Should You File for Chapter 7 or Chapter 13 Bankruptcy?

Nobody expects to file for bankruptcy, but when life hands you unexpected and uncontrollable circumstances filing for bankruptcy can be a good way to protect yourself from creditors taking further action against you.

Many people do not know that you can file for two different types of bankruptcy: Chapter 7 bankruptcy and Chapter 13 bankruptcy. Before you file for bankruptcy, it is important to understand which option may be better for you.

Similarities Between Chapter 7 and Chapter 13 Bankruptcy

While Chapter 7 and Chapter 13 bankruptcy are different, they do have some commonalities. First, they are available to you if you need to discharge certain kinds of debt. Second, upon filing for either, they immediately implement a protective stay which prevents creditors from pursuing debt payment enforcement options against you. This affords you a safe harbor in which you can file for bankruptcy and determine a path forward without worrying about having to fend off additional legal actions. Where Chapter 7 and Chapter 13 bankruptcy differ is the income level necessary to qualify to use either chapter, as well as how they treat certain kinds of debts and assets.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is available to individuals who can pass the income level test. Essentially, you qualify for this option if your income is lower than the median family income in Wisconsin. There are some circumstances in which you can qualify if your income is higher, so if your income is higher than the median for Wisconsin families you should consult an experienced Wisconsin bankruptcy lawyer to see if you can qualify.

Most Wisconsin residents who need to eliminate a heavy debt burden choose the Chapter 7 option. With Chapter 7 bankruptcy, you get a fresh start and the only debts you owe after your bankruptcy is discharged are secured assets of your choosing. Additionally, there is no minimum debt required to use this option, and any wages and property you acquire after filing belong to you. Finally, Chapter 7 bankruptcy cases are usually finalized in about six months.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is the only option available to you if you are behind on your mortgage or business payments, and you still want to keep your property at the end of the bankruptcy process. With Chapter 13 bankruptcy, you make up your overdue payments over time and the original mortgage agreement can remain in effect. Additionally, Chapter 13 is the only option for people who have too much income to qualify for Chapter 7 bankruptcy.

With Chapter 13, your debt payments can be reduced under a payment plan and your co-signers are immune from creditor debt collection efforts. You generally have more time to pay off your debts, and you can file for Chapter 13 repeatedly.

Filing for Bankruptcy in Wisconsin?

At Hanson & Payne, LLC, we know that filing for bankruptcy can be a scary, complicated, and emotionally difficult process. Our experienced bankruptcy attorneys will treat you with respect and professionalism and will work with you to help you find the best bankruptcy option to get you on sound financial footing as quickly as possible. If you need to file for bankruptcy, contact the Wisconsin bankruptcy attorneys at Hanson & Payne, LLC, today.

A Hidden Asset Raises Thorny Legal Issues

Who owns a legal claim that is filed after a bankruptcy, but stems from actions that took place before the bankruptcy case was closed? This is the question our federal courts are trying to answer thanks to a Wisconsin woman who recently went through the Chapter 7 bankruptcy process.

Megan Kitchner was sued in small claims court on March 9, 2017. A few weeks later, on March 28, she filed for Chapter 7 bankruptcy. The small claims collection action became part of her bankruptcy case, as all pending and potential legal matters do when someone files for bankruptcy.

Kitchner received her bankruptcy discharge on June 29, 2017, and her bankruptcy case was closed on July 3, 2017. Less than six months later, Kitchner was back in court. She filed a lawsuit alleging that the Kohn Law Firm had violated the Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA) by disclosing her credit score and credit report when it filed its small claims collection against against her in March 2017. She claimed she was eligible for compensation stemming from the alleged violations.

The firm asked the court to dismiss the claims Kitchner had filed against it because it argued that those claims should have been included in the bankruptcy case, and were therefore under the control of the bankruptcy trustee, not Ms. Kitchner.

