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What Clients Need To Know About BankruptcyThursday, May 28, 202030 minutesAlan GassmanAlan Gassman 0:03 Hi, this is Alan Gassman, and I am here to talk about bankruptcy. Hopefully you don't need one today, or you haven't thought ahead, but if you do need one today, I can try to help you.Before we get started, let me just mention that you should not rely upon this webinar, or even my book on bankruptcy in making your debtor creditor law and real life decisions. You should be talking to a good CPA, you should be talking to a good business advisor. You should be talking to a bankruptcy lawyer who has a lot of experience. I am an estate planning tax and business lawyer who knows a lot about bankruptcy, but not enough. So our clients who have bankruptcy issues are always referred to a very good bankruptcy lawyer and there are a lot of them out there.By the way, Saturday my partner can Crotty is going to talk about creditor protection for physicians. And then Thursday June 4, Brandon ketron is going to talk about 199 a planning. The following Saturday I'm going to talk about planning for the single physician. Then Christine Nicola is going to talk about S corporations June 11. And he's going to talk about charitable remainder trust June 18. So we're going to keep you busy. We've got a lot of things going on. There is a 90 minute webinar that I recorded with Bankruptcy Lawyer Mike Markham, and they book whatever CPA lawyer and financial advisor needs to know about bankruptcy. Those are presently on sale. I'm sorry, I can't give them away anymore. I've got an exclusive agreement with Lizzy.But this is the entire PowerPoint for the 90 Minute Webinar. And if you're interested in the lissie product, which includes the webinar on the book, you can let me know I'll send you a link or the book is now is available onAmazon.I've got questions and answers here from a conference with Mike Markham that may be of interest. There's a lot of businesses right now that are basically shut down and not in need of a bankruptcy yet because there's no creditors at the door. There's no creditor with a judgment who's about to seize assets. There's no landlord with an eviction action going from in most cases, everybody's waiting. So you don't want to ever file a bankruptcy if you don't have to. One thing to remember about bankruptcies is that once you file it is an absolute Sorry about that. Once you file it is an absolute fishbowl complete and utter disclosure of information to anyone and everyone involved. Thanks for your patience as I get to the PowerPoint slides.The first thing I want to do is go through some definitions. And in reviewing the definitions, we're going to review a lot of the rules that apply in bankruptcy. The Bankruptcy Code comes basically from the pilgrims, and others like them, they came in the Mayflower and they were escaping debtor prisons. They were looking for freedom of religion, and they were looking for the ability to owe money and not have to go to jail in Europe, in the16 and 1700s. If you couldn't pay your debts, you went to prison. Now, if you can't pay your debts, you can go into the bankruptcy court. And you can have your debts in many cases completely eliminated so that you get what we call a fresh start. And as an estate planner, and as a business advisor, one of my jobsto think through what I am doing and what I recommend for a client to do, in case they would ever have horrendous judgments against them and need to file a bankruptcy and the most common and usually the most effective type of bankruptcy is a chapter seven bankruptcy. And in a chapter seven bankruptcy,if most of the debt is business debt and or tort debt like debt resulting from a car accident and other things like that, then the person who files bankruptcy will normally get a complete discharge of any and all liabilities owed, including business indebtedness, and there will be no need to make a payment plan. Once the bankruptcy is filed, the post petition earnings of the person are protected what they areReceive as gifts after they file the petition is protected, what they inherit more than 180 days after filing the petition is protected. So it's basically as I said, a way to get a fresh start.Now, if most of the indebtedness is consumer debt, in other words, if most of the debt is business debtand or toward debt, you get a discharge. If most of the debt is consumer debt, then you get a payment plan, you get converted to chapter 13. The court looks at your earnings and looks at your expenses and comes to a decision based upon general guidelines as to how much you can afford to pay to your creditors over a five year period. And then the court requires those payments over a five year period and the rest of the debt is completely gone.There's not a lot of court oversight, you just make your payments to the court system. And by the way, Kelly, I'm getting feedback here, you could turn off the sound there because it's causing feedback that can be heard on