How Applying Your Tax Return to a Bankruptcy Case Could be a Prudent Financial Planning Strategy

Bankruptcy and Your Tax Refund

For many trapped in the cycle of credit card use and minimum payments, the question of how to use a tax refund is not a simple one.  Having access to cash is appealing.  In the short term, a tax refund may allow you to buy groceries without a credit card as well as make payments on your credit card balances.  On the other hand, you could also apply your tax returns to your credit cards and begin to chip away at your credit card debt.  The first path is almost never a sound one.  A tax refund is a once per year occurrence–the money will soon be gone but your credit card debt will remain.  Applying your tax refund to your credit card debt might make sense in some situations but, for many unfortunate people, that use of a tax refund would benefit creditors while providing no .  Let’s consider a couple of hypothetical situations.

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First, let’s assume that you owe $5,000 in credit card debt with no other significant unsecured debt and you are current on all of your debt obligations.  If you receive a tax refund of $3,000 and you exercise the discipline required to plunk all of that down on your credit card obligations.  The result here could be good.  Your debt to income ratio will improve and you will be better situated to pay down the credit card debt over the coming months.

Second, let’s assume that you owe $15,000 in credit card debt and another $10,000 in unpaid medical bills.  You are consistently behind on your credit card bills and are routinely penalized with late fees and interest charges.  The same $3,000 refund will not put you in a better position to address your debts–rather it is something like dropping a teaspoon of water upon a raging fire.  Your financial position and credit score were poor prior to your receiving your tax return and will not be substantially improved by handing your tax return to your creditors.  Moreover, just as in the prior example, spending your refund on day to day living expenses offers no hope of long term improvement in your financial position.

Thus, in the first hypothetical, paying down debt with your tax refund is sensible.  In the second, it is not.

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Tax Return and Bankruptcy – A Viable Solution

The debtor in our second hypothetical, with $25,000 of unsecured debt and a $3,000 tax return could be better served by filing a chapter 7 bankruptcy case.  A case under chapter 7 of the United States Bankruptcy Code would allow that debtor to get a fresh start.  Most consumer chapter 7 bankruptcy cases last a few months and debtors never see the inside of a court room (rather, they simply meet with a trustee at a meeting of creditors that lasts only minutes).   While certain types of debt are not dischargeable (e.g., student loans, domestic support obligations and some tax obligations and criminal fines), most common unsecured debt (like credit card debt and medical debt) is dischargeable.

By using part of the $3,000 tax return to file a chapter 7 bankruptcy case, the debtor in our second hypothetical has a drastically improved debt to income ratio and more available cash from month to month.  That newly available cash flow can serve to improve quality of life and enable the debtor to begin to accumulate savings and prepare for retirement.  While the filing of a bankruptcy case does adversely affect one’s credit score, if your credit is already poor, filing a bankruptcy case can put you on the quickest path to rebuilding your credit by responsibly paying down your debts as they become due.  Contact a Pittsburgh Bankruptcy Lawyer today to find out whether a bankruptcy case could improve your financial future.

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Who May File a Plan in a Chapter 11 Bankruptcy Case

The debtor in a chapter 11 case always has standing to file a plan of reorganization.  In fact, during the “exclusivity period,” only the debtor has right to file a plan.  The exclusivity period starts out as the first 120 days after the filing of the chapter 11 bankruptcy case or, in a small business case, the first 180 days following the filing of a bankruptcy petition.  Often, debtors seek extensions of their exclusivity periods.  While the requirements and timing for such motions vary between small business cases and chapter 11 bankruptcy cases that are not designated small business cases, extensions are routinely granted when debtors are diligently working toward resolving matters in order to file a confirmable chapter 11 plan of reorganization.

