditors, what struck a chord with us was the court’s discussion of debt priority.

When a company declares bankruptcy, the court must figure out who gets what when any remaining assets are distributed. Debts are prioritized, and the higher the priority a debt is, the more likely it gets paid back. For example, first-lien secured bonds are superior to second-lien secured bonds, are superior to senior unsecured bonds, are superior to subordinated unsecured bonds, are superior to preferred stock, are superior to common stock, etc.

One cannot come in claiming that the title at the top of a document completely determines what type of debt it is and what priority it gets during a bankruptcy. That is like the villagers dressing up the woman as a witch to make their case against her stronger. It is necessary to do a closer examination of the details of the agreement to determine what exactly it is.

However, the court went a bit overboard in deciding that the terms of the subordinated notes in the case at hand were basically ambiguous. Parties need to have some certainty that their intentions about the priority of debt be respected. Wiggle room is not necessarily something lenders or debtors want in this area of the law.

 

110,000 Travelers Stranded Abroad After Airline Declares Bankruptcy

Although other countries have attempted to emulate the American bankruptcy system, few can replicate it. Consider the recent bankruptcy of Britain’s Monarch Airlines. The company collapsed so suddenly and completely that 110,000 travelers were stranded abroad, and the government had to charter special flights to bring them home.

While it is possible that something like this could happen to an American company, it is rather unlikely. Even businesses that face a very bleak financial future can use our country’s bankruptcy system to wind down operations rather than halt them abruptly.

Under United States law, troubled businesses can also avoid shutting down by going into receivership. Receivership is a close cousin to bankruptcy in that it allows a troubled company to keep operating as it looks for a buyer or winds down operations. As a bonus, it is generally faster and cheaper than going through bankruptcy, while still offering the company an opportunity to get a business’s fiscal house in order.

Receiverships are not voluntary. Instead of a company filing for receivership, a creditor can ask the court to appoint a neutral third party called a receiver to take over a debtor’s company and keep it running long enough to pay off the creditor.  

Instead of liquidating all assets like would be done in a bankruptcy, a receiver can help a company seek buyers who are willing to pay top dollar for part or all of the business. The fact that a business in receivership is being overseen by a neutral third party also reassures those the troubled business is working with, so additional credit is often offered as deals are renegotiated.  

Receiverships are also a good option when a creditor suspects the debtor company is committing fraud, has breached their fiduciary duties, or is operating a Ponzi scheme. The receiver is a neutral third party, so they can step in and help victims of the debtor by keeping the business running or by preserving assets while a criminal or civil investigation is ongoing.

There are people that specialize in being receivers and helping turn companies around or wind them down. Our firm helps businesses find such people, and advises such people on legal issues in the companies they are overseeing. We also work with businesses who are in receivership.