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FREQUENTLY ASKED QUESTIONS IN OUR BANKRUPTCY AND INSOLVENCY PRACTICE
PERSONAL BANKRUPTCY
Can Creditors and Debt Collectors pursue me once I file for bankruptcy?
No. Immediately upon the filing of a chapter 7 (straight liquidation) or a chapter 13 (reorganization) bankruptcy, all creditors are barred by the “Automatic Stay” under the Bankruptcy Code from taking any action to collect on debts incurred prior to the bankruptcy. Creditors, such as banks, may not continue foreclosure or other types of actions, unless they seek permission from the Court. The automatic stay also extends to co-debtors of a chapter 13 debtor provided that the chapter 13 debtor is current on his or her plan payments.
What is the goal of a chapter 7 bankruptcy?
To receive a discharge of all debts which are not “non-dischargeable” and enable you to obtain a “fresh start.” “Non-dischargeable” debts (debts which cannot be discharged in a bankruptcy) include most taxes, alimony, child support, payments in respect of injuries resulting from intoxicated driving, student loans, criminal and civil restitution payments or damage awards for willful or malicious personal actions causing personal injury or death. Additionally, the dischargeability of certain debts can also be challenged if the money owing by the debtor was obtained through fraudulent conduct.
Is it possible to settle with my creditors instead of filing for bankruptcy?
Yes. In my opinion, the best settlements that can be reached with credit card companies are those settlements where the debt is settled at a discount in exchange for a lump sum payment. The problem is that even if a settlement can be reached at a 50% discount, many debtors lack the financial wherewithal to come up with the lump sum settlement payment together with the attorney’s fees incurred to reach such settlement. Additionally, unless settlements can be effected with all of the debtor’s creditors, it is risky. Settlements involving repayment arrangements (as opposed to lump sum payments in exchange for a discount) are often unsuccessful because debtors typically default under such settlement arrangements. A bankruptcy filing, on the other hand, provides for the discharge of all of the debts that are not non-dishargeable at no settlement cost other than costs and fees associated with the bankruptcy filing.
Can I keep all or some of my personal property, including a car, in a chapter 7?
Yes. A debtor is allowed to retain personal property to the extent that it is exempt from execution by judgment creditors under state law. There are several New York bankruptcy exemptions. Some include exemptions for wearing apparel, household furniture and certain appliances and other household items and necessary working tools and instruments, provided that these items do not exceed $5,000 in the aggregate, or certain monetary amounts established for a particular item. A debtor, who does not seek a homestead exemption and who claims less than $5,000 in exemptions for personal property, may use the balance of such $5,000 exemption to exempt cash that the debtor may have. Additionally, a debtor is entitled to exempt a motor vehicle up to $2,400 above any liens and encumbrances against the vehicle. We recommend that you check Kelly’s Bluebook and/or obtain an appraisal to ascertain the value of your vehicle. To the extent that you have property that exceeds the value of the exemptions above any liens, a chapter 7 trustee, who is an official in charge of overseeing and administering a debtor’s case, will either sell such property and distribute pro rata to the creditors (beyond the amount of your exemption) or reach a settlement with the debtor that may allow the debtor to retain that property. The latter can realistically only be pursued if a debtor is represented by highly qualified bankruptcy counsel.
Will I get to keep the assets in my 401(k) plan, Pension Plan, Profit Sharing and/or IRA in a chapter 7?
Yes, assuming that they meet certain qualifications under the Internal Revenue Code and with certain exception, these assets are generally considered “exempt” from creditors. It is very unfortunate when a prospective client comes to us after he or she has used these exempt assets to pay certain creditors. Had they sought counseling at the onset of their debt troubles, they would have been much better off financially as their assets would have continued to have been preserved for their benefit only.
Will I be able to keep assets in my annuity?
Yes, assuming that the annuity meets certain qualifications under the Internal Revenue Code. There are certain exceptions though and also limitations on the aggregate exemption that may be taken for certain annuities. You should consult an experienced bankruptcy attorney to discuss these.
Would the $8,000 in a New York State college choice tuition account we set up for our daughter be protected in a chapter7?