Filing a Chapter 11 Bankruptcy Plan After Exclusivity Has Lapsed

When the debtor’s exclusive right to file a plan of reorganization lapses or is terminated, any “party-in-interest” can file a plan of reorganization.  The term “party-in-interest” is not defined in the Bankruptcy Code but so many courts have taken up the question that bankruptcy attorneys have a good concept of its boundaries.  As mentioned, the debtor is always a party-in-interest with standing to propose a chapter 11 plan of reorganization.  The Bankruptcy Code also confers standing upon creditors of the debtor thus, outside of the exclusivity period, creditors have standing to file chapter 11 plans of reorganization.  Interestingly, the term creditor is so broadly defined in the Bankruptcy Code that any party with a claim against a debtor is considered a creditor.  A claim includes rights to payment and equitable remedies that have not been filed or reduced to judgment.  In fact, a party remains a “creditor” of a debtor even if the debtor vigorously disputes any liability to that creditor.

But party-in-interest standing goes extends beyond the debtor and its creditors and extends to any party whose interest could conceivably be affected by the confirmation of a chapter 11 plan.  Many courts have noted that the intent of Congress was to encourage greater participation in chapter 11 cases.  Effectively, party-in-interest standing is not a limit at all but, rather, an invitation to participate–the only real limit is the bare limit imposed by Article III of the United States Constitution.

To begin with, the debtor has the right to file a plan.  If exclusivity terminates, then any party-in-interest may file a plan of reorganization in a chapter 11 bankruptcy case.  To determine whether you may propose a plan of reorganization in a chapter 11 bankruptcy case and whether becoming a plan proponent makes sense, you should consult an experienced Pittsburgh Bankruptcy Lawyer.

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Can I File Bankruptcy Again; The Prior Bankruptcy Case Question

Can I file bankruptcy again after a prior bankruptcy case?  Many individuals who were debtors in a prior bankruptcy case and who fall upon hard times a few years later want to know whether they can file bankruptcy again.  The answer to that question very much depends on several factors including (i) the timing of the prior bankruptcy case; (ii) the chapter under which the prior bankruptcy case was filed; (iii) whether the debtor received a discharge in that prior bankruptcy case; (iv) the chapter under which the debtor wishes to file a subsequent bankruptcy case; and (v) whether or not the debtor needs or expects a discharge.

If your prior bankruptcy case was dismissed with prejudice, generally, you will be unable to file bankruptcy again for a period of 180 days.  There are many reasons why a bankruptcy court could dismiss a case with prejudice but, generally speaking, when a debtor has acted in good faith but a bankruptcy court must still dismiss a bankruptcy case, the order dismissing the case will be without prejudice to file bankruptcy again.

File Bankruptcy Again – Past Bankruptcy Filing Eligibility for a Discharge Under Chapter 7 of the Bankruptcy Code

If you have a received a prior discharge in a case under chapter 7 or a case under chapter 11 of the Bankruptcy Code, you are not eligible to receive another discharge unless 8 years have elapsed between the date upon which you filed the prior case and the date when you file bankruptcy again.  If your prior discharge occurred in a case under chapter 12 or chapter 13 of the Bankruptcy Code, the waiting period is 6 years in most cases.  However, if in your prior chapter 12 or chapter 13 bankruptcy case you paid your unsecured creditors 100% of their allowed claims, you would be eligible to file bankruptcy again and receive a discharge under chapter 7 without any waiting period.  Also, if in your prior chapter 12 or chapter 13 bankruptcy case, you paid your unsecured creditors 70% of their allowed claims, proposed that prior chapter 13 bankruptcy plan in good faith and it was your best effort, you will also not be held to the 6 year bar for a discharge in a chapter 7 bankruptcy case if you chose to file bankruptcy again.

File Bankruptcy Again – Past Bankruptcy Filing Eligibility for a Discharge Under Chapter 13 of the Bankruptcy Code

You are not entitled to receive a discharge in a case under chapter 13 of the Bankruptcy Code within 4 years of having received a discharge in a case under chapter 7 or chapter 11 of the Bankruptcy Code.  Once again, the waiting period to file bankruptcy again is less for a prior case under chapter 13 of the Bankruptcy Code.  In that instance, you are barred from receiving a discharge if you file bankruptcy again within 2 years of having received a discharge in a prior chapter 13 case.

