By IAN MOUNT For the past 23 years, Chuck Benjamin has been working as a turnaround consultant, primarily for troubled private companies with annual revenues of $25 million to $250 million. During that time, his company — Benjamin Capital Advisors of Rye Brook, N.Y., and Boca Raton, Fla. — has handled some 70 cases. “My endgame is to save companies,” said Mr. Benjamin, 71, “hopefully for their owners.” That has become much more difficult in recent years, he says, as changes in bankruptcy law have given unsecured creditors more power and made bankruptcy more expensive. These legal changes and increased costs have in turn pushed troubled companies to liquidate their assets instead of reorganizing, Mr. Benjamin said, which ends up eliminating the original owners — and many jobs — in the process. The following is a condensed version of a recent conversation.  Q. You say the bankruptcy process is broken. How so?  A. When bankruptcy evolved, it was to protect debtors, the owners. The whole concept was forgiving debts or restructuring so the business would survive in the hands of the owners. But the rules have changed over the years. Today, if they have to go into Chapter 11, the odds of the owners keeping the business are much lower. So there’s no incentive for the owners to enter Chapter 11 and reorganize. Why save a company for somebody else?  Q. What changed?  A. First, the Supreme Court’s 1999 LaSalle decision basically meant that any company that entered bankruptcy was on the market and could be bought either whole or piecemeal. And then in 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, and that changed the face of Chapter 11 for privately held businesses. No. 1, B.A.P.C.P.A. changed the landlord’s position. It limits the time to just seven months for debtors to decide whether to accept or reject the lease in bankruptcy. It used to be you could get extended almost forever the time you could accept or reject a lease. Now they have seven months. That’s not a long time to decide which locations to close while you’re in trouble and you’re trying to work through all kinds of other issues. The second change is exclusivity, that is, the debtor’s exclusive right to file a plan of reorganization. It used to be you had all kinds of extensions. Sometimes bankruptcies used to take two, three, four, five years. I had one that was in Chapter 11 for seven years. But it survived. Now you have 18 months where the owner has the exclusive right to file plans for reorganization. Unsecured creditors know that after 18 months they can file a plan excluding the debtor. After you’re in Chapter 11 for eight or 10 months, creditors say, “I’m just going to hang on. I’ll file my own plan and take over the company. Or after 18 months we’ll just liquidate it.”  Q. It’s hard to see anything positive about a bankruptcy that takes seven years.  A. Sometimes staying in bankruptcy a longer time was better, because it gave a debtor time to catch its breath.  Q. Who wins from this change?  A. The LaSalle decision and B.A.P.C.P.A. have given unsecured creditors a huge advantage, and the result is the cost of bankruptcy has gotten so high — because of professional and other costs — that the ability to continue the company under current ownership has reached almost zero. I understand the plight of unsecured creditors, but everyone who sells on unsecured account understands the risk. Every businessman understands this when he sells and makes a credit decision.  Q. Really? Small-business owners offer credit like this routinely. You don’t think they expect to get paid? A. You know that old saying, “Let the buyer beware”? I think it’s every businessman’s responsibility to know to whom he sells and offers credit. If I sell to you and you begin to pay very slowly — which often happens before a bankruptcy — I should stop selling to you on credit. But if I continue to sell to you to make a buck, it’s not your fault, it’s mine.  Q. So what happens instead of reorganization these days?  A. Companies are liquidated. Back in 1983, the Lionel case allowed companies the freedom to sell off assets as opposed to filing a plan of reorganization. It expanded what could be sold in a “363 sale.” The 363 component was originally designed to allow companies to sell off spoilable product, like fruit. If you were in the grocery business and you filed bankruptcy, it allowed you to sell off assets. The Lionel case expanded that so you could sell major assets, virtually including the whole company. That’s a quick way to avoid a plan of reorganization.  Q. How does a 363 sale work?  