Yes. Generally, the debtor is entitled to exempt an amount not exceeding $10,000 in a single account, or in the aggregate for more than one account.
Can I keep my home if I file for chapter 7 bankruptcy?
Very possibly, particularly in this depressed real estate market. A married couple who files a chapter 7 and jointly owns shares in a cooperative apartment, house, condominium unit or mobile home is entitled to a homestead exemption of $100,000 above all liens and encumbrances. So if a couple’s home is worth $400,000 and is encumbered by $300,000 of arms-length and duly granted, recorded and signed mortgages and/or judgment liens, the debtors’ home should be unaffected by the bankruptcy. This assumes that the debtors have not defaulted in the payment of their monthly debt service to the bank. Note that in this market with falling real estate prices, it is often the case that the value of the property is less than the debtor thinks it is. In deciding whether to file, we cannot recommend enough that the debtor obtain a qualified appraisal on the property or at least an analysis by qualified brokers in the area, evidenced by comparables.
Will I qualify for chapter 7 if I earn $45,000, am single and live in New York City?
Yes, with certain provisos. First you have to determine the annualized average of your monthly income over the course of 6 months prior to the month in which you would be filing. If the average is under the New York State median income of $46,523, then you should qualify. Please note that with each additional member of the family, the median income increases. So for instance, the median income for a family of 2 people is $57,006 and 3 people is $67,991.
If my income over the last 6 months averaged to over $46,523 on an annualized basis, is there still a possibility that I can qualify for chapter 7?
Yes. Even though your income exceeded the median income in New York State, you may still qualify if your disposable income after expenses (based upon a mix of actual expenses and standardized expenses) is less than $10,950 over the course of 60 months, or $182.50 per month. If your deposable income equals or is greater than the foregoing, chapter 13 would in most be a more appropriate option.
Is there any way I can keep my home if I have equity in excess of $50,000?
Yes. Individuals with debt who have significant non-exempt assets, including homes and automobiles in which they have significant equity, can elect to file under chapter 13. Under chapter 13, a debtor proposes a plan that repays a portion of all of his/her debts. Priority debts, such as alimony, child support, certain taxes, etc., must be paid in full under the plan. If a debtor is behind in his/her mortgage payments, the debtor would use the plan as an opportunity to make up the missed payments while also concurrently paying the current monthly amount, so that the original agreement is effectively reinstated. The plan is typically from 36 to 60 months in length. A chapter13 trustee is appointed to administer the plan. Each month, the debtor pays a chapter 13 trustee all of the debtor’s “disposable income,” which is income which is not reasonably necessary for the support of the debtor’s dependants. The trustee uses these funds to pay creditors under the plan.
Is Chapter 13 reorganization available to all debtors?
No, but the requirements are fairly easy to statisfy. A debtor must have regular income and have noncontingent, liquidated, unsecured debts of less than $336,900 and noncontingent, liquidated, secured debts (such as a mortgage) of less than $1,010,650. If a debtor advises us that creditors have asserted claims in excess of the foregoing, that doesn’t necessarily mean that such debtor is prohibited from filing. Just because a creditor alleges that it has suffered damages in a certain amount doesn’t mean that such allegation is true. A debtor may have defenses or counterclaims against such creditor. Accordingly, it is important that a debtor work with a qualified attorney who can assist the debtor in determining whether that debtor qualifies.
RIGHTS OF LANDLORDS OF COMMERCIAL LEASES IN BANKRUPTCY
Does the filing of a company under chapter 11 mean that it will reorganize and continue as a going concern or does it mean that it will liquidate?
It can mean either. Chapter 11 enables a debtor to liquidate its assets in an orderly fashion and also enables a debtor to reorganize. However, in order to continue as a going concern with the ability to reorganize, a debtor must be able to keep itself afloat during the pendency of the bankruptcy and comply with the provisions of the Bankruptcy Code. If cash is short and financing is unavailable, a chapter 11 debtor may experience difficulty in staying afloat, filing a feasible plan of reorganization and actually emerging from bankruptcy.
How do we find out whether and in what court our commercial tenant filed for bankruptcy and under what bankruptcy chapter?