As you can see, determining eligibility for a discharge when you’ve filed a prior bankruptcy requires careful attention to the facts of your case.  Additionally, even if you are not eligible to receive a discharge, you may still wish to file bankruptcy again for other reasons.  For example, a person who has fallen behind on their mortgage payments may wish to file a chapter 13 bankruptcy case for the benefit of the automatic stay and to have the ability to repay the arrearages through a chapter 13 plan over a period of 3 to 5 years.  As with most bankruptcy questions, it is best to discuss them with an experienced bankruptcy lawyer during a free initial consultation.

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Take advantage of your free opportunity for an initial debt relief consultation.  Find out whether you qualify for relief under the United States Bankruptcy Code.  In Pittsburgh, call today for your no fee initial discussion with a highly experienced bankruptcy attorney.

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After a business debtor files a bankruptcy case, its trade creditors are often sued for receiving preferential payments under sections 547 and 550 of the Bankruptcy Code.  These creditors didn’t do anything wrong, they just happened to accept a payment from the debtor within the 90-day period preceding the bankruptcy case for a pre-existing debt.  Often, these businesses will simply return those payments rather than pay to fight to keep them.  In fact, they may have very good defenses to these claw back claims.  In practice, even an imperfect defense is a good defense because of the nature of preference cases.

A preference case must be brought by way of adversary proceeding, that is a separate case, related to the bankruptcy case of the debtor which allegedly made the preferential payment.  A capable Pittsburgh bankruptcy lawyer defending a preference case will review all relevant defenses to assist in determining whether which preference defenses fit the facts of the case.

If you need to defend against a preference claim in bankruptcy, you may be able to attack the claim on its elements by arguing that (i) the transfer was not an interest in property of the debtor; (ii) that it was not made to or for your benefit; (iii) that the payment was not made for or on account of an antecedent debt which the debtor owed you before it made the transfer; (iv) that the debtor was not insolvent at the time it made the transfer; (v) that the debtor did not make the transfer within the 90-day period preceding the bankruptcy case (or the one-year period for payments to insiders of the debtor); or (vi) that the transfer did not enable you to receive more than you would have received in a hypothetical chapter 7 case.

Section 547 of the Code contains its own list of possible defenses to a preference claim.  Those statutory defenses provide safe harbors for certain would-be preference claims.  Those include circumstances where the creditor who received the payment at issue provided a contemporaneous exchange for the payment which enabled the debtor to receive new value.  Additionally, payments in the ordinary course of business, made according to ordinary business terms are shielded.  Also, certain circumstances involving security interests give rise to a preference defense.

Moreover, case law has given rise to other defenses to preference claims.  If the recipient of the payment acted as a passive conduit for funds which flowed through it to a third party, it may have a defense to a preference claim.  See Golden v. The Guardian (In re Lenox Healthcare, Inc.), 343 B.R. 96, 103 (Bankr. D. Del. 2006).  Likewise, if the debtor assumes an executory contract or unexpired lease pursuant to which a preferential transfer is made, a preference defendant may be able to defend on the basis that the debtor would have necessarily have had to cure that contract or lease in any event.  See Kimmelman v. The Port Authority of New York and New Jersey (In re Kiwi Int’l Air Lines, Inc.), 344 F.3d 311 (3d Cir. 2003).

If your business has received a demand for payment from a bankruptcy trustee or a preference complaint, you should promptly contact a Pittsburgh Bankruptcy Lawyer.

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Exit Financing

“Exit financing” is a term used to describe new credit extended to a debtor-in-possession that allows it to fund its chapter 11 plan and exit its bankruptcy case. Thus, while a debtor must typically file a motion to enter into an agreement outside of the ordinary course of business (see 11 U.S.C. § 363(b)), the “exit” is made via the chapter 11 plan confirmation process. The real challenge then, would remain plan confirmation (and meeting the 16 requirements of 11 U.S.C. § 1129(a)).