This is where things get tricky. Kitchner should have told the bankruptcy court about her potential claims against Kohn, even though she hadn’t filed her lawsuit yet. However, even though she didn’t disclose her potential claims and hadn’t filed them yet, they still technically belong to the bankruptcy estate and are under the control of the bankruptcy trustee. The trustee gets to decide whether to pursue the case, settle it, or abandon it and put it back under the bankruptcy filer’s control.

In this case, the court agreed with Kohn that the bankruptcy trustee, not Kitchner, was the true owner of the claims Kitchner had against the firm. However, it was reluctant to dismiss the case. Instead, it instructed Kitchner to either convince the bankruptcy trustee to formally give the case back to her, or to pull the trustee into the case to act as the plaintiff.

Our clients often find it frustrating that we ask so many questions about their lives as we are preparing to file their cases, but this case shows why it is necessary for us to do so. The bankruptcy court needs to know about ALL assets and liabilities, not just the ones you can think of off the top of your head. It can be frustrating and time-consuming to go through your entire life searching for hidden assets and liabilities, but it is important.

This case is also a good reminder of how critical it is to be vigilant about protecting your personal information. You don’t lose your right to keep your personal financial information private just because you file for bankruptcy. But as this case illustrates, you can lose your right to seek compensation for a FCRA or FDCPA violation.


The Rebirth Of American Apparel

“Companies are mutating all the time, shutting down departments that aren’t financially viable and discontinuing products that don’t sell. But when a brand is bought out of bankruptcy… it becomes eminently clear what portions of its business still have value, because that’s all that’s allowed to live on.” This quote, which is from an article on the relaunch the clothing company American Apparel, is a very succinct summary of a typical Chapter 11 business bankruptcy.

We would know, because at Hanson & Payne, LLC, we help Milwaukee area businesses retool and relaunch just as frequently as we help them shut down, and it always becomes clear as we work with our clients what portions of their business still hold value.

For many businesses, the real value lies in the business’s brand and reputation. This is what American Apparel discovered after going bankrupt twice. By studying consumer buying habits, they learned that regular people bought their clothes because they were a “cool” brand, not because all of their products were manufactured in America. Wholesalers, however, were buying because American Apparel’s products had that coveted “Made in the USA” label that sports teams and local fire departments want when they order shirts with their logo on the front.

We help business owners figure out what portions of their business hold the most value, and how to move forward with that information. Oftentimes this occurs in the middle of a Chapter 11 bankruptcy proceeding.

When most people hear the word bankruptcy, they conjure up images of a Chapter 7 bankruptcy, where a business’s (or individual’s) assets are liquidated to pay off creditors, and the business is shut down. During a Chapter 11 bankruptcy, however, the business stays open and operates pretty much as normal. Bits and pieces may be shut down or sold off though, and it is through the process of going through all of a business’s assets and figuring out what they are valued at by others as stand-alone entities that many businesses find their way forward.

During its bankruptcy, American Apparel realized it needed to revamp its manufacturing to offer different price points. And that it needed to cut ties with a former leader to generated more lawsuits than business. It closed all its stores, including the ones in Milwaukee and Madison, but it plans to open a new one in L.A. by the end of the year. It is charting a new and radically different path forward. One that only opened up after the company went into bankruptcy for a second time, and was more thoughtful about its future.

It is our goal to help Wisconsin businesses tell a similar story of redemption and rebirth. Our country’s bankruptcy laws exist in order to give people and businesses a second (or third) chance. Business owners should not hesitate to take full advantage of them. Especially in this day and age where monumental changes in consumer preference and the market seem to happen over night, bankruptcy allows one to be nimble and to focus on creating value for the future.


Boston Store Is Coming Back

If you have been to one of our local malls recently you will have noticed a big change — all the Boston Stores have gone out of business. The popular department store, which was established in downtown Milwaukee in 1897, and ultimately grew to form the core of the larger Bon-Ton group, filed for bankruptcy back in February. In August, the entire chain, which had corporate headquarters in Milwaukee, liquidated its merchandise and closed its doors.