Shortly after the bankruptcy filing, assuming that the tenant properly listed your company on its schedules, you should receive notification of the filing from the clerk of the bankruptcy court. Beforehand, Lieber & Lieber, LLP can also assist you in ascertaining the particulars as we have access to all bankruptcy cases through an electronic filing system. In general, retaining a lawyer facilitates the creditor’s monitoring of the bankruptcy case and prompt exercise of such creditor’s remedies. Once retained, Lieber & Lieber, LLP will serve and file a notice of appearance in the bankruptcy case requesting that it be served with copies of all pleadings, motions and other documents filed by any party, including the debtor, other creditors, creditor’s committees, and the office of the United States Trustee. This will facilitate Lieber & Lieber’s and the landlord’s monitoring of the case.
What are the debtor’s options with respect to the commercial lease?
The debtor has the following options: Subject to court approval and satisfaction of certain criterion, it may assume the lease. This means that the debtor has decided to retain the lease and obligate itself under the lease as though it never filed for bankruptcy. In other words, it is not seeking to discharge and rid itself of this obligation, but rather maintain the lease even after it emerges from bankruptcy. If the debtor has multiple locations and certain of those locations are profitable and others are not, it may decide to assume those leases at the profitable locations and conversely reject those leases which are associated with unprofitable store locations. (Certain stores may be unprofitable because those leases provide for rent that is too high in the current market (“over-market”) and/or because revenues are insufficient.) With respect to profitable leases, the debtor may seek to assume and assign such leases to third parties, subject to court approval. So, the assumption process may be designed to facilitate a viable debtor’s restructuring, enabling it to rid itself of unprofitable locations through the bankruptcy and maintain its profitable locations. Alternatively, the assumption process may be used to maximize a liquidation (and in some cases reorganization) of a debtor’s estate for the benefit of creditors by selling off (assuming and assigning) profitable leases to third parties.
How long does a commercial tenant in chapter 11 have before it must make a determination of whether it will reject or assume a lease?
A commercial lease will be deemed rejected if a debtor fails to assume or reject a lease by the earlier of (a) 120 days from the bankruptcy filing or (b) the date of entry of an order confirming the debtor’s plan of reorganization or liquidation. Without the consent of the landlord, the maximum extension a debtor can obtain is 90 days if a court makes a determination on a debtor’s motion made prior to the expiration of the 120 day period. However, an extension is not automatic. The debtor must convince the Court that there is “cause” to extend. In many instances, a landlord may feel that the extension is not justified, such as where the debtor has defaulted in its payment of rent, as described below. In order to competently oppose a debtor’s request for an extension, the landlord would need to promptly retain bankruptcy counsel to file written objections and/or a motion to compel the immediate assumption or rejection by the tenant of the lease, and/or the lifting of the automatic stay to pursue state court eviction proceedings. Lieber & Lieber, LLP is well equipped to represent the interests of the Landlord.
What are the obligations of a commercial tenant to pay rent while in bankruptcy?
The debtor is obligated to make current payments of rent pending its decision to assume or reject the lease. The court may extend “for cause” the time for performance of any obligation that arises within 60 days from the filing date, but the time for performance may not be extended beyond such 60 day period. If, for instance, the debtor has a history of defaulting under its lease (monetarily and/or non-monetarily) prior to the bankruptcy filing, has and continues to violate the terms of the lease and/or circumstances reveal that the debtor has no chance of successfully emerging from bankruptcy, a landlord may oppose any request for an extension. The landlord may also use the debtor’s request for an extension as an opportunity to try to reach a settlement which is favorable to the landlord. In order to competently oppose a debtor’s request for an extension and/or reach a settlement with the tenant, the landlord would need to retain bankruptcy counsel. Lieber & Lieber, LLP is well equipped to represent the interests of the Landlord.
If a debtor assumes a lease, what happens to all of the arrearages?