A. The 363 sale requires nothing more than saying, “I’m going to sell you my equipment,” and I publish that, and for 30 or 40 days people have a right to object to it and the judge can decide, O.K., sell it, or if there’s a higher or better bid, it goes to the highest or best bidder. That happened in the Brunschwig & Fils bankruptcy where I was the chief restructuring officer. I sold the company’s assets for $10 million, very successful, but the original owners lost control and 116 employees lost their jobs. In the old days we would have been able to reorganize the company.  Q. How do these changes affect a troubled company’s ability to get financing during reorganization?  A. All of these changes say to the world that the chance of a company surviving bankruptcy is much lower. And if it’s much lower, the banks aren’t going to give debtor-in-possession financing — and rightfully so. The D.I.P. financer gets a priority lien. Last in, first out. But the company has to survive to have the money to pay that super-priority lien.  Q. Does this change how troubled companies act?  A. Debtors are delaying seeking help longer and longer and longer. They’re very frustrated. They’re walking in molasses. They figure if they wait another week the economy is going to turn.  Q. What should business owners do instead of filing for Chapter 11?  A. People need to seek help quicker, change their business plan quicker, and avoid Chapter 11. It’s just an absolute last resort. It’s virtually nonsurvivable. One of the things we do as consultants is take two weak companies that are facing annihilation and we merge them and we get one survivable company — without a bankruptcy. We also try to make out-of-court settlements with creditors, as opposed to Chapter 11 proceedings. In Chapter 11, the debtor pays for attorneys, accountants and consultants of the creditors’ committee. They even pay for the investment bankers. The owner is paying the other side to oppose him. It’s tilted to the unsecured creditor side.  Q. But doesn’t this law fix some biases toward debtors that allowed them to drag out the process, hurting their creditors as they did so?  A. The law probably does fix some problems, but you have to look at the nuances. There are some cases with the tighter rules where the creditors get a little more but the company fails. The other option is the bankruptcy lingers and the creditors get a little less but the company survives, and that way the creditors continue to have a customer.  Q. You’re a small-business owner yourself. How is your business doing?  A. Business right now is kind of quiet. I think this is the calm before the storm. Copyright 2012 The New York Times Company.  All rights reserved.

    The Chapter 13 Trustee almost snarled from the counsel table at last week’s hearings. Counsel’s “fix”, she told the court, put the debtor instantly in default. Huh?  The amended plan was supposed to correct the previous defect in the filed plan.  What’s the problem?  Counsel certainly was befuddled. There were several such cases, and whatever dollars and cents problem in the plan the amendment was addressing, counsel in each case didn’t deal with the payments already made to the previous plan. The problem Most simply, assume that the plan  provided payments of $200/month for 60 months.  The trustee’s objection points out that the plan pot, at $200/month, is $3000 short of paying all the creditors provided for in the plan. By the time the amended plan is filed, the debtor has made four payments to the plan.  But counsel’s amended plan reads:  $250/month for 60 months. The math is correct:  Sixty times $250  produces a plan pot of $15,000. But the debtor’s first four payments were only $200, because that’s what the defective plan provided. Bingo:  instant default, unless the debtor ponies up an extra $200 ($50 a month times four payments already made).  The payments already made did not match the terms of the amended plan. The fix To get the money right and avoid an instant default, the amended plan needed to read: 4 payments of $200  (validating what’s already happened) 56 payments of  $253.57 I always round plan payments up to the nearest five dollars, since I’m never absolutely certain that claims will come in just as I expected, nor that the trustee’s percentage commission might not change during the life of the plan.  Plus, I want a number my client won’t have trouble remembering (client memory is another story for another day). So, the moral of this tale is:  recognize that you can’t change the past when you amend a Chapter 13 plan to provide more money. For those of you who followed the flap about my day in Chapter 13 confirmation hearings populated with professional bumblers, this piece emanates from a different court altogether.  And these attorneys who didn’t get it right only had to go back and do it again.  Egg on the face, but no lasting harm to the clients. If you are within driving range of Mountain View, I’m presenting a bankruptcy basics class on Chapter 13 plans April 14.  Details on Crafting Chapter 13 Plans. Image courtesy of soldierant.