the microphone here if you could turn off your sound. Sorry about that.Okay, soUnknown Speaker 6:23 that is the chapter seven bankruptcy. Before you can file a Chapter Seven bankruptcy, you now have to take a credit counseling course. And you would have to reside in Florida, normally for more than 730 days in order to file a bankruptcy here in Florida, because the way it works is if where, if if you have not resided in the jurisdiction, where you live, when you file a Chapter Seven bankruptcy for 730 days, then thatUnknown Speaker 7:00 Test is the jurisdiction where you lived for the hundred and 80 days before the 730 days. So it's basically from day 731 toUnknown Speaker 7:14 180 days before that would determine the law of the state that applies. So because Florida has so many good creditor laws, a lot of people move to Florida, and then they wait two full years 730 days before they file their bankruptcy. Now, once you file a Chapter Seven bankruptcy, the debtor loses any assets that are available for creditors under the applicable law,Unknown Speaker 7:51 but the debtor gets to keep the assets that are protected under the creditor law. So the assets that you get to keepUnknown Speaker 8:00 Are the exempt assets and the assets that you lose are the non exempt assets. So if I file bankruptcy, owning my legal practice, owning my 401k, owning my IRA, and owning a bank account in owning a home,Unknown Speaker 8:21 when I file bankruptcy, my bank account and my professional Corporation are going to be considered as held by the trustee in bankruptcy, the court is going to appoint a trustee. The trustee is going to get paid a percentage of the value of the assets to liquidate or sell those assets. Commonly, the trustee would sell those assets to me or someone I know for as much as the trustee can get without a lot of time or effort and that money that the trustee gets from the saleUnknown Speaker 9:00 gets used to pay for the trustee for the trustees legal fees because the trustee gets to hire a separate lawyer to represent the trustee for accounting fees that the trustee might have, and for court costs, so there may not be much left for the creditors. In the meantime, I keep my home if I qualify under the homestead exemption, I keep my 401 K. I keep my IRA and that is the short story of the chapter seven bankruptcy.Unknown Speaker 9:35 If a company files a chapter seven bankruptcy, then it does not get a discharge. And even some bankruptcy lawyers don't realize that. So a lot of times companies have more debt than they have assets and the client wants to make a fresh start. And the client would like to shut the companyUnknown Speaker 10:00 down, and simply by I mean simply start a new company. But there's something called the doctrine of successor liability, which we'll go into more later. And because of that, theUnknown Speaker 10:15 creditor may be able to reach into the new company. On the other hand, if the company with the problems files a chapter seven bankruptcy, and then does a court approved sale of the assets of the company, by the trustee, to someone related to the person who originally owned the company, then the doctrine of successor liability would typically not apply. But again, when you put a company into bankruptcy, it does not get a discharge, that old company still owes the judgment. So page 62, the word discharged that you understand there, and then section five, the loss of a discharge andUnknown Speaker 11:00 This would be a grave, awful situation when you file a bankruptcy, and you go into what they call debtor purgatory, because your debt was not discharged, so you could never bankrupt it. And a good example of when your debt would never be discharged, would be if you lied on your bankruptcy court application. If you have assets, you put them in your mother's name, but they're really your assets, everyone knows it. And the creditor finds out about it and can show that you concealed the asset or you defrauded your creditors, then you could lose your right to a discharge. Another way you could lose your right to discharge is if you make a transfer for the purpose of avoiding creditors within 365 days before filing the bankruptcy. So in Florida, the make the making of a fraudulent transfer.Unknown Speaker 12:00 is not illegal. It is notUnknown Speaker 12:04 something that causes necessarily any sort of penalties under the Florida Statutes. But if you make that transfer to avoid creditors, within one year before you file bankruptcy, you could lose your right to a discharge. So you have to be very careful. And if you're going to make a transfer to avoid creditors, sometimes it's better to make it right away so you can get your year in before you file the bankruptcy, the creditors may still be able to set the transfer aside under the Florida four year fraudulent transfer statute,Unknown Speaker 12:41 which applies even in bankruptcy. But even if they can transfer that, even if they can set that transfers aside, as long as it's been more than a year, they should