Testing, Testing… Is This Thing On? How Means Testing Shapes The Bankruptcy Process

There is a common misperception among folks in the Milwaukee area that all personal bankruptcies are liquidation bankruptcies. Our clients often assume that all their assets will be sold off, their debts wiped out, and then they will have to rebuild their life from scratch. 

But it is also common knowledge that some companies file for bankruptcy, then continue operating as if nothing out of the ordinary was going on. David’s Bridal, for example, filed for bankruptcy last year, but is still selling dresses and otherwise outfitting bridal parties. Wisconsin-based Shopko attempted to follow a similar path but ultimately shut down. 

This doesn’t seem fair. Why should companies get to decide if they want to liquidate and shut down or try to keep operating while people are forced to sell off all their assets and start over with nothing? 

The reality is that people can choose to file for bankruptcy under a chapter of the bankruptcy law that allows them to hold on to many of their assets instead of being forced to liquidate them. 

Chapter 7 and Chapter 13 Bankruptcy

There are two main chapters of the bankruptcy code that people may file under — Chapter 7 and Chapter 13. 

A Chapter 7 bankruptcy is a traditional liquidation-style bankruptcy. Assets are sold off, the proceeds are used to pay off debtors, and most remaining debts are forgiven. 

If starting over with nothing is not appealing, or the debtor has an asset like a house or car that he or she really wants to hold on to, filing under Chapter 13 may be a better option. Chapter 13 is sort of like a corporate restructuring. The court presses the pause button on collections, figures out how much the debtor owes, then sets up a multi-year repayment process that allows the debtor to get caught up on their payments and get their finances under control. At the end of the process, most debts will be paid off rather than forgiven. 

Deciding which chapter to file under can be difficult. And that task is made more complicated by the fact that some people who want to file for bankruptcy under Chapter 7 are legally barred from doing so. 

Because the government wants to encourage people to pay off their debts rather than have them forgiven, the law tries to push people to file under Chapter 13 rather than Chapter 7 by forcing would-be Chapter 7 files to pass a means test

What is the means test?

The means test is a government-designed set of factors that measures a filer’s income, expenses, and family size to determine whether it thinks the filer has enough disposable income to repay his or her debts.

If a debtor “fails” the means test, it means the government thinks he or she should attempt to pay off his or her debts through the Chapter 13 bankruptcy process instead of having them forgiven through the Chapter 7 process. 

As bankruptcy attorneys, it is our job to help our clients figure out which chapter of the bankruptcy code would be better for them to file under. If they think getting a clean slate through the Chapter 7 process would be best, we help them through the means testing process. 

Take Backs, Clawbacks & Money That Is Rightfully Yours

Advice columns and etiquette guides are chock-full of suggestions about what to do when someone asks for something they previously gave you back. This advice is most often sought out at the end of a relationship when there are shared household items to divvy up or a diamond ring that is causing strife.

Some etiquette gurus suggest pushing back politely. Others say give the item back and move on with your life. As bankruptcy practitioners, we often wonder why the law of take-backs is not more fleshed out because, in our world, the law is quite clear. 

If a debtor that owes you money, or someone you do business with declares bankruptcy, the court may order any assets the filer transferred to you within the last few months returned to the bankruptcy court so that they can be equitably distributed among all creditors. 

These clawbacks are meant to guard against the preferential treatment of certain creditors and ensure all creditors are treated fairly. However, if you are the entity being forced to give back the money that is rightfully yours, you may question how fair this actually is. 

Fortunately, there are exceptions to the clawback rule that you may be able to take advantage of. The three most common preference defenses are (1) the contemporaneous exchange for new value, (2) the subsequent new value and (3) the ordinary course of business defenses.

1. Contemporaneous Exchange for New Value

The most common defense is the contemporaneous exchange for new value defense. It applies when the payment sent to a creditor was intended by both the debtor and creditor to be a payment for some new good or service exchanged right when new assets were transferred to the creditor. The assets transferred cannot have been exchanged in order to pay off old debts.

Organizations doing business with debtors who are in financial trouble should make it clear in their contracts and financial records that money coming in is being exchanged for something new of value, not paying off past due invoices.

