It has never been more dangerous for business owners to file Chapter 7 bankruptcy in Nebraska.

New rules now require that business owners prepare special valuation reports to provide more information about the assets of their business.  Chapter 7 Trustees have the power to sell unprotected assets, and they are demanding special reports showing the annual revenue of the business and the value of the business inventory, equipment, real estate and accounts receivable.

Companies with significant revenue and assets will be put under the microscope, even if the net value of those companies is negative.

In short, the trustees want to know the scope and size of the business. How many employees and contractors are employed? What is the the gross monthly revenue? Are there any liens on the company assets? If the company liquidated all its property, how much cash would exist?

These new business reports will help the trustees to identify possible targets. Companies with significant revenue and assets will be put under the microscope, even if the net value of those companies is negative.

REPORTING THE VALUE OF A BUSINESS INTEREST ON BANKRUPTCY SCHEDULES:

What is the value of a business? In most cases, the value a debtor’s business is based on a balance sheet approach. If the debts of a company exceed the assets, the company is normally valued at zero. Conversely, if the assets exceed the liabilities the company is valued at the net difference. In most cases a debtor’s business corporation has debts greatly exceeding company assets and the ownership interest is zero. The general feeling is that a company with a negative net worth is protected in Chapter 7, but that concept may not always be true.

NEW CONCEPTS IN BUSINESS VALUATION:

Assume a debtor owns a small business corporation with $50,000 of assets and $100,000 of liabilities.  Traditional thinking is that the company ownership is safe in Chapter 7 since the company has a negative net worth.

But net value concepts may be lacking. Nebraska law only protects up to a maximum of $5,000 of stock ownership.  You would think that stock in a company with a negative net worth is therefore protected, but that is not how stock is valued.  The price of stock ownership is based on what an investor is willing to pay for its ownership, not necessarily what the net value of a company is. In fact, many companies listed on the New York Stock Exchange sell for prices greatly exceeding the stock’s net value per share price.

Value to Competitors:

Assume the above company is based in a smaller community with only one other significant business competitor.  How much would the competitor be willing to pay to own the debtor’s stock? More than the $5,000 protected exemption limit?  Chances are a competitor would be willing to buy the company’s stock to take over ownership of its main competitor and its customer list.  Clearly the company stock is worth more to that investor than just the mere net asset value.

Value to Liquidators:

Assume the $50,000 of business assets above are free of liens.  The company is still insolvent since total debts exceed total assets, but the assets can be sold to generate cash since no lien is present.  What would an investor pay to own stock in a company that could be liquidated for $50,000 in cash? Yes, that cash would have to be applied to the $100,000 of company debt, but administrative expenses–wages of corporate officers in particular–are paid before general creditors.  So the new owner could pay a generous executive salary greatly exceeding the stock purchase price to handle the task of closing down the company. In addition, perhaps the new owner could negotiate with creditors to pay them, say, 25 cents on the dollar for their debt, thus generating a positive $25,000 net asset value for the company.

Value of Company Name, Customer Lists, Customer Contracts & Phone Numbers:

Although a company may have a negative net asset value, there is an independent value to the company’s name, customer list, customer contracts and telephone numbers. Any company that has been existence for a long period of time develops a reputation in the community and probably has a long customer list. The company may have value beyond the auction value of its assets.

Piercing the Corporate Veil in Reverse:

The legal concept of a corporation is that it has a separate legal identity from its owner. But creditors may disregard the corporate form and pursue its owner for a debt if the formalities of operating as a company are not followed. Were corporate tax returns filed and paid? Did the company conduct annual stockholder and board of director meetings to elect new officers? Does the company use a separate taxpayer identification number? Are company assets and funds comingled with the debtor’s personal funds? In short, was the company really operated as a company? If not, there are cases in Nebraska courts where the company fiction is disregarded and creditors were able to reach the assets of the company.

The takeaway here is that Chapter 7 Trustees are looking intently for companies with hidden value and net asset value is not the only measure of a company’s worth. Debtors who own a substantial business may be well advised to consider the safer options of Chapter 13 or Chapter 11 bankruptcy to protect their business operations in Nebraska.