But just when we all thought it was gone for good, Boston Store announced its comeback. The bankruptcy court signed off on a deal that gives a company called CSC Generation ownership of Boston Store’s intellectual property assets, including the company name, customer data and databases, and social media accounts and content. Almost immediately after the purchase was approved by the bankruptcy court, the Boston Store website came alive, and rumors of a brick and mortar renaissance were rampant.

CSC Generation claims its mission is saving companies from Amazon, and intends to save Boston Store by making some radical changes. It will focus on e-commerce, as is apparent with the relaunch of the Boston Store website, but it also says that it hopes to reopen some brick and mortar locations for the holiday season. However, these stores will be smaller and open fewer hours, just Thursday through Sunday. The stores will also offer services like personal styling and interior design, and allow customers to buy big ticket items via a new lease to own financing system.

Boston Store’s innovative comeback is getting a lot of attention because it is not the traditional return from bankruptcy. A new company is using the old name, but doing things radically different than everyone else in the department store sector. We wish more of the articles on the company’s planned innovations would highlight how going through bankruptcy made this possible.

The flexibility that bankruptcy provides is unmatched. As we have said many times, it is a tool that companies and individuals should be wary of, but should not hesitate to use if other options are limited. Our firm frequently works with businesses who are interested in using the bankruptcy process to retool and revamp.


The Ripple Effect

This month marks the tenth anniversary of what is viewed by many as the beginning of the 2008 financial crisis — the bankruptcy of Lehman Brothers. Over the past decade, the ripple effects from the Lehman Brothers bankruptcy spread to countries throughout the world, and to businesses here in Milwaukee, raising awareness that one bankruptcy can lead to many.

The year before it collapsed, Fortune magazine named Lehman Brothers the No. 1 “most admired securities firm” in the country. Today it is the poster child for risky investments and bad decision-making. The company simply held too many subprime mortgages, and when the housing bubble popped, there was no way for it to recover.

Once Lehman fell it was as if everyone was finally able to see that the emperor had no clothes. The federal government pumped over $700 billion into the financial sector to stave off a complete collapse, but still an estimated 6 million jobs were lost, unemployment rose 10%, the Dow Jones Industrial Average dropped an astounding 5,000 points, and bankruptcy filings skyrocketed.

We see a miniature version of this chain of events play out nearly every day. Whenever a business is in financial trouble, all the connected businesses and people are also put at risk. If one goes down, it is likely that others in its supply chain will follow. We work with many Wisconsin business owners who have been negatively impacted by the bankruptcy of a major customer or supplier, who must now act quickly to craft a financial workout and prevent their own downfall.

We regularly help businesses broker forbearance agreements with secured lenders, renegotiate equipment and real estate leases, and negotiate discounts with creditors. Over the years, we have developed strong relationships with the lenders and attorneys whose cooperation and patience are a necessary component of any successful workout. Our tenure in the field has also led to our credibility with the commercial lenders, whose yes or no vote on a workout proposal typically means the difference between an opportunity to recover and a bankruptcy filing.

If your business is teetering on the brink, or you are getting worried because a link in your supply chain has failed, don’t hesitate to reach out. As we are all too aware, recovery from the Great Recession was and is slow and painful. In the Milwaukee area, we just this year dropped to pre-recession levels of bankruptcy filings. In this sort of market, you need advisors you can depend on, and that’s why you can depend on Hanson & Payne.


The Deal That Saved A $1 Trillion Company

Earlier this month Apple made headlines when its stock hit $207.39, making it the first company with a market valuation over $1 trillion. For the past 15 years or so this has seemed almost inevitable as “the fruit” revolutionized the music industry and the smartphone market, launched the ap market, and made everyone want a tablet. But not so long ago, Apple was teetering on the edge of bankruptcy.

In 1997, Apple was not doing so well. Products were flopping and the company lacked direction. Co-founder Steve Jobs had been ousted from the company in 1985, but was brought back on to see if he could turn things around. He claims he didn’t realize how bad things really were until he started digging in after his return, but later revealed that the company was about 90 days away from declaring bankruptcy.