This defense exists because policymakers want to incentivize companies to keep doing business with troubled organizations in hopes that they can get back on their feet. 

2. Subsequent New Value

This defense is only slightly different from the previously discussed defense. In order to claim the subsequent new value defense, the creditor must have given something of value to the debtor after payment from the debtor was received. Once again, this exception was drafted in order to incentivize the continuation of business relationships in situations where the creditor could easily have been pushed into bankruptcy sooner.

3. Ordinary Course of Business

This defense applies when a payment subject to clawback was received in the ordinary course of business between the creditor and the debtor. In order to take advantage of this defense, the creditor must be able to show that its relationship with the debtor did not change in the time period leading up to the debtor’s bankruptcy filing. No special payments were received, things were just going along like they usually did.

Don’t Give Up Without A Fight 

If you have been hit with a preference claim, and the courts are asking you to give back the money or other assets that are rightfully yours, don’t hand anything over without a fight. 

Hanson & Payne has helped many Milwaukee area businesses take advantage of these and other exceptions to the preference transfer law. In our experience, the sooner a creditor acts after being notified of a potential clawback the better. However, it is never too late to try and protect the money you are rightfully owed from flowing into someone else’s pocket. 

Whether you have just been notified your business was doing business with someone who has filed for bankruptcy, or you have already been asked to return a payment flagged as a preference transfer, don’t hesitate to contact our office and find out what your options are.

How Can I Negotiate My Debt with Creditors?

Getting behind on bills can happen to anyone. It only takes one financial setback, such as a car accident, job loss, or illness, to throw your finances into upheaval. Once this starts, however, things can quickly get out of hand and you may find yourself buried under a pile of bills that you just cannot pay.

While bankruptcy is an option, there are many steps before you may want to consider it. For instance, did you know that many creditors will work with you regarding your outstanding debt? They want to get paid and they will often work with you on not only negotiating a payment plan, but on the amount of the outstanding debt.

How Can I Negotiate My Debt with Creditors?

Working with creditors to negotiate a reduction in the overall amount you owe them is a big step in getting a handle on your debt situation. First, it is always better to call your creditor to try and negotiate the debt before they send it to a collection agency. This will avoid a big impact on your creditor score. Also, debt collectors buy debts for pennies on the dollar. This means that the creditor will likely be amenable to reach a settlement with you. Even if you pay slightly more than a collection agency would to buy the debt, it is still better for them.

Before you attempt to negotiate your debt with creditors, read and save all mail and correspondence related to the debt. Review your income and expenses and know what you can reasonably offer the creditor in order to settle your debt. Be prepared to take notes when you speak with the creditor. This means writing down the name of the person you spoke with and what was discussed. If you reach an agreement with your creditor regarding your payment, be sure to get it in writing.

When negotiating your debt with a creditor, mentioning the possibility or likelihood of filing bankruptcy in the near future can be an effective way to open up the creditor to reduce your debt. In Chapter 7 bankruptcy filings, unsecured creditors usually get nothing. This is also the case in most Chapter 13 filings. Your unsecured creditors, such as credit card companies, are aware of this and will be more than willing to accept what they can get from you in the face of getting nothing should bankruptcy occur.

Negotiating your debts will largely depend on what type of debt you are trying to negotiate. For instance, many people struggle with mortgage payments. A mortgage payment can easily be one of your biggest monthly expenses. Do not wait for foreclosure to be inevitable. You can call your mortgage servicing company and inquire regarding your modification options.

You may also be one of the many Americans struggling with student loan payments. Unfortunately, student loan debt is almost impossible to negotiate. Student loan debt is very rarely dischargeable in bankruptcy which gives the creditor little incentive to work with debtors. There are, however, many options for refinancing student loans, government programs that will allow you to reduce your monthly payment obligation, and even programs to eventually have your outstanding loan balances forgiven.

Wisconsin Debt Negotiating Attorneys

A financial situation can quickly go from bad to worse. Do not wait to lose total control over the situation. Hanson & Payne, LLC will work with you and your creditors to help you through your financial troubles. Let us help you move towards a brighter financial future. Contact us today.