Debtor in Possession Financing

A debtor-in-possession (“DIP”) in a chapter 11 case can also seek to obtain financing prior to plan confirmation. DIP financing is governed by 11 U.S.C. § 364. Section 364(a) allows a debtor in possession to obtain unsecured credit in the ordinary course of business (e.g., a DIP that has NET30 terms with a vendor can continue to order inventory from that vendor without first seeking court approval). Section 364(b) deals with unsecured credit outside the ordinary course of business–that requires the approval of a bankruptcy court, on notice and with a hearing but entitles the creditor extending credit to administrative priority status for repayment of its loan pursuant to 11 U.S.C. § 503(b)(1). Subsections (c) and (d) of section 364 deal with post-petition, secured debt. Subsection (c) addresses circumstances in which a DIP cannot get obtain credit on an unsecured basis. With court approval after notice and a hearing, a DIP can use one more more of the following tools to improve the position of its prospective lender: (i) a priority position over some or all administrative expense claims; (ii) a security interest in unencumbered assets of the DIP; and (iii) a junior lien on already encumbered, assets of the DIP. The Order granting authorization to enter into a loan agreement under 364(c) should explicitly address which of the incentives the lender is to be granted (and which if any administrative claims are subordinate to the lender). Subsection (d) allows a DIP to go even further to obtain financing and to prime the rights of existing lien holders notwithstanding protections those prepetition lenders might have in their loan documents. However, the ability to prime an existing lien is an extraordinary remedy. The DIP must show, not only that it would be otherwise unable to obtain credit, but also that it is providing adequate protection to the affected, subordinated lien holders. A DIP can adequately protected a primed lender by providing it with a replacement lien on other unencumbered property. However, when the effect of the DIP financing is merely to shift the risk of being unsecured or undersecured to the prepetition lender from the DIP lender, the court should deny the request for DIP financing. 3 Collier on Bankruptcy ¶ 364.05 (16th ed. 2013) citing In re Mosello, 195 B.R. 277, 293 (Bankr. S.D.N.Y. 1996). The burden of proving adequate protection of the affected lien holder is on the DIP. Id. In the end, DIP financing can be a very potent tool but it is vulnerable to many of the same challenges that a DIP proposing a chapter 11 plan that crams down on the rights of prepetition secured creditors (compare “adequate protection” required under section 364 to “realization… of the indubitable equivalent” in 1129(b)(2)(A)(iii) required to cramdown a plan over the objection of a secured creditor).

What Exactly is a Reaffirmation Agreement?

A reaffirmation agreement is an agreement between a debtor in a bankruptcy case and a creditor through which the debtor agrees to continue to remain liable for the underlying debt and the creditor agrees to honor the terms of the agreement.  Typically these kinds of agreements only in exist the case of secured obligations (think car payments and mortgages).

When Does it Make Sense for a Debtor to Reaffirm a Debt?

The decision on whether to reaffirm a debt should not be taken lightly.  To start with, if a debtor doesn’t want to keep the property to which the debt is tied the answer is simple–don’t reaffirm the debt.  Instead, simply allow the creditor to take the asset back and have the debt discharged.

If you want to keep the asset, the question becomes a little more difficult.  In the case of an automobile loan, generally, if you have made your payments on time and you continue to make timely payments, you’re going to be able to keep the vehicle irrespective of whether you enter into an agreement reaffirming the car loan.  The difference is that if you reaffirm the debt and subsequently default on the loan, the lender can seek to collect a money judgment from you personally; if you do not reaffirm the debt but stop making the payments after the debt is discharged and your bankruptcy case is closed, the creditor’s only remedy is to repossess the vehicle.  For this reason, debtors’ lawyers and bankruptcy judges are apprehensive about allowing debtors to enter into reaffirmation agreements unless those agreements incorporate new terms, more favorable to the debtor (e.g., lower interest rate or reduction of the principal balance of the loan).