The Dallas Court of Appeals has published a new decision correctly applying the doctrines of judicial estoppel and standing relating to a cause of action omitted from a bankruptcy filing. Norris v. Brookshire Grocery Company, ___. S.W.3d ___ (Tex. App.--Dallas, 2/29/12, no pet.). You can find the opinion here.In Norris, the plaintiff filed suit against Brookshire Grocery prior to filing bankruptcy. Upon filing bankruptcy, the plaintiff/debtor neglected to mention the suit in either the Schedules or the Statement of Financial Affairs. However, just thirteen days after filing bankruptcy, the debtors filed a motion to dismiss their bankruptcy case on the ground that they "desire to work a payout with creditors." No party objected and the case was dismissed.After the bankruptcy case was dismissed, Brookshire moved for summary judgment based on judicial estoppel and lack of standing. The trial court granted the motion. On appeal the Dallas Court of Appeals reversed finding:1. In order for judicial estoppel to apply, the Bankruptcy Court must have "actually accepted" the debtors' non-disclosure of the asset. Where the debtors dismissed their case without receiving a discharge, there was not an opportunity for the bankruptcy court to "actually accept" their position.2. Normally, an undisclosed asset remains property of the bankruptcy estate and is not abandoned when the trustee closes the case. This is not the case when the case is dismissed, since the estate ceases to exist. As a result, the debtors had standing to pursue their cause of action.The opinion by the Dallas Court of Appeals should be commended for correctly applying difficult principles of bankruptcy law. The purpose of judicial estoppel is to prevent debtors from gaming the system and reaping a benefit from taking inconsistent positions. Reading between the lines, it seems likely that when debtors' counsel learned of the cause of action, he gave them a choice: proceed with the bankruptcy and lose the cause of action or dismiss the bankruptcy and keep the cause of action. Because the debtors effectively undid the omission by dismissing their bankruptcy, judicial estoppel did not apply.Hat tip to St. Clair Newbern.

Starting in September of each year, when clients come in asking about bankruptcy one of the questions we ask is whether the prospective client expects to receive a tax refund for the upcoming tax year. If the answer is yes, we ask how much. For a Chapter 7 for example, if someone comes in and says they expect a $4,000 tax refund and they want their bankruptcy filed on September 1st (the 244th day of the year), we explain that 244/365 about 67% ($2,673.97) of the tax refund for the next year is part of the bankruptcy estate. Does this mean the trustee automatically gets over $2600 of this client’s refund? No. The court gives you certain exemptions to keep property, including money in a bank account or an expected tax refund. The amount of these exemptions vary case by case depending on whether you are head of household and whether you have dependents under the age of 18. This is something that you will need to consult your attorney about to determine for your specific case how much could be protected. So lets say the client expects $4000. This client is not head of household and does not have any dependents. The amount that could be protected would be limited to a $600 wildcard exemption. This client may want to wait to file the bankruptcy after they have received and spent their tax refund. Once it is spent, we no longer need to exempt it and the trustee cannot take it. However, if this is the route you chose to go, it is important to be cautious of what you are spending the money on. You cannot make payments to family members or friends and do not want to pay any creditor more than $600. You can however pay normal expenses: rent, utilities, necessities for yourself or dependents, etc. If you are not sure whether the bills you plan to pay with your tax refund and acceptable, contact your bankruptcy attorney. 