Image courtesy of Flickr and Kevin Dooley.

In finance, and in life generally, there are steps and elevators.

Steps and elevators take us to where we want to go.

When it comes to money, eventually we want to wind up in a nice place. A paid home. A retirement fund. An opportunity to slow down and enjoy the fruits of our work. An opportunity to help others financially.

Money elevators are rare. You receive an inheritance, or win the lottery, or marry that rich person. Few people get to ride money elevators.

Most of us climb the steps. And the financial steps of our lives are called paychecks.

We normally are paid twice a month, or about 25 times a year.

Each decade has 250 paychecks.  250 steps.

Today you are here.  Tomorrow you want to wind up there.  How many steps are left?

This is why it is critical to know what “there” is in great detail. Because if you don’t know how much “there” costs, then you don’t know how much of today’s paycheck must be set aside for that goal.

When you know the price of the home you want paid in 20 years–in 500 steps–then you are informed about what you must do today.

Knowing where you want to be in the future informs you of what you must to do today.

But when you do not know where you want to wind up–when your goal is not specific–you wander. You try this and taste that. You go in circles.

Identify where you want to wind up being. Measure the paycheck steps left in your life. Make every step count.

The more steps you have left, the smaller each step is.

Paychecks are steps towards your future. Make every step count.

 

Image courtesy of Flickr and ~jar[]

 

 

Business owners filing Chapter 7 beware!  You may have to close your business until the Chapter 7 Trustee surrenders any claim to it.

That is the nightmare that potentially awaits unincorporated business owners who file Chapter 7.  Why is that?  And why does this only happen to unincorporated business owners?

The problem occurs because the moment a Chapter 7 case is filed all property of the debtor becomes vested in the Chapter 7 Trustee and the Trustee is charged with the duty of preserving the bankruptcy estate.  A debtor who continues to operate a sole proprietorship after the case is filed is diminishing the assets of the business by spending funds in a checking account and collecting accounts receivables and using business equipment.  And in the eyes of the trustee appointed to the case, many debtors do not run their business very well so they may direct the debtor to stop all business activity until they decide if any assets are worth claiming.

You can imagine the nightmare this presents.  Chapter 7 trustee’s don’t meet with debtors until at least a month after the case is filed, and they may wait even longer to decide if they will claim a business asset or surrender them back to the debtor.  In the meantime, a debtor may be forbidden to earn an income.

How can this be prevented?

SOLUTION #1: Incorporate the Business

The least expensive and most effective solution to the sole proprietorship dilemma is to incorporate. It has never been easier or less expensive than now to incorporate a business. Services such as LegalZoom will incorporate a business for as little as $150 plus filing fees. After the business is incorporated–a process that can be completed in a few days–the next step is to transfer assets into the new company.  Then, when the bankruptcy is filed, the debtor is not operating a business but is rather the owner of stock in a company running a business.

SOLUTION #2: Motion to Abandon Property

In the alternative, a business owner could opt to file a motion in the bankruptcy court to compel the trustee to abandon the business assets and to ask for an expedited hearing on the motion. This is an expensive option that will basically double the cost of the bankruptcy case, and there will still be a delay in business activity until the expedited hearing takes place.  In addition, the outcome of such a hearing is uncertain and it may require additional hearings to settle the matter thus causing the business to be shut down for an extended time.

A cold wind is blowing out there and it is impossible to say who will be told to shut down.

SOLUTION #3: Do nothing.

In 25 years of bankruptcy practice, I have seen few cases where a trustee actually compelled a debtor to cease business. However, in recent weeks we have seen a trustee pick up this issue and threaten debtors with penalties for dissipating business assets and operating businesses without trustee approval. In fact, the trustees have a point: the continued operation of an unincorporated business potentially reduces assets of the bankruptcy estate.  But it is rare for a trustee to make a shutdown demand, so perhaps this is much to do about nothing. The problem is, a cold wind is blowing out there and it is impossible to say who will be told to shut down.

Image courtesy of Flickr and Hannah Rosen.