What saved the company was not, however, a Chapter 11 restructuring, but a lifeline from a rival in the highly competitive tech industry. Jobs made a deal with Microsoft founder Bill Gates that saved the company.

Microsoft purchased $150 million worth of non-voting Apple shares and promised to hold on to them for at least three years. Microsoft also agreed to develop and support Office products on Mac systems. These pieces of the deal were both important because they gave Apple an immediate cash infusion and made Macs more desired by professionals who relied on the Office Suite.

In exchange, Apple made Internet Explorer the default browser on its machines. Both companies agreed to drop a lawsuit over the look and feel of their competing operating systems and settle various patent disputes.

Apple employees were not thrilled with the deal when it was announced, but Jobs rebuked them, saying, “If we want to move forward and see Apple healthy and prospering again … we have to let go of this notion that for Apple to win, Microsoft has to lose.”

The take-away from this story is that there are often alternatives to bankruptcy for fundamentally good companies that know where and when to ask for help. And sometimes that help comes from unexpected places. A large chuck of our firm’s business is helping clients who are at the point where they need to make some drastic moves to shore up their financial situation, or file for bankruptcy.

Over the years, we have assisted countless businesses through the minefield of the business workout. We have strong relationships with the lenders and attorneys whose cooperation and patience are a necessary component of any successful workout. Our track record has also given us credibility with commercial lenders, whose yes or no vote on a workout proposal typically means the difference between an opportunity to recover and a bankruptcy filing.

If your business is in financial trouble, and you need help deciding what path to take forward, it’s time to fill out our online contact form or give us a call: (414) 271-4550.

Preparing for Bankruptcy: What Documents To Bring To Your First Appointment

Filing for personal bankruptcy is a simple and straightforward process if you do some work to prepare before showing up at the courthouse. Below is a list of documents we ask all of our clients to work on pulling together before we file their case.

  1. A certificate of credit counseling from a credit counseling agency approved by the Eastern District of Wisconsin. You must complete a credit counseling course not more than 180 days before filing for bankruptcy.
  2. A copy of every pay stub (proof of each pay period) you have received over the past
    seven months. Your employer should be able to provide you a copy of your pay stubs if you do not already have them.

If you have other income, write or type up a list describing it. Include any cash payments you have received.

  1. The complete and current address of all of your creditors (the people/companies to whom you owe money), including account number, the approximate amount you owe each of them, and the approximate date(s) you incurred each debt.

If a creditor has recently sent you a notice directing where notices should be sent in the event you file a bankruptcy, then you also need to provide us with that notice.

  1. Copies of state and federal tax returns for the 2 most recent tax years. If you have not filed tax returns for both of the 2 most recent tax years, then provide us with a copy of the tax return for the most recent year in which you did file.
  2. The state and federal tax returns for the most recent tax year for any business in which you hold an ownership interest (you do not need to provide us with tax returns for publicly traded companies in which you hold stock and in which you are not also an officer).
  3. A copy of the most recent real estate tax bill listing the tax assessed value for each parcel
    of real estate in which you have an interest. For properties in the City of Milwaukee you can get that information by clicking here. For information on properties in other Wisconsin counties, click here.
  4. A copy of each recorded mortgage or recorded land contract on property in which you have an interest. You will likely have to visit the county courthouse for the county in which each property is located to get this information. Click here to see the addresses and official phone numbers of all the courthouses in the state.
  5. The recorded deed to each parcel of real estate in which you have an interest. This information is also available at the county courthouse in the county where the property is located.
  6. A copy of the title to each automobile on which your name(s) appears.
  7. A copy of the Vehicle Purchase and Finance Agreement (the car note) or lease for each vehicle that you are financing through a lender or leasing.
  8. A written/typed list of the name, address, and phone number of everyone to whom you owe a domestic support obligation (includes alimony, maintenance, or child support). Also include the amount you owe, the amount of any arrearage, and the amount of the monthly payment. If an Order has been entered with the court outlining your obligations, please provide a copy of the Order.
  9. A copy of any divorce decree entered within the last four years, or a divorce decree entered at any time if the property division has not been completed between you and your ex-spouse.
  10. A copy of any marital settlement agreement (“MSA”) if divorced in the last twelve (12) months
  11. Any marital property agreement (“MPA”) between yourself and your spouse.
  12. A written or typed description of any personal injury or worker’s compensation claim you may have and a copy of all accident reports related to the claim, a written or typed estimate of the value of the claim, and the name of the attorney(s) who represents you regarding such claim.
  13. Copies of bank statements from all bank accounts you, and/or your spouse if applicable, have used for the last six months.
  14. A copy of each promissory note secured by real estate you own, including your home. The promissory note is the document that states the amount borrowed, interest rate, installment payment amount, and due date of the loan. Your lender(s) should be able to provide you a copy of this information if you do not have it on hand.
  15. A copy of your social security card. If it is a joint filing, we will need a copy of your spouse’s social security card as well.
  16. Any other documents you think are relevant.