A married person can file bankruptcy without their spouse.  If a person files bankruptcy individually, it will not negatively affect their spouse or their spouse's credit.  However, if there are joint debts, the filing spouse's liability for the debt will be eliminated, but the non-filing spouse can still be held liable for the debt and may be pursued by creditors.  In that case, the non-filing spouse's credit may be affected.  If there are joint debts, it probably would be beneficial to file a joint bankruptcy so both parties' liability for the debt is eliminated.  In that case, any debt in joint names or any debt in each party's individual names would be discharged through the bankruptcy. If a person's spouse only has debt that is not able to be discharged, such as student loans, certain taxes, alimony, child support, etc., or secured debts they are current on and wish to keep, they can continue to make those payments without needing to file bankruptcy.  They do not need to file jointly just because they are on certain secured debts together.  Secured debts are those that are protected by collateral, such as a house or a car.  For instance, if both spouses' names are on a car loan or a mortgage and the loan or mortgage is current and the property is going to be retained, both spouses do not need to file just because their name is on the property jointly.  However, if both spouses do not file, and the loan or mortgage becomes delinquent, or the property is foreclosed or repossessed, the non-filing spouse would then be responsible for the deficiency. Additionally, if a person files without their spouse, their spouse would not be included in the bankruptcy, but their income would be included for purposes of determining median income as long as the married couple is living together.  That is based on the assumption that if a married couple is living in the same house, they are sharing income and expenses.  If you have any questions regarding this material or bankruptcy in general and would like to meet with a St. Louis or St. Charles bankruptcy attorney, please contact us at 636-916-5400.

Tax refunds in a Chapter 13 are handle somewhat different than in a Chapter 7. We know, in a Chapter 7, as long as you received and spend your refund before filing, or are able to exempt your refund, then the trustee does not take it. In a Chapter 13 if you have already received and spent your refund before filing, the trustee cannot take it. However, exemptions cannot be used in a Chapter 13 to protect an anticipated refund. The entire time you are in a Chapter 13 bankruptcy, between 36-60 months), any refund over $600, or 2x your plan payment amount (whichever is less) is to be turned over to the trustee. If however, unanticipated expenses have occurred after the filing of the bankruptcy and you need to keep this money for a specific purpose we can file a Motion to Retain Tax Refund. In order to do this, you must provide your attorney with copies of bills, estimates, etc. showing the amounts you need to retain the refund for. Acceptable uses of the tax refund are medical bills from AFTER filing, car repairs, unexpected home repairs, and so on. It cannot be kept to pay things that are already allotted in your budget like utilities, rent, or even getting caught up on your Ch 13 plan payments. All of these expenses are already accounted for in your budget and therefore the trustee will not allow you to retain additional money to pay these creditors. Once you have provided your attorney with this document, we file the motion and then wait 21 days to see if the trustee objections. If not objections are filed, then an order is submitted to the court. Once granted, you can spend the tax refund on the approved expenses. If however, an objection is filed, your attorney can work with you to correct the issues. If the issues are not resolved and the order is not granted, you must turn the tax refund over to the trustee. So let’s say you do not have any additional expenses and do not need the refund. What happens to it once you send it in to the trustee? Does the trustee get to keep it? No. The money is spread out proportionally to all of your unsecured creditors.

Joining the majority position, U.S. District Judge Walter Smith has ruled that inherited IRA accounts may be exempted as "retirement funds" under 11 U.S.C. Sec. 522(d)(12). Hill v. Studensky, No. W-11-CA-00214 (W.D. Tex. 2/22/12), which can be found here. (PACER registration required).The issue on appeal was whether an inherited IRA continued to constitute "retirement funds" once the person for whose retirement they had been saved was no longer alive. The Court found that there were two elements to be satisfied: (1) whether the account contained "retirement funds"; and (2) whether the funds were exempt from taxation. When an IRA is inherited, the beneficiary may receive the funds immediately, in which case they are recognized as ordinary income. Alternatively, they may be transferred to a new trustee. The account will still be in the name of the decedent and the beneficiary must begin receiving distributions within one year or withdraw the entire amount within five years. Turning to the issue of whether the inherited IRA constituted "retirement funds," the Court noted that both parties' interpretations were reasonable. However, section (d)(12)'s relation to the other subsections of section 522(d) proved important. The other subsections of section 522(d) referred to the debtor's interest in property, but section 522(d)(12) did not. The issue of inherited IR As is presently pending before the Fifth Circuit Court of Appeals. The Eastern District of Texas reached the same result as Judge Smith in Chilton v. Moser, No. 4:10-CV-180 (E.D. Tex. 3/16/11). The case is pending before the Fifth Circuit as Case No. 11-40377, Chilton v. Moser. The case was argued before the panel on February 8, 2012.

