Credit Counseling Is Not Just Another Hoop To Jump Through

There is a Revolutionary War era fort in Morristown, New Jersey known as Fort Nonsense. Legend has it that Washington has his men construct the fort in order to keep them busy and out of trouble during a winter encampment in the town.

The idea that Washington needed to keep his men thinking about the war and out of trouble makes a good story, but scholars say it is probably not true. Forts like the one Washington ordered built were a common form of defense, and he typically had more things on his to-do list than he had soldiers to do them, so soldiers were not just loafing around during the winter months.

There are a lot of things about the bankruptcy process that are Fort Nonsense-like. Numerous aspects of the process seem like they are only there to make filing more difficult and time-consuming than it needs to be. However, each step of the process exists for a particular reason.

Credit Counseling Is Not Nonsense

Take credit counseling for example. Debtors that want to file for personal bankruptcy under Chapter 7 or Chapter 13 must first seek credit counseling with a court-approved provider. This may seem like just another hoop that a would-be filer must jump through, but everyone who takes the credit counseling requirement seriously learns a few things that can help them manage their finances better in the long term. This is true even in cases where the debtor has been forced into bankruptcy by something like surprise medical bills.

The counselors typically work with a debtor to put together a budget, and discuss strategies for sticking to it. Counselors also make sure the debtor understands how to avoid financial risks and the importance of having a good credit score.  

Depending on the type of program, the credit counselor might also help the debtor consolidate debt, negotiate a better deal on existing debt, or set up a repayment plan.

Some debtors who were previously planning on filing for bankruptcy find that they no longer need to do so after they have worked with a credit counselor.

Finding A Counselor

As mentioned above, the courts have a list of approved credit counseling providers. Debtors who want to file for personal bankruptcy under Chapter 7 or Chapter 11 must get counseling from someone on the court’s list.

Here in the Eastern District of Wisconsin, there are counselors that will meet with you face to face, or you can work with a counselor over the phone or online.

Even though it is mandatory, counseling is not free. The credit counseling providers can charge a reasonable fee for their service. However, if a debtor absolutely cannot afford to pay, the counselors are supposed to work for free, or at a reduced rate.

At the end of the counseling course, the debtor will get a certificate of completion. This certificate must be filed with the court or the bankruptcy judge will throw the case out.

When Chapter 11 Just Isn’t Working Out As Planned

Coming to terms with the fact that a business is failing is extremely difficult for many business owners. A business almost becomes an extension of oneself after so much heart and soul have been poured into it. And business owners tend to be overly optimistic, otherwise they never would have started a business in the first place.

Many business owners facing bankruptcy want to file under Chapter 11, which allows them to retool, and move forward rather than wind down their affairs. But Chapter 11 is not the best option for all businesses. Many times a business simply cannot be salvaged, no matter how much the business owner wishes it could be. In such a situation, it may be necessary to convert a Chapter 11 bankruptcy into a Chapter 7 bankruptcy.

A Recent Example Of A Chapter 11 to Chapter 7 Conversion

There have been several sporting goods retailers with stores in the Milwaukee area file for bankruptcy over the past couple years. MC Sports, which is based in Michigan but had 7 stores in Wisconsin, filed for Chapter 11 bankruptcy in February 2017. It began liquidating its inventory to pay back creditors while looking for a buyer that could bring the business back from the brink. In late May, the company asked the court to convert its bankruptcy from Chapter 11 to Chapter 7 after it was unable to find a buyer and had decided to close its doors permanently.  

Conversion is Common

This is not an unusual situation. Many businesses that file under Chapter 11 and continue to struggle, even after taking advantage of the benefits that the bankruptcy law provides, end up converting to Chapter 7 and winding the business down completely. Reorganization is simply not possible for every business out there.

Debtors who filed under Chapter 11 typically have a one-time absolute right to convert the case from a Chapter 11 case to a Chapter 7 case.

Sometimes Business Owners Have No Choice But To Convert

Sometimes debtors have no choice but to have their case converted to a Chapter 7 bankruptcy. A party in interest, which includes creditors, can file a motion asking the court to convert a Chapter 11 case “for cause.”

There are many ways a party in interest can show cause. They can show the business is being mismanaged, present evidence that the business is continuing to lose money and is unlikely to recover, or alert the courts that the public is being put at risk by the continued operation of the business in question. These are just a few of the most common ways a party in interest can show cause. The Bankruptcy Code sets forth numerous examples of cause that would support conversion.

Don’t Guess Or Go It Alone, Contact An Experienced Bankruptcy Attorney

Business owners who are struggling to make Chapter 11 work, and creditors or other parties in interest who are frustrated with a case they are involved with, should not hesitate to speak with an attorney about converting a Chapter 11 case into a Chapter 7 case. There are few downsides to converting, but an experienced bankruptcy attorney can explain the pros and cons of converting a specific case.