Archive for the ‘Protected property issues’ Category
Wednesday, July 14th, 2010
The United States Supreme Court rarely accepts cases that affect consumer bankruptcy debtors. Recently, however, the Court considered an issue that potentially impacts all debtors – the treatment of exemptions.
The term "exemptions" refers to property you own that is protected from the reach of the trustee or creditors. For example, every state provides for exemptions that include your clothes, a certain amount of household goods, a certain amount of equity your car, and a certain amount of equity in your home. Georgia has fairly stingy exemptions – you can read the Georgia exemption law by clicking on the link.
When property is declared as exempt, it does not count for purposes of counting up your assets. If you own property that exceeds the exemption available to you, that property could be seized and sold by a Chapter 7 trustee or it could force you to pay back a higher percentage of your unsecured debt in a Chapter 13. Exemption planning and exemption calculation are important functions for consumer bankruptcy lawyers.
The Supreme Court decision in Schwab v. Reilly requires debtors and their attorneys to be more exact when identifying exemptions, and applies to cases filed in Georgia and everywhere else in the United States. The article that follows is a guest post written for this blog by Brandon Moreno, Vice President of the Utah Bankruptcy Hotline. The Utah Bankruptcy Hotline maintains a network of unaffiliated Utah bankruptcy lawyers who provide debt relief and bankruptcy counsel to consumers in Utah.
On June 17, in Schwab v. Reilly, the U.S. Supreme Court issued a decision that limits the extent to which individuals filing under Chapter 7 can exempt their property from the bankruptcy estate. The case arose out of the interplay between two important rules. One imposes dollar-value limits on the extent to which a debtor can exempt certain types of property. The other requires interested parties to object to a debtor's claimed exemptions within 30 days after the conclusion of the creditors' meeting, or else lose the ability to retain any of that property for the bankruptcy estate.
The question in Schwab was, what happens when a debtor both reports an asset with an estimated market value and claims an exemption for the asset equal to the market value, the trustee does not object because the claimed exemption falls within the applicable-dollar value limit, and it later becomes apparent that the asset's true market value exceeds the claimed value and the applicable dollar-value limit? According to some lower courts, the trustee's failure to object entitled the debtor to an exemption equal to the entire market value, regardless of whether that value exceeded the limit imposed by the rules. In Schwab, however, the Supreme Court rejected that approach. According to the Court, the trustee need not have objected to the exemption to preserve the estate's ability to recover value in the asset beyond the value the debtor declared exempt. The rationale for this conclusion was that the trustee had no basis for objecting in the first place–on its face, the exemption appeared to comply with the limit imposed by the rules, and there was no way of knowing beforehand that the asset would appreciate in value beyond the limit.
The Court's analysis was somewhat complex, but an example helps to illustrate the effect of the ruling. Imagine that an individual files for Chapter 7 protection and reports an asset–in this example, office equipment–to which he assigns an estimated market value of $5,000, that he claims a $5,000 exemption for the equipment, and that the applicable dollar-value limit on office equipment exemptions is also $5,000. Given the dollar-value limit, the trustee concludes that the claimed exemption is appropriate and therefore does not object. The thirty-day objection period then passes, and a third-party appraises the equipment and assigns a market value of $8,000. Under the prior approach of some lower courts, the trustee's failure to object would have entitled the debtor to an $8,000 exemption for the equipment. But Schwab invalidates that approach and establishes that the debtor will be entitled to an office equipment exemption of $5,000, even though the true value of the equipment exceeds that amount by $3,000. The $3,000 remainder goes to the bankruptcy estate, to be distributed among the creditors.
For individuals contemplating Chapter 7 bankruptcy, the lesson of Schwab is twofold: First, even if you accurately report an asset's value and claim a valid exemption equal to that value, you cannot later capture any serendipitous increase in value beyond the limits imposed by the rules. Second, if for some reason it is important to you to exempt the full market value of an asset or the asset itself, rather than a particular monetized interest in the asset, Schwab suggests that it might be appropriate to claim an exemption for "full fair market value (FMV)" or "100% of FMV." Thus, going back to the example above, the debtor might try to claim an exemption of "100% of FMV" for his office equipment, rather than $5,000. A court could reject this claim if it later became apparent that fair market value exceeds the $5,000 limit. But Schwab also suggests that phrasing an exemption claim in this manner effectively places other parties on notice that the debtor seeks to exempt the entirety of the asset's value. If a debtor provides this notice and others nevertheless fail to object, the debtor may be able to keep a subsequent increase in market value beyond the otherwise applicable dollar limit.
Posted in 13 , Bankruptcy, Chapter 7, Chapter 7 issues, Debtors, Exempt Property, Protected property issues, a, accepts, an, and, appraises, assigns, bankruptcy exemptions, calculation, cases, chapter, claimed, court, entitled, equipment, exemption, falls, hotline, hotline , maintains, market, network, object, office, passes, planning, rarely, reilly, rejected, requires, schwab, states, supreme, the, third party, united, united states supreme court bankruptcy decision, utah, v, the | Comments Off
Wednesday, June 30th, 2010
Not surprisingly, I get calls from small business owners who are contemplating personal bankruptcy when their businesses fail. There are many issues that arise in these types of cases but I would like to focus on one problem that, more than any other, can force the business owner into bankruptcy.
Generally when the owner of a small business leases retail space, the landlord will demand a personal guarantee. This means, of course, that in the event of a default, the business (which may be a corporation or LLC) faces liability and the business owner personally faces liability.
Given this reality, every small business owner should seek counsel to discussion asset protection options before starting his business, but that is a topic for another day.