If you are considering filing for bankruptcy you probably have a number of questions about what creditors must be listed and what payments you can make in the months leading up to bankruptcy.  Clients may have a number of reasons for wanting to exclude creditors, including wanting to keep and ongoing business or personal relationship with a particular creditor.  However, when filing for bankruptcy you are required to list every debt owed.  You may not pick and choose what to include in your bankruptcy petition.  The next natural question is can you pay off the debt prior to filing for bankruptcy to keep it out of your petition.  The answer depends on the nature and the amount of the debt.  Any payment to a friend or family member in the year leading up to bankruptcy can be reversed by the trustee.  This is because any payment to a friend or family member is automatically presumed to be fraudulent by the court.  You will want to avoid this type of payment, even if you are paying back an amount borrowed from that individual.  Payments to ordinary creditors, meaning not friends or family, should not exceed $600 in the months leading up to bankruptcy However, if your minimum payment is over $600, for example if your mortgage is $1,000, you may pay what is actually owed.  The idea is that the bankruptcy code is written so that debtors may not try to exclude certain creditors from the bankruptcy or give any creditor preferential treatment.  If you do make a payment of more than $600 the trustee may reverse the payment and make that payment a part of your bankruptcy. It is true that if you file bankruptcy and name certain creditors they make cancel your accounts or not do business with you in the future.  Unfortunately, they still must be listed.  There are a few options that may be available.  You may choose to voluntarily repay the debt after the bankruptcy is closed if you choose.  However, doing this will eliminate some of the benefit that filing for bankruptcy offers as you will not truly be starting over.  There are a number of creditors that specialize in working with people that have filed for bankruptcy and can get you on the right start to improving your credit.  If you still have questions, or would like to speak with a St. Louis Bankruptcy Attorney, call us today!

    My call to the inept bankruptcy practitioners to get better or get out spawned some surprising push back. I spoke bluntly about what I saw as harm to the public from less than competent or committed bankruptcy attorneys. Most reaction was supportive:  A trustee wanted to use the piece for a presentation he was making; another lawyer asked to reprint it.  Many simply added their voice to my call. But I got two very heated, negative responses. The Arrogance Of A Helping Hand The first is easier to understand:  this reader thought I was arrogant.  I suppose he finds arrogance  in my willingness to name the performances I saw as sub par and to protest publicly when client cases are dismissed for the lawyer’s  failings.  Should that offend?  What obligates us to sit by in silence? It does make me wonder what that attorney, a certified specialist in consumer bankruptcy law, is doing to help people in his area become better at their craft.  Does he sit with practitioners and assist in the crafting of plans?  Does he educate his colleagues about new developments in the law? I suspect that he does nothing, sitting idly by as the next generation of bankruptcy lawyers circles the drain with their hapless clients in tow. To this lawyer I say, “If you’re not helping, get out of the way of those who do.” Scheming For Someone’s Clients The second retort was more disturbing in some ways.  The reader attributed the observed incompetence to competition among lawyers that ran counter, he thought, to the idea of a profession. He saw my criticism as being borne of a desire to take the bumbler’s clients, and contended that as profession we should be circling the wagons around the less-stellar members and nurturing them. After all, he claimed, we are a profession, not a business. This lawyers doesn’t know me personally, nor does he know my firm.  He has no sense of whether we’re booked solid or begging for business. I personally find it reprehensible for a professional to speak poorly of another attorney with the intent to steal his or her clients.  And you certainly can’t make the case that I’m confronting those lawyers who sparked this dialogue  with an eye on their clients because, like at most CLE presentations, the people who could really benefit aren’t reading here. Most disturbing in this angry comment was the unstated proposition that we, as a profession, should be protecting the least among us from criticism or consequence of their ineptitude.  