not be able to deny the discharge.Unknown Speaker 12:57 A chapter 13 bankruptcy is a patientUnknown Speaker 13:00 Plan bankruptcy, where people or entities can go into bankruptcy. And when they can't get a discharge in a chapter seven, they will commonly go for a chapter 13 or a company that doesn't want toUnknown Speaker 13:18 actually companies cannot file chapter 13. They go into chapter 11.Unknown Speaker 13:24 So we talked about consumer debt and you don't want to have more than 50% of your debt in consumer debt. So if you have to borrow, it's better to borrow for business purposes, and spend your money on consumer goods, as opposed to borrowing for consumer purposes and spending your money to save the business. So you do need to run a spreadsheet. If you're in this middle ground and you may have a lot of consumer debt, you may need to run a spreadsheet and decide how these rules work with the guidance of a bankruptcy lawyer. In order to have more than 50% of your debt. BeUnknown Speaker 14:00 business and non consumer debt. And means testing speaks to the process of determining how much a person can afford to pay to creditors over five years. Even if it's all consumer debt if the person has no ability to work, or to pay the creditors over time, they may be able to simply file the chapter seven bankruptcy and get an overwhelmed. So a lot of people who are now unemployed living on $600 a week from the federal government, plus $255 a week if you're in Florida, maybe in a better position to file a bankruptcy before they get a job, so that the court would be more lenient in putting together their chapter 13 payment plan that is for individuals. Now the much more complicated and quite frankly,Unknown Speaker 15:00 A more exciting and more opportune chapter of the bankruptcyUnknown Speaker 15:07 code is chapter 11. And for businesses, the chapter 11 can have significant advantages to a chapter sevenUnknown Speaker 15:21 because with a chapter 11, the court can reduce the debt owed by the chapter 11 debtor to an amount equal to the value of collateral, or to whatever other level the court deems to be appropriate. Now, before the cares act, and the secure act or the 2019 changes made to the bankruptcy code, Chapter 11 was much less debtor friendly because before these changes,Unknown Speaker 16:00 Is the chapter 11 bankruptcy court would allow the different classes or categories of creditors to vote on whether to allow reduction of debt.Unknown Speaker 16:14 The debtor, typically the company that can't pay its bills are has a big creditor issue coming would file a Chapter 11 bankruptcy, and then you come up with a plan. Normally within 90 days of filing, you come up with a plan of bankruptcy. And your plan is to salvage a reasonable amount of monies to pay the creditors usually over time, and to preserve a reasonable amount of equity, so that the original owners of the company can still be the owners of the company. So for example, let's say that I am in the bus transportation business and I haveUnknown Speaker 17:00 I have a million dollars worth of buses, but I have $2 million of debt.Unknown Speaker 17:07 And I can't pay the debt. And a couple of the creditors that are owed the money have sued me and gotten judgments and they're about to come and confiscate the buses and my bank account of in the bus company, I can file a Chapter 11 bankruptcy.Unknown Speaker 17:26 We can value the buses as of the day that I filed a bankruptcy and all the other assets that the lenders have as collateral. And if the buses are worth a million dollars, then the creditors only have a lien against the buses for the million dollars. And they are considered to be what we call unsecured creditors. For the rest of the money they were owed, in my example, another million dollars because they're owed a total of $2 millionUnknown Speaker 17:59 nowUnknown Speaker 18:00 Before these new laws, the court would not approve the reduction of the other million in debt to zero or a much smaller number, unless the creditors approved that by majority vote.Unknown Speaker 18:15 Now, the court is able to reduce the debt. So chapter 11 bankruptcy can be very attractive. Another thing attractive about a chapter 11 bankruptcy is that the unlike a chapter seven, where a impartial trustee is appointedUnknown Speaker 18:39 in a chapter 11 normally the debtor remains in control as long as the debtor follows the rules, and the debtor is called the debtor in possession. So the debtor in possession has to follow a lot of rules, a lot of regulations, a lot of honesty, a lot of transparency, but as long as they do what they're supposed to do under the bankruptcy codeUnknown Speaker 19:00 They can retain control of the business. And once they propose a plan, once the court approves the plan, they have to, of course, go forward with the plan, which might be in the bus example, to pay a million dollars over a number of years at a reasonable interest rate, and to have the rest of the debt, the other million reduced to $150,000. Or