In today’s email inbox came this message:

Message from UST Regarding Necessary Documentation for Chapter 7 Section 341 Meetings of Creditors

The Chapter 7 Panel Trustees for the District of Nebraska have standardized the documents that they will request in every chapter 7 case. The following documents must be submitted to the appointed trustee prior to the section 341 meeting of creditors by email or the trustee’s system for receiving documents:

  1. The most recently filed Federal and State Tax Return with all schedules. Tax transcripts will not be accepted. Social Security Numbers should not be redacted from the tax return provided to the trustee. If the debtor is not required to file tax returns, counsel shall notify the trustee by email. Tax returns are required to be sent to the trustee at least seven days prior to the scheduled meeting of creditors.
  2. Bank statements and electronic debit card statements covering ninety days (90) of activity up to and including the petition filing date on all accounts listed in the schedules, including checking and savings accounts. Bank statements should be provided to the trustee at least seven days prior to the scheduled meeting of creditors.
  3. If the debtor is a business or owns an interest in a business (corporation, LLC, PC, partnership etc.), the debtor shall provide a current Balance Sheet and Profit and Loss Statement and detailed inventory and accounts receivable lists at least seven days prior to the scheduled meeting of creditors.

In any given case, the appointed trustee may request additional information.  The list above, however, pertains to all cases.

Every person who files bankruptcy must attend a court meeting before the Trustee appointed to review their case. We call these “341 Meetings” because they are required under Section 341 of the Bankruptcy Code, and they are also called “creditor meetings” because creditors may attend the meetings (although creditors rarely attend).

Over time the amount of information requested by the Trustees to supplement the bankruptcy petition has grown larger, and this notice is largest demand for documents yet. At some point the Trustees will probably demand a video of a person’s home! (Shoot, they already look at Google Earth and Maps to get pictures of the outside.)

  • Tax Returns:  We already send Trustees copies of a debtor’s last two tax returns, but what is different about this request is that the trustees will no longer accept Tax Transcripts provided by the IRS.  This is strange.  How exactly are we to supply tax returns that have been lost? Providing trustees with an official tax transcript from the IRS which contains all the information that appears on the tax return itself appears to meet the trustee’s requirements.  What does a debtor do if there is no available copy of an electronically filed return?  I would guess they will have to get a transcript, prepare the return again, and print a copy of the copy.  Yeah, this is a stupid rule.  There is no valid reason for trustee to refuse to accept tax transcripts when a copy is not available. Good grief, tax transcripts are provided by the federal government. Does the US Trustee not trust the records of its own government?
  • Bank Statements and Debit Card Statements: Years ago we provided no bank statements to the trustee unless requested. Then, a few years ago we had to start providing statements showing the balance on the day the case was filed. Recently we had to start supplying statements for the past 90 days so the trustee’s could track down Preference Payments.  (A preference payment is a payment made to a creditor in excess of $600 made within 90 days of filing bankruptcy, and trustees have special powers to reclaim those payments.)  Now they are adding the requirement to provide Debit Card statements for the past 90 days.  Many debtors do not use traditional bank accounts and rely on the use of prepaid debit cards, and those same debtors generally lack access to their online accounts.  This is going to be a nightmare to produce all these records.  It’s already a mess, but at least this requirement makes sense.
  • Balance Sheets, Profit & Loss Statements and Accounts Receivable Lists.  Self-employed debtors and their attorneys will be faced with additional paperwork production burdens. The trustees are trying to figure out what a business is worth, and these documents will help inform them of the business value.  But what is also true is that this almost requires the preparation of two bankruptcy cases–one for the individual debtor and one for their business–and that extra burden will significantly increase the cost of filing bankruptcy for the business owner. No guidelines have been provided for the preparation of these financial statements.  Are these statements submitted under penalties of perjury as are the bankruptcy schedules? Is the debtor’s attorney liable for the accuracy of the business schedules?

Bankruptcy Rule 9011

Debtor attorneys must verify the accuracy of the documents they submit to the court. Bankruptcy rule 9011 provides the following:

By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,—

(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;

(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;

(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and

(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.