Click here to download a .pdf checklist of these documents that you can print and use to organize your files.

Sometimes it can be tricky to track this information down, so if you have any trouble, please reach out to our office and let us know.

Creditors Must All Be Sung The Same Tune

Earlier this year, we did a blog on the Gibson Guitar bankruptcy. It’s a case we’ve been following closely because it is a high-profile version of a type of case we frequently work on ourselves – a Chapter 11, business reorganization bankruptcy. A recent article in the Wall Street Journal provides yet another peek into the case with a focus on an issue that comes up in almost every business bankruptcy – the pre-filing treatment of creditors.

The guitar company’s creditors are reportedly investigating whether certain lenders were favored in the months leading up to the bankruptcy filing. For example, a loan from Elavon Financial Services DAC, U.K. Branch was swiftly paid down from $60 million to $24 million in the months leading up to the bankruptcy filing.

Businesses that are struggling to stay out of bankruptcy, and those that suspect they will soon be forced to file, often think it is a good idea to pay off small debts so it looks like they have fewer creditors, or to focus on paying down larger debts to keep those lenders happy. But treating some creditors better than others in the months before filing for bankruptcy is a no-no.

If a filer prefers one creditor to others, that creditor might have to give back the money they were paid by the debtor and see it instead distributed to all the creditors.   

The Bankruptcy Code defines a preferential payment as:

  1. Any transfer by the debtor;
  2. Made to or for the benefit of a creditor;
  3. To pay back a debt which was owed by the debtor before the transfer was made;
  4. Made while the debtor is insolvent;
  5. Within 90 days prior to the date the bankruptcy case was filed, or within 1 year for “insiders”;
  6. That enables the creditor to receive more than it would have received in a Chapter 7 liquidation.

This is a very broad definition, so it is common for all of a bankruptcy filer’s creditors to receive a letter alerting them that funds they have been paid are being clawed back. Creditors should not hesitate to fight these demands.

Creditors can often keep the money they were paid or at least reach a settlement allowing them to keep a portion of the payment if they can show that they have a valid defense to a claim of preferential treatment.

The most common defense is that the payment was made for a contemporaneous exchange of goods. Prime examples of contemporaneous exchanges involve cash-on-delivery (COD) payments for equipment or inventory the debtor is using to run their business.

It may also be possible to show that the payment was made in the ordinary course of business, and was therefore not preferential but typical. This is a heavily litigated defense, but one that should not be dismissed just because there are few bright lines rules governing what is done in the ordinary course of business.

Our firm regularly helps creditors defend against all sorts of preference claims.

Trump’s Tariffs May Cause Bankruptcies In Wisconsin

It seems as it each week another tariff on foreign goods, or a retaliatory tariff on American goods, is announced. While some industries may benefit, as President Trump claims, Wisconsin dairy farmers are suffering.