Reminds me of the conspiracy-of-silence charge against professions, where no member of the profession can be found to testify for the victim of the defendant professional. Yes, this is a profession.  One dedicated not only to profit but to assisting people who need it most.  By coddling those who bumble through in the face of proffered education, we are allowing them to sacrifice the best interests of their clients at the altar of their profit.  And that, gentle reader, is abhorrent. Part of being a profession is having a duty to the calling as well as to the client. A Call To Action The experienced attorneys need to take up the mantle, make themselves available to mentor,  and point out educational opportunities for inexperienced bankruptcy attorneys.  Immediately. In my local case, the bench and the trustee’s office had labored mightily to educate the bar on the new procedures.  The local bar associations and the Bankruptcy Forum run classes all over California. The National Association of Consumer Bankruptcy Attorneys runs two programs each year.  The American Bankruptcy Institute puts on many programs, some of them dedicated to consumer issues. I offer educational opportunities, both live and online.  So do other lawyers and private groups, some of them excellent. A lawyer who remains clueless in the face of such educational opportunities should be pointed in the right direction.  If he or she fails to get the hint, permission to practice before the bankruptcy court should be revoked.  It may sound harsh, but we are a helping profession; a failure to help is a danger to those we are here to protect. What do you think?  As a profession, what should be our attitude be toward the less competent?  As a specialty within a profession, are the rules in bankruptcy practice any different? Image courtesy of Steve Snodgrass.

Do I have to appear in front of a Judge for my bankruptcy? No. The Judge does oversee the bankruptcy process; however you are not required to appear in front of him. Depending on your specific case, your attorney may need to appear in front of the Judge for certain motions or objections that may arise, but you do not need to attend. So do I have to go to court at all for my bankruptcy? Yes. One time during your bankruptcy you are required to appear in front of a trustee who has been assigned to your case. This appearance is often referred to as the “meeting of creditors”. What happens at the meeting of creditors?  The meeting of creditors is required under 11 USC §341 of the United States Code. This meeting is required in order to receive your discharge under both Chapter 7 and Chapter 13 bankruptcies. At the meeting the trustee will ask you questions under oath. There are some required questions and other questions will be asked depending on what you have listed on your petition, schedules, statements, and related documents. Generally, the questions are aimed towards verifying information you have listed (i.e. Are all of your creditors listed? Is your income still the same at it was on the date the petition was filed?). If you were honest and reviewed for accuracy your documents before they were filled with the court, then you will have nothing to worry about at this meeting. Are my creditors going to show up and tell me that I have to pay them back? Yes and no. Can creditors show up at your meeting of creditors? Yes, but they usually do not. Even if some of your creditors do show up, they cannot come and tell you to pay them back. Their appearance is permitted to allow them to ask you questions about your income, assets, etc. Again however, appearance by creditors is rare. Who is the trustee and what does he do? The trustee is appointed by the United States trustee, an officer of the Department of Justice, who oversees the bankruptcy. The trustees’ role is to determine whether there are assets that can be liquidated for the creditors’ benefit. They are essential appointed to make sure your bankruptcy complies with the bankruptcy code and that you have disclosed all income and property and that those items do not exceed that which is allowed in the bankruptcy in order to receive a discharge. In Closing…. The meeting is nothing to be worried about. If you have been thorough and completed your forms honestly and accurately, then this will be a breeze. Show up on time with your ID and SS card and the rest is easy!