Does Rule 9011 apply to Balance Sheets, Profit & Loss Statements and Account Receivables Lists emailed to the trustees? If so, it would appear that the debtor’s attorney now must undertake the burden of verifying the accuracy of the balance sheets, profit and loss statements and accounts receivable lists of the non-debtor business entity, and that burden is going to be very, very expensive.

Bankruptcy Code 707(b)(4)(C)

Section 707(b)(4)(C) of the Bankruptcy Code states that “[t]he signature of an attorney on a petition, pleading, or written motion shall constitute a certification that the attorney has – (i) performed a reasonable investigation into the circumstances that gave rise to the petition, pleading or written motion; and (ii) determined that the petition, pleading, or written motion – (I) is well grounded in fact; and (II) is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law and does not constitute an abuse under paragraph (1), [i.e., an abuse of the provisions of Chapter 7 of the Bankruptcy Code]”.

Does Section 707(b)(4)(C) apply to this new rule of emailing the trustee the business records of a non-debtor corporation? Must the debtor’s attorney now perform a “reasonable investigation” into the debtor’s corporations?

 

These new rules were promulgated without seeking any input from the attorneys who prepare the cases. What are debtors to do if they cannot reproduce copies of the electronic tax returns they actually filed?  Are they prohibited from filing bankruptcy even though they fulfilled their legal duty to file returns and even though the Internal Revenue Service can provide detailed transcripts of what they actually filed? And why do Chapter 7 trustees believe that an unverified copy of a tax return is superior to a transcript provided by the federal government? What is the duty of a debtor’s attorney to verify the accuracy of corporate records of a company owned by the debtor that is not actually involved in the bankruptcy case? Does Bankruptcy Rule 9011 and Bankruptcy Code Section 707(b)(4)(C) apply?  Gosh, I wonder if this rule might have benefited from just a little bit of input by the people who actually prepare the cases? Are debtor attorneys the enemy?

 

Image courtesy of Flickr and Alexander Baxevanis.

 

 

 

 

Are trailer homes, pull-behind campers, and RVs protected in Nebraska bankruptcy cases?

Homes are protected in bankruptcy by a law called the Homestead exemption, and traditionally that exemption applies to homes built on land a debtor owns. But what about portable homes and RVs sitting on rented lots?

Case #1: Foley: A Tent of Cloth

In a 1951 court opinion (In re Foley) the debtor and his family lived in a Glider trailer house parked on a lot rented from the Garden Valley Trailer Court.  The question in that case was whether a debtor could claim a Homestead exemption when the ground the trailer home sat upon was merely leased by the debtor.

If a tent of cloth can have the essential attributes of a homestead, there is no apparent reason why a trailer house cannot.

The Nebraska bankruptcy court ruled that a debtor need not be the absolute owner in fee in order to establish a homestead right in land, but that any interest in land, coupled with the requisite occupancy by the debtor and his family, is sufficient to support a homestead exemption. The court in Foley ruled that an oral month-to-month lot rent agreement was enough to invoke the homestead exemption, but the court pointed out that a Tenancy at Will was not sufficient. (A Tenancy at Will is where there is no agreement to pay rent or a situation where someone is basically a squatter.)

The Foley opinion makes it clear that a debtor does not have to own land to claim a homestead exemption. But what about the nature of the home?  Does it have to be a home built on a foundation or can it be a movable home, camper or RV?  The Foley court answered that question as well.  “It may be a ‘brown stone front,’ all of which is occupied for residence purposes, or it may be a building part of which is used for banking or business purposes, or it may be a tent of cloth. If a tent of cloth can have the essential attributes of a homestead, there is no apparent reason why a trailer house cannot.”

Case #2: McGinnis: A Trailer on Wheels

In the case of In re McGinnis decided in 2000, the Nebraska court was faced with an objection to the debtor’s claim of a homestead exemption in a 5th Wheel trailer. The debtor had an oral month-to-month lot lease in a trailer home park. The Chapter 13 Trustee objected to the homestead exemption because the trailer was not permanently annexed to the real estate–that is, the trailer sat on wheels and could be moved at any time. The debtor countered that the trailer was sufficiently connected to the land because it was connected to city water, sewer and electrical systems.