According to a report in the Journal-Sentinel, “About 90 percent of Wisconsin milk is turned into cheese, and all but about 10 percent of that cheese is sold outside the state’s borders. Mexico buys nearly a quarter of all dairy products exported by the U.S., and the American dairy industry is reeling from $387 million in Mexican tariffs — of between 15 and 25 percent — on cheese.”

And it is not just Mexico that is imposing tariffs. Canada, the EU, and China are also getting in on the act. Experts estimate that Wisconsin’s dairy farmers can conservatively expect to lose $75 million a month because of these tariffs.

Unfortunately, suffering is nothing new in the dairy industry. A drop in milk prices over the past few years has brought many small family farms to their knees. As the Journal-Sentinel article notes, “Wisconsin lost 500 dairy farms in 2017, and about 150 have quit milking cows so far this year, putting the total number of milk-cow herds at around 7,600 — down 20 percent from five years ago.”

A look at the latest bankruptcy data shows that 17 Wisconsin farmers filed for Chapter 12 bankruptcy during the first quarter of 2018. Chapter 12 is a special chapter of the bankruptcy code that was enacted specifically so that “family farmers” and “family fishermen” can file for bankruptcy without losing all their assets and giving up their way of life.

Chapter 12 bankruptcies are like Chapter 11 or Chapter 13 bankruptcies in that the goal is to reorganize operations, and repay debts on a payment plan. However, Chapter 12 is simpler and less expensive to file under than Chapter 11, which was designed with large corporations in mind. But Chapter 12 is also a lot better at dealing with the large debts and less predictable income that characterize family farming and fishing operations than Chapter 13 is.

As we all focus on getting through these turbulent economic times, know that our firm is here and ready to help. We are ready to help those who are in financial distress determine what paths forward are available. And if the best option is bankruptcy, we can determine what chapter would be best to file under, and how to structure things so the filer comes through the process set up for success moving forward.

As we always emphasize, filing for bankruptcy is not a sign of failure, it is simply a legal mechanism that allows people and businesses to press the reset button and move on with their lives. More often than not, the cause of a bankruptcy is not something that the filer could control, like the imposition of tariffs.

Linda McMahon Knows How To Take A Hit And Come Back Stronger

“..It’s really not how you fall… it’s how you get back up…” These are wise words from Linda McMahon, the head of the federal Small Business Administration and the co-founder and former chief executive officer of WWE. Because of her background, you might think this is advice she is giving to an aspiring wrestler, but it is actually a summation of the lessons she learned when she and her husband Vince were forced to file for personal bankruptcy.

Why Were the McMahon’s Forced to File for Personal Bankruptcy?

According to Linda, the McMahons accumulated over $1 million in debt when she was in her late 20s. She and Vince, “partnered with some folks who weren’t quite the business partners we expected them to be” and invested in a construction company and a cement block factory. Things quickly went south, and the McMahons lost their house and had to watch as their car was repossessed.

“We didn’t really know the safeguards to really look for. We were relying on someone else whose opinion we respected at the time for those kinds of investments, and they just didn’t work,” says McMahon.

After going through bankruptcy, the couple was determined not to make the same mistakes again. They focused on what they knew rather than trusting others for business advice, and ended up growing the WWE from a 13-person regional operation to a publicly traded global enterprise with more than 800 employees in offices worldwide.

Filing for bankruptcy is what allowed the McMahons to get back on their feet and build their business into what it is today. And the law offers this same opportunity to everyone. Our firm has helped countless Wisconsin families and businesses navigate the bankruptcy system and get on with their lives.

And we do so in a very focused and unique way. Instead of rushing through as many cases as possible so we can make a quick buck and move on, we get to know our clients and work with them to craft a plan that will allow them to move forward on their own terms. We believe this is important because like Linda McMahon says, it’s how you get back up that matters. We don’t just help our clients get through the bankruptcy process, we help them get back up.