How Should a Debtor in A Bankruptcy Case Decide Whether to Reaffirm a Debt?

Because every situation is unique, debtors should have a serious conversation with their bankruptcy lawyers to determine whether it makes sense for them to reaffirm a debt.  Creditors nearly always want debtors to reaffirm their debts.  Debtors need to understand that by reaffirming a debt, they are giving up a signficant bankruptcy benefit–the discharge of their obligation to pay that debt.  For that reason, talking to a Pittsburgh bankruptcy attorney is the most prudent course of action.

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tend to hear the same question very often:  “Can I keep my car if I file a bankruptcy case?”  Typically, the answer is yes.  If you have $10,000 in credit card debt and you own a Ferrari, free and clear, the analysis changes but, in most cases, keeping the vehicle is possible.

Keeping a Vehicle in a Chapter 7 Bankruptcy Case

In Chapter 7, or “liquidation bankruptcy,” a debtor can typically keep at least one vehicle.  While exemptions vary by state, the Federal Exemptions, which are available to debtors in Pennsylvania, allow debtors to exempt up to $3,450 of their interest in a motor vehicle (spouses filing together each get their own exemption).  If you owe a loan on your vehicle, your “interest” in the vehicle is its value in excess of the amount you still owe.  For example, if you owe $7,000 on a vehicle that is worth $10,000, your “interest” in the vehicle is $3,000 which would make it fully exemptible under the vehicle exemption.  If your interest in your car is worth more than $3,450, you can also apply a “wildcard” exemption to cover the difference.  The wildcard exemption can be applied to any interest in property.  The value of the wildcard exemption varies from $1,150 to $11,975, depending on how much of the “homestead exemption” debtors need to use to protect their interest in their homes.

A rule of thumb is that, if you want to keep the car in bankruptcy, you have to keep the car payment current.  That rule is subject to some exceptions and variations.  If you’re badly behind on your payment, you can use a Chapter 13 bankruptcy case to pay the arrearages over time.  Interestingly, if you owe more on your car than it is worth, you can compel your lender to accept on the value of the vehicle.   There are some important limitations to this process, so you should talk to a bankruptcy lawyer in Pittsburgh to determine whether that process might make sense for you.

Keeping a Vehicle in a Chapter 13 Bankruptcy Case

Keeping a car in a Chapter 13, or “reorganization bankruptcy” follows the same set of rules that apply in a Chapter 7 bankruptcy case except that, under Chapter 13, debtors repay their creditors some or all of what they owe them over a period of three to five years.  Under Chapter 13, the exemption thresholds become less important to the “keeping the car in bankruptcy” inquiry.  Your car payment will be paid through your Chapter 13 plan.  The exemptions are not irrelevant in a Chapter 13 case.  The reason for this is what’s known as the bankruptcy liquidation analysis.  Generally, the rule for Chapter 13 cases is that, debtors must pay creditors at least as much as they would receive in a case under Chapter 7 if the debtors’ assets were liquidated.  This requires bankruptcy lawyers to imagine what would happen in a hypothetical Chapter 7 case.  If the vehicle is fully exempt, then there would be no sale proceeds available to pay unsecured creditors.  However, if a debtor owns a $100,000 Ferrari with no car payment and has $10,000 in credit card debt, that debtor would need to pay the credit card debt in full through the Chapter 13 plan.

In practice, the most common reason for filing a Chapter 13 case is to protect a house from foreclosure.  Generally, the arrearages are repaid over the plan period and the car is exempted just as it would be in a case under Chapter 7.  If the debtor has a car payment, that debtor would be required to continue making that payment over the life of the plan.

Contact a Pittsburgh Bankruptcy Law Firm today to answer your questions during a free initial consultation:  (412) 925-8194

Chapter 11 Bankruptcy for Beloved Video Game Company Atari – Will Atari Become Space Invaders or Defenders?