The Court observed that while the home was on the leased lot the trailer was not hooked up to any vehicle and the trailer was held in place by various braces in addition to being connected to utility services.  “The Trailer in the present case was permanently annexed to the land following the liberal construction encouraged in Foley. The Trailer was held in place by braces to the land and was connected to electricity, plumbing, sewer and water service. Therefore, according to the analysis in Foley , the Trailer was permanently annexed to the land.”

Case #3: Zeleny: Vehicles Pulling a Living Space

In 2006 the Nebraska Bankruptcy Court decided the case of In re Zeleny involving whether a debtor could claim a homestead exemption in the vehicle that pulled a 5th Wheel Trailer. In Zeleny the debtor had traded a motor home for a 5th Wheel Trailer and a pickup truck that pulled it. The debtor attempted to claim that both the trailer and the pickup truck were homestead protected since they were both purchased from the proceeds of selling an exempt motor home.

That power unit/pickup truck can be used for other transportation . . . I decline to stretch the statutory definition to fit the facts of this case.”

This time the bankruptcy court limited application of the homestead exemption an denied protection of the vehicle pulling the trailer. “The Nebraska homestead exemption statute at Neb. Rev. Stat. § 40-101, et seq., does not provide for a claim of a homestead exemption in a vehicle that pulls the living space, whether it be a fifth-wheeler or some other type of trailer. The power unit/pickup truck cannot be permanently affixed to the real estate and was not in this case. That power unit/pickup truck can be used for other transportation, in addition to its use as a tow vehicle for the fifth-wheeler. Considering the Nebraska statutory exemption for a homestead and the type of units claimed in this case as eligible for the homestead exemption, I decline to stretch the statutory definition to fit the facts of this case.”

Case #4: Bernhardt: A Temporary Home

In 2008 the court issued an opinion in the matter of Bernhardt regarding whether a debtor could claim a homestead exemption when they rented a motor home as a temporary residence on his farmland while repairs to his permanent home were being made. The debtor owned two traditional homes on his 160 acre farm but could not live in either since there were in a state of disrepair. In Bernhardt the issue was not whether the motor home was exempt since it was not owned by the debtor but merely leased.  Rather, the issue was whether the requirement that a debtor “reside” on the property was satisfied.

The Nebraska homestead law says the following: “A homestead not exceeding sixty thousand dollars in value shall consist of the dwelling house in which the claimant resides, its appurtenances, and the land on which the same is situated, not exceeding one hundred and sixty acres of land . . . .”

The bankruptcy trustee objected to the homestead exemption because the motor home was a “recreational vehicle” and the debtor was only temporarily residing in the motor home.

The court disagreed with the trustee and pointed to the fact that the motor home was connected to electrical and water systems and further stated that “given the homestead statute’s liberal construction, I find that Debtors’ actual occupancy on the Farm property in which they own an undivided one-fourth interest, coupled with their intent to occupy the dwelling house upon its repair, is sufficient to support their claim of a homestead exemption.”

SUMMARY

The case law makes it very clear that trailer homes, pull-behind campers and recreational vehicles may be protected under the Nebraska homestead law, but important questions need to be asked.

  • Is the mobile home your primary residence?  If you live in a trailer home and pay lot rent or own the land it sits on, there is a good chance the home is protected by Nebraska’s homestead exemption, but you must live in the home full time and this cannot be a trailer used for a few months each year. This must be your full-time home on the day the bankruptcy is filed.
  • Is the trailer home connected to real estate?  A portable home that is pulled by a truck and is not connected to the ground will not be considered a homestead under Nebraska law.  The home must be connected to the ground and be somewhat immovable because of those connections.  The home should be  connected to utility services for electricity, water and sewers.  The presence of braces connecting the home to the ground is a strong indicator that the home is sufficiently affixed to the ground to qualify for the homestead exemption.
  • Does the home sit on land you rent or own?  To qualify for Nebraska’s homestead exemption, the debtor must have some legal interest in the land the home sits upon.  A month-to-month written lease agreement is sufficient to claim an “interest” in the real estate and outright ownership of the land is not required, but a Tenancy at Will is not sufficient.
  • Vehicles pulling a camper are not protected by the homestead exemption.  Although a pull behind camper may be protected by the homestead exemption, the truck pulling it is not.
  • RVs have questionable protection.  It is likely that a trustee will question whether a RV qualifies for the homestead exemption unless you reside in the RV full time and the RV must be connected to utility services and perhaps braces should be present. If a RV is unhooked from utility services frequently and is driven on a routine basis, it starts to resemble a vehicle more and a homestead less.