In order to assume a lease, all defaults that are curable must be cured, or the debtor must provide the court with adequate assurance that all such arrearages will be promptly cured. This will be conducted at a hearing of which the landlord will have been given prior notice. It is critical that the landlord be represented by competent counsel as the landlord may be desirous of objecting to such proposed assumption on various bases, such as the failure of such debtor to demonstrate adequate assurance or the failure of the debtor to cure non-monetary defaults that are otherwise curable. It is often the case that if the landlord is represented by competent bankruptcy counsel, a settlement that is advantageous to the landlord can be reached in resolution of the landlord’s opposition to the debtor’s motion to assume the lease. Lieber & Lieber, LLP is well equipped to represent the interests of the landlord.
What happens if the debtor rejects the lease? What are my damages?
Although the rejection occurs after the bankruptcy is filed, for purposes of your claim, it is deemed to have occurred immediately prior to the filing. Additionally, the claim is treated as a general unsecured claim and not an administrative priority claim, which means that it is unlikely that it would be paid in full. Your claim would be limited to the rent reserved under the lease without acceleration for the greater of one (1) year or 15%, not to exceed 3 years, of the rent reserved under the remaining term of the lease following the earlier of the filing date of the bankruptcy or repossession of the leased premises, plus any unpaid rent, without acceleration, on the earlier of such days. Additionally, pending the debtor’s decision to assume or reject the lease after it filed, you would generally be entitled to an administrative claim for the rent accruing after the bankruptcy until the lease rejection. (Administrative expense claims are afforded a priority of payment over unsecured claims. In order to confirm a proposed plan of reorganization or liquidation, such plan must provide for 100% payment to such holders of administrative claims.) It is critical for a landlord to retain bankruptcy counsel to ensure that its rights are protected and that remedies are promptly pursed to protect those rights. Lieber & Lieber, LLP is well equipped to represent the interests of the Landlord.
Is it possible for a debtor to assume the lease and then subsequently reject it? What would be the landlord’s damages in such case?
Unfortunately, yes. But the fortunate news is that Congress has provided a landlord with damages significantly greater in amount than if there had been no assumption at all. For instance, the landlord is afforded an administrative priority claim for the period of 2 years following the later of the rejection or turnover of the property to the landlord as well as an unsecured claim for certain additionally damages. (Administrative expense claims are afforded a priority of payment over unsecured claims. In order to confirm a proposed plan of reorganization or liquidation, such plan must provide for 100% payment to such holders of administrative claims.) It is critical for a landlord to retain bankruptcy counsel to ensure that its rights are protected and that remedies are promptly pursed to protect those rights. Lieber & Lieber, LLP is well equipped to represent the interests of the Landlord.
The landlord surrendered the premises to us, but failed to pay rent while it was in possession during the bankruptcy. Do we have any recourse against the landlord for the rent accrued during the bankruptcy?
Yes. Lieber & Lieber, LLP can assist you in filing a request for payment of an administrative expense claim. Depending on the debtor’s financial circumstances, that claim may be paid after the request is made, or subsequently, in connection with the debtor’s plan of reorganization or liquidation. There are instances where a debtor fails to successfully emerge from bankruptcy due to cash shortages. In such instances, where the debtor becomes administratively insolvent, payment of the administrative claim is less certain. That is why it is critical for a landlord to retain bankruptcy counsel immediately upon a debtor’s filing of a bankruptcy case so that a landlord is in a position to exercise its remedies, including demanding immediate payment of rent on an ongoing basis, rather than allowing it to accrue without adequate protection to the landlord.
RIGHTS OF VENDORS AND OTHER CREDITORS IN BANKRUPTCY
We shipped goods to a company which filed for bankruptcy two (2) weeks after the shipment. What are our rights?
The Bankruptcy Code was recently amended to provide additional protection for vendors like you. A vendor is entitled to an administrative claim for the value of goods received by a debtor before the date of the commencement of a case under the Bankruptcy Code that have been sold by the debtor in the ordinary course of its business. (Administrative expense claims are afforded a priority of payment over unsecured claims. In order to confirm a proposed plan of reorganization or liquidation, such plan must provide for 100% payment to such holders of administrative claims.) This administrative expense claim protection is afforded creditors like yourself as long as the goods were received by the debtor within 20 days before the bankruptcy. To ensure that your rights are protected so that you’ll be afforded priority treatment, it is critical that you immediately retain bankruptcy counsel upon first learning of the customer’s bankruptcy. Lieber & Lieber, LLP can assist you in promptly filing the necessary papers to ensure administrative claim treatment and can further assist you in monitoring the case so as to enable you to exercise your rights and remedies. Timing is everything in bankruptcy.