Chapter 11 for video game maker Atari

Atari Interactive, Inc. filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code on January 21, 2013 in the United States Bankruptcy Court for the Southern District of New York.  In 2000, the iconic game developer came under the wing of French video game concern, Infogrames–which later adopted the more familiar name of its subsidiary to become known as Atari, S.A.

However, Atari, S.A. has become financially distressed.  In fact, over the last year, its stock has given back almost half of its value.  Weeks ago, the French company’s situation worsened when its secured lender shut off its access to cash.  The early indications are that Atari, S.A. will seek to sell its American subsidiary, either through a sale under section 363 of the Bankruptcy Code or through a Chapter 11 Plan.  For a generation of gamers and technophiles, the Atari brand is recognized–not just for its kitschy, “can people ever actually played Centipede” value–but also as having provided considerable contributions to the evolution of modern entertainment.  Thus, in addition to the value of its intellectual property and its value as an enterprise, Atari also has considerable good will.  That mix should serve to generate some interest at the time of sale.

Atari is represented by Hunton & Williams, LLP and its bankruptcy case is docketed at 13-10176.

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Bankruptcy Lawyer Needed to Assist Honest Debtor in Handling Debt.

A consumer in Pittsburgh might take out that advertisement in the Pittsburgh Post Gazette and interview a dozen bankruptcy attorneys (if they had the time and were willing to pay for the ad).  Those interviews–while time consuming–would tell our hypothetical consumer a lot about bankruptcy attorneys in Pittsburgh.  The debtor would soon learn that some lawyers really seem to understand bankruptcy law well.  Beyond that, some lawyers are better able to explain the bankruptcy process to their clients than others.  The ability to clearly explain bankruptcy issues can be especially important in complex area of the law.  Understanding the means test, bankruptcy exemptions, chapters of bankruptcy and the meeting of creditors is essential.  Additionally, knowing how medical debt, credit card debt and student loans will be treated in a bankruptcy case is important.  A debtor should know what debts will be discharged before the bankruptcy case is ever filed.

Lawyers with an office in Downtown Pittsburgh will very often offer a free initial consultation.  While it probably does not make sense to interview a dozen bankruptcy lawyers, taking advantage of a free meeting with a bankruptcy lawyer just makes sense.  Make a list of your questions before you go into that meeting.  Make sure that you’re comfortable with the lawyer–both as a person and in terms of legal competence. If you’re not comfortable after your interview, move on.

The choice to file bankruptcy is a major decision.  Having the right bankruptcy lawyer can make a world of difference.

Call (412) 925-8194 for your free consultation with a bankruptcy lawyer.

After months of inertia, a lame duck session of Congress passed a bill through the Senate and the House to avert our country from falling over the “Fiscal Cliff.”  Similarly, consumer debtors often wait until after the holidays to address their credit card, medical and other unsecured debt obligations.  In many cases, the consequences for individuals can feel every bit as drastic as perils posed by the so-called fiscal cliff.  Law suits, judgement liens, repossessions and foreclosures are serious business.  An experienced bankruptcy lawyer can help.

Chapter 7 bankruptcy can provide many people suffering under the weight of their debt obligations.  Often called “liquidation,” or “straight” bankruptcy, it is the simplest form of bankruptcy protection provided for under the United States Bankruptcy Code.  For many individuals, the process results in a discharge of most or all of their debts without having to enter into any difficult repayment plan.

Chapter 13 bankruptcy is available to individuals with a regular source of income who wish to repay some or all of their debts over a three to five year period.  For people attempting to stave off the foreclosure of their homes, this individual reorganization bankruptcy offers a way to repay significant arrearages over the life of a Chapter 13 plan.  As long as a Chapter 13 debtor continues to pay under a confirmed plan of reorganization, creditors must accept the payments provided for in that plan and cannot resort to foreclosure or repossession.  Chapter 13 is a powerful and important tool for consumer debtors.

With the holiday season behind us, it is imperative to face the new year with a clear vision for your financial future.  If a fresh start through bankruptcy makes sense, seek out a free initial consultation with an experienced bankruptcy professional.

Call (412) 925-8194 now.