something that the court feels is reasonable to give the business and their employees and the community the chance to allow this business to get a fresh start.Unknown Speaker 19:40 So now when you file a Chapter 11 bankruptcy, if you want the new rules to apply,Unknown Speaker 19:48 the debtor has to make a special election to have chup, subchapter VI of the bankruptcy code apply. So if you're at a cocktail party with people and you wantUnknown Speaker 20:00 Talk about bankruptcy law and feel really cool. Say, yeah, I was just reading about Chuck chapter v. That's been great for debtors, hasn't it, and then somebody will be so impressed with you.Unknown Speaker 20:13 Now, when you would file a Chapter 11 bankruptcy, typically only if you have to, if you can reach out to the creditors and make a deal, sure to file even chapter seven, Chapter 11 bankruptcy, that's usually in everyone's best interest. And that's usually what happens. But if you're going to file a Chapter 11 bankruptcy, you want to do it when the assets reach their lowest value, because remember, the court is going to strip down the secured debt to be secured only by an amount up to the value of the collateral. So in the middle of this virus, if the buses are still at a million, but I'm pretty sure they're going to go down to 700,000 the way things are going I'm going to want to waitUnknown Speaker 21:00 Till they hit 700,000 before I filed my bankruptcy, assuming that there's nobody who's about to take the buses away with a tow truck after going through the court approved repossession rules, so a lot of strategy hereUnknown Speaker 21:16 something very real and of concern is the cost of a chapter 11 bankruptcy. We really encourage the clients in insolvency situations to keep close track of how much cash they have, how much cash they have access to, and how much money they will need to give to a reputable Bankruptcy Lawyer as a retainer before they file a Chapter 11 bankruptcy. This can be very expensive anywhere from 25,000 to $250,000 is not a surprise. These bankruptcies are very, very work intensive and there is no way for the lawyer to get paid from a practice practical standpoint. UsuallyUnknown Speaker 22:00 Unless they get their money upfront, or they have a guarantee from somebody with a deep pocket. So you want to use a lawyer who's done a lot of chapter 11 work, a lot of bankruptcy lawyers do not do a lot of chapter 11 work, but you want one who does and don't be surprised when they ask for a larger retainer. Don't spend all your money on creditors, it's better sometimes to hoard it, and to pay it to the bankruptcy lawyer.Unknown Speaker 22:27 Something I think is interesting that I just like to mention is the new Nol rules that that Congress recently enacted, will allow you to take a loss this year and immediately get cash. So I think we're going to see a lot of form 1040s and 1120s filed for individuals and corporations, taking losses for 2020. carrying those back to 2018 2019. And getting a refund.Unknown Speaker 23:00 From the prior years, and if you had a loss in 2018 or 2019, that you couldn't carry back because of the law at that time. It's been amended so you can carry it back immediately, and get cash for your losses. So a lot of clients who may not survive may still be well advised to make pension plan contributions to get tax deductions to increase Noel's net operating losses to increase refunds that they would receive in January from previous years because of the net operating losses.Unknown Speaker 23:40 Now, I would be very remiss not to mention the importance of proper income tax planning well in advance of having an insolvency situationUnknown Speaker 23:54 if an individual is personally insolvent, and debt is reduced.Unknown Speaker 24:00 deuced and that does not make the person solvent, then there is no income from the reduction of debt. But if the person has assets, which would include the creditor exempt assets, and the credit and the debt is reduced, then the person has to pay income tax under Internal Revenue Code Section 108. Let me give you an example. Let's say I have a $500,000 creditor protected homesteadUnknown Speaker 24:28 and I owe the bank $2 millionUnknown Speaker 24:33 and my business can't pay them anything. So now I go to the bank. And I say, my mother will give me 100,000 I'll get a mortgage on my house for five. I'm sorry, my mother will give me 100,000. So I will give you $100,000Unknown Speaker 24:53 and a mortgage on my house. I want you to reduce the debt by 1,000,004 to the 600Unknown Speaker 25:00 If you don't take that I'm going to file bankruptcy and you're not going to get anything the creditor agrees. Now I have a $1,400,000 taxable event. On the other hand, if that reduction in debt had taken place as part of a pre agreed, Chapter 11 bankruptcy called a prepackaged bankruptcy, then I would not have to pay any tax on the reduction. And if the insolvency takes place in an S corp or a C corporation, there is usually not a problem for the shareholders. But