 

Image courtesy of Flickr and Albuquerque Film Office.

 

Saundra Latham writes a good review of the best credit counseling agencies of 2018 in The SimpleDollar website.  She correctly points out that the best credit counseling firms to handle a Debt Management Plan are:

Generally speaking, if you are signing up for a Debt Management Plan to consolidate your debts into a payment plan managed by a certified credit counselor that provides lower interest rates and financial counseling, you want to go with an agency certified by the National Foundation for Credit Counseling (NFCC).  The NFCC has the toughest certification standards in the credit counseling industry and it is simply unwise to go with an agency not certified by them. Continue Reading Best Debt Management Companies 2018 Reviewed

I continued to be amazed at the inability of banks to produce a copy of the actual credit card agreement signed by their customers when suing on a defaulted account.  The inability or unwillingness to produce a signed agreement is truly astounding. How can a bank obtain a judgment for a debt on a written contract without production of the contract itself?

The answer to that question is that banks are allowed to rely on the monthly billing statements they send their customers as proof of the debt without having to produce a signed copy of the written agreement. This action is called an Account Stated lawsuit, and for the first time the Nebraska court system has issued a ruling specifically allowing these lawsuits to proceed in the case of American Express Centurian Bank v. Scheer, 25 Neb. App.784 (2018). Continue Reading American Express v Scheer: Account Stated Nightmare Comes to Nebraska

The 8th Circuit Bankruptcy Appellate Panel has issued a new opinion that is really causing a lot of anxiety and uncertainty about the exemption status in bankruptcy cases of retirement accounts awarded to debtors during a divorce case.

If a debtor is awarded a portion of their ex-spouse’s retirement account in a divorce proceeding, is that account protected in bankruptcy? Until a few months ago the majority opinion was yes, but that is all changed since the BAP issued the Lerbakken opinion.

In Lerbakken, the debtor was awarded one-half of his wife’s 401(k) retirement account in a divorce proceeding. He subsequently filed Chapter 7 and the bankruptcy trustee claimed his interest in the retirement.  The bankruptcy judge ruled in favor of the trustee citing the United States Supreme Court’s opinion of Clark v Rameker, a case involving inherited IRA accounts.

Continue Reading Retirement Accounts & Divorce: Lerbakken Opinion Puts Accounts at Risk

A “Suggestion of Bankruptcy” is a document filed in a lawsuit to notify the court that the defendant has filed bankruptcy. Filing such notices with the court is very helpful to the court and to opposing parties so they may cancel upcoming court hearings or pending garnishment orders. Many courts automatically place a pending lawsuit on hold until further order of the bankruptcy court and take affirmative steps to release garnished funds.

Our office files bankruptcy cases electronically and in the next moment we electronically file Suggestions of Bankruptcy with the Nebraska court system. The system is efficient and quick. The goal is to “put out the fire” of collection activity as quickly as possible, and filing Suggestions of Bankruptcy greatly facilitate that goal.

In most cases the bankruptcy results in a discharge of debts, but what happens if the bankruptcy case is dismissed without a discharge? Does the filing of a Suggestion of Bankruptcy mean that the debtor’s bankruptcy attorney has entered a general appearance on behalf of the debtor-defendant? Is the debtor’s attorney in a dismissed bankruptcy case now obligated to defend the debtor in the state court action?

Continue Reading Do Suggestions of Bankruptcy Constitute an Appearance of Counsel?