We shipped goods to a company which filed for bankruptcy a month after the goods were received by them. What are our rights?
Under the Bankruptcy Code, a creditor which has shipped goods that are received by a debtor while the debtor was insolvent and within 45 days of its bankruptcy filing can seek to have such goods returned by the debtor. No such attempt can be made unless the vendor has served a reclamation notice on the debtor not later than 45 days after the receipt of any such goods by the debtor or not later than 20 days after the bankruptcy case commences if the 45 day period expires after the commencement of the bankruptcy case. A creditor’s right of reclamation is subject to the rights of a secured lender of a debtor which may hold a security interest in such goods or the proceeds. A vendor has a greater likelihood of reclaiming its goods if the reclamation claim is promptly made before the debtor has had a chance to sell the shipped goods and if the debtor does not have secured financing. Lieber& Lieber, LLP can assist you in assessing your rights and preparing a timely reclamation demand to the debtor so as to preserve any rights you may have. Timing is everything in bankruptcy.
DEFENDING PREFERENCE ACTIONS
We are the subject of a preference suit commenced in a bankruptcy case of a former customer of ours. What should we do?
Retaining bankruptcy counsel is critical immediately upon service of a complaint or a notice from plaintiff’s counsel that the debtor, or an entity on its behalf, will be commencing suit. Lieber & Lieber, LLP has successfully defeated and settled numerous preference actions and threats against its clients for a fraction of the preference demand and for no amount at all.
What are some of the defenses to a preference action?
There are several defenses to an action to recover a preference (to wit, a transfer of property (the “Transfer”)) to a creditor occurring within 90 days of the filing (in the case of a non-insider) or within 1 year of the filing (in the case of an insider) on account of an antecedent debt while the debtor was insolvent. If the aggregate amount transferred by the corporate debtor or individual debtor (whose debts are not primarily consumer debts) to the creditor was less than $5,475, than a debtor or a third party acting on its behalf cannot recover the preference. Likewise, a creditor which receives a preference of less than $600 from a consumer debtor is exempt from recovery by the debtor or a third party acting on its behalf. Additionally, some standard defenses to a preference action include:
(1) the Transfer was intended to be a contemporaneous exchange for new value given to the debtor and was in fact a substantially contemporaneous exchange;
(2) the Transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee and such transfer was made in the ordinary course of business or financial affairs of the debtor and transferee or made according to business terms; and/or
(3) following the Transfer, the transferee provided new value to or for the benefit of the debtor on account of which new value the debtor did not make an otherwise unavoidable transfer.
Lieber & Lieber, LLP carefully works with its clients in presenting documentation in such a way as to show that these defenses apply. For instance, simply because the invoice date states “net 30” does not mean that a payment that was made 60 days after the date of invoice should be a preference when the history of the parties’ course of dealing reveals that the parties never abided by the net 30 day terms. It is also often the case that new value exceptions come into play as our clients often supply inventory on an ongoing basis. Successfully defending preference suits contemplates excellent attention to detail, knowledge of applicable Bankruptcy Law, and litigation and negotiation skills with which Lieber & Lieber, LLP prides itself.
GENERAL REPRESENTATION OF CREDITORS IN BANKRUPTCY
Generally, why is it critical for general unsecured creditors to be represented by counsel in a bankruptcy case?
At every stage of the process, whether involving the filing of and defense of administrative expense and unsecured claims, sale of assets, the automatic stay, preference claims, the assumption or rejection of leases, the plan formulation stage, the disclosure statement stage and the plan confirmation stage, there are a multiple of remedies available to creditors, many of which are time sensitive. It is critical that a creditor have counsel that has superb bankruptcy knowledge and excellent litigation and negotiation skills.
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