If the business fails you might be surprised to learn that the landlord does not necessarily have to take any steps to "mitigate damages" by releasing the retail space. Instead, the landlord can demand payment for the full value of the lease from the business owner personally. If the business owner has a house with $100,000 of equity, that equity is therefore at risk, and given that Georgia's bankruptcy exemption statute is stingy ($10,000 for an individual or $20,000 for a married couple filing jointly), bankruptcy may not offer much protection.
I ran across two helpful resources that go into more detail about the landlord's obligations or lack thereof. The first is a blog post from Atlanta lawyer David Pardue in his Georgia Real Estate Litigation blog. In his post, David discusses a recent Georgia Court of Appeals case called Sirdah v. North Springs Assocs., LLLP, which was decided by the Court of Appeals in June, 2010. In the Sirdah case, the Court restated its previous holding that a landlord is under no duty to mitigate damages unless (1) the landlord accepts the tenant's surrender, or (2) the tenant successfully terminates the lease. In the Sirdah case, the tenant returned his keys to the landlord and argued that by accepting the keys, the landlord accepted the tenant's surrender. The Court said that accepting the keys did not constitute an acceptance of the surrender.
Another helpful resource is a more extensive article written by attorney Stephanie Everett of the Bloom Law Firm in Atlanta. In this paper, Stephanie examines the various scenarios that could arise when a tenant breaches a lease and the resulting consequences. Although Stephanie's article is written for the benefit of landlords, tenants will find the information very helpful as well.
As the law in this area could change, you should not rely on these resources in the absence of counsel. If you are a small business owner and you are coming to the realization that your business may not survive, you would be wise to consult with a lawyer to discuss your options both in business and in terms of bankruptcy. I have seen far too many business owners who simply left and discovered after the fact that their bankruptcy options were limited, or too painful.
Posted in 1, Business, David Pardue, General consumer bankruptcy info, Georgia Bankruptcy, Protected property issues, Sirdah v. North Springs Associates, a, accepted, accepts, and, appeals, assocs, breach of lease, breaches, called, case, consequences , damages, duty, faces, landlord, lease, lease , leases, liability, liability given, llc, mitigate, mitigation of damages, north, owner, personally, resulting, retail, retail lease and personal liability, sirdah, small, space, springs, successfully, tenant, terminates, the, v | Comments Off
Saturday, October 24th, 2009
With a sluggish economy, I have met with an increasing number of small business owners who are considering personal bankruptcy to deal with credit card debt and personal loans, but who want to keep their business assets and credits separate. Is this possible.
First, it does make a difference whether the small business is incorporated. If your small business is a proprietorship (i.e. "Tom Smith d/b/a Tom's Lawncare") then there is no way to separate personal assets and debts from business assets and debts. In this situation, all debts are "personal" because the proprietorship does not have a separate identity from the individual. All debts would have to be listed – for bankruptcy purposes in this situation, there is no difference between your personal credit card debt that arises from gasoline and grocery purchases and a credit card that you use for business purchases.
Assets of the proprietorship would be considered personal assets – assets that do not fit within the Georgia exemption statute would be at risk.
In a Chapter 7, if you have non-exempt assets you would have to surrender those assets to the trustee or offer to buy the "estate's interest" from the trustee (usually at a discount from fair market value).
Note that any receivables of the business or any other property with potential resale value (i.e. customer lists, pending contracts) could be claimed as estate assets.
In rare instances a Chapter 7 trustee could object to your small business bankruptcy using an "income suppression" argument. This argument asserts that you should not be eligible for bankruptcy relief because you have intentionally suppressed your income by leaving a highly paid job or intentionally refused to maximize income opportunities.
If you are incorporated, the shares of your business are assets and you may very well be asked to justify a de minimus (i.e. $500) valuation that you put on those shares. I see this issue frequently when clients own service businesses. For example, I recently represented a client in an incorporated service business that had about $75,000 worth of equipment, but also had around $80,000 of credit card debt, $2,000 of tax debt and was behind on rent and facing a possible eviction. What is the value of the shares in this case? Is it $75,000 under the theory that the equipment was not subject to any lien and could be liquidated? Is it zero under the theory that the business (and my client as personal guarantor) could be liable for a fraudulent transfer if it liquidated the equipment when the business was insolvent? Or is the value somewhere in between zero and $75,000 using a compromise argument?
The income suppression argument described above also applies when the individual debtor's business is incorporated. I have seen trustees take the position that a debtor with a certain level of education and training should make a reasonable effort to monitize that education rather than chase an entrepreneurial dream at the expense of creditors.
In the case of an incorporated business where the debtor has partners, the Chapter 7 trustee may become a replacement partner by virtue of his trustee powers and thereafter force a liquidation or a buyout.
I usually advise my clients who own small business clients that there is a possibility that the trustee may demand that the business close its doors and that they may have to find a new line of work. This possibility is less likely if the business is a service business that does not involve hard assets or inventory, and more likely if there are business assets with value or receivables.
Needless to say there are a myriad of potential issues for small business owners who are thinking about filing a personal bankruptcy. As always, you will benefit greatly by seeking counsel before your situation becomes critical.
Posted in General consumer bankruptcy info, Georgia Bankruptcy, Protected property issues, Tax issues, atlanta bankruptcy, jonathan ginsberg, small business and personal bankruptcy, solo practitioner bankruptcy | Comments Off
The United States Supreme Court rarely accepts cases that affect consumer bankruptcy debtors. Recently, however, the Court considered an issue that potentially impacts all debtors – the treatment of exemptions.