if the entity is taxed as a partnership and the shareholders have assets, whether exempt or non exempt, then when the partnership reduces its debt, the partners typicallyUnknown Speaker 26:00 have to pay a lot of income tax. So if you're sitting on a limited liability company that's presently disregarded for income tax purposes, or taxed as a partnership, and you think that you may be renegotiating debt, consider converting that partnership into an S corp or a C Corp. Before the debt on the entity exceeds the tax basis of its assets, because once the debt of the entity exceeds the tax basis of its assets, you trigger income tax converting from a partnership or an LLC to an S corp or a C Corp. When you make an S election, you can go back as bi as much as 75 days from the election date, but only if the entity paperwork would be consistent with the S corp rules. So for a lot of clients, we have been amending their eyesUnknown Speaker 27:00 Operating agreements so that they would be able to make a retroactive s election or up to 75 days because quite frankly, these entities are continuing to borrow money they're continuing to get in more debt. And we want to make that selection before the debt exceeds the basis.Unknown Speaker 27:17 So we but we but we may not have to make the selection things may be okay. So it's good to have that 75 day look back, we call that the crass CRS T. We'll be glad to send you more information on it if you want it.Unknown Speaker 27:31 With two minutes remaining. I'll mention before you make a transfer to avoid creditors, you get tax advice, read about it. Sometimes it is the absolute right thing to do. Sometimes it is the wrong thing to do. If you're outside of Florida, it may actually be illegal. If you do this to avoid paying the IRS the FTC or the SEC or criminal restitution. It may be illegal. So you have to be veryUnknown Speaker 28:00 Careful, but you run into a lawyer and say I need to make a transfer to avoid creditors. The lawyer says no, under no circumstances should you ever do that, then you need to go talk to another lawyer, if you're in Florida, because sometimes the transfer is the best strategy, and there's a lot of different ways to do it. I mentioned the doctrine of successor liability, you try to set down one business and set up a new one, the creditors can reach into the new one, unless you've done a court of a bankruptcy court approved sale. And that would be the reason that a lot of people go into bankruptcy.Unknown Speaker 28:35 Finally, if you have an LLC, a limited liability company, with multiple members and someone gets a judgment against one of the members, they typically cannot reach into the LLC, they can't take over control. They just have to wait to see if and when there's a distribution. But once the debtor files bankruptcy, then unless the LLC operating agreement is what we call an executory agreement.Unknown Speaker 29:00 TheUnknown Speaker 29:01 the bankruptcy trustee can take over the LLC if the client owns the majority and can reach into the LLC as a result of that. So you definitely want your LLC operating agreements to be executory contracts and maybe give half of the voting stock at arm's length to someone different. Please keep in mind that the exempt assets are typically not protected from the super creditors, which include the IRS, the FTC, securities exchange commission, and then sometimes some cases Medicare and other federal agencies. Finally, my partner Ken Crotty talked about tenancy by the entireties last Saturday, if you live in Florida, Delaware, or one of the other tenancy by the entirety states like Vermont, you want to know about tenancy by the entireties because if one spouse files bankruptcy and everything is handled properly, then theUnknown Speaker 30:00 tenancy by the entireties joint assets cannot be touched by creditors. And that applies even if the couple lives outside of a community property state, because the TV protection is part of the Federal Bankruptcy Code. So I promised a client's orientation to bankruptcy in 30 minutes. If there is anything whatsoever that I have not mentioned or that came across with confusion, or not so clear or you need more information on a particular item, please let me know. I'm quite proud of an article that I wrote with Adriana Choi of our law firm called creditor protection during the virus crisis 22 definitions 33 strategies 20 to 26 traps for the unwary. If yet, please read this especially if you have trouble sleeping at night. If you want the white paper copy as a Word document or an or an Adobe document as opposed to being an articleUnknown Speaker 31:00 PowerPoint slide. Please feel free to let us know. There are other YouTube videos on creditor protection and bankruptcy. Again, thank you very much for attending this program. You've got my email address there a Gassman at Gassman pa Calm, calm and may the rest of your day be productive, happy and healthy. Thank youTranscribed by ................
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