Bankruptcy - is it as easy as it looks?

Factual Questions
1

I’m not planning on filing, but I run into customers who have. For example, there’s one customer who owes us $15,000 and has filed. He owns a business, but nothing is in his name, therefore, we will get zip and have to eat the whole amount. Of course, we are at fault (REALLY pathetic accounting procedures) for letting this guy rack up such a tab, but there you go. Here’s a few questions:

  1. Why don’t lenders offer some sort of bankruptcy “insurance”?

  2. If a business is run like the guy above (nothing in his name), why couldn’t his “backers” be held responsible for his debts?

  3. Before lending money, why not, somehow, “test” the lendee (is that a word?) to see if they know what the hell they’re doing? I know a lot of people who are talented, but know nothing about how to run a business. I don’t feel that a business plan is enough. If I were a lender, I would want to know that I am making a good investment. I understand that even the best business people have bad runs.

Anyone here have to file? If you don’t mind sharing, what happened?

Anyone in the money-lending or bankruptcy-handling biz?

Just wanna know!

2

Bankruptcy is easy, but can be quite painful.
Records are kept for 10 years, so you shouldn’t plan on any credit cards soon,

3

Corporate loan-shark checking in. From your description, it sounds like your company had accounts receivable out to the bankrupt company, and that in bankruptcy (7 or 11, BTW?) the assets and/or ongoing value business were insufficient to cover the secured lenders, leaving your firm with the big zippo. My post is based on that; let me know if the circumstances are different.

**1) Why don’t lenders offer some sort of bankruptcy “insurance”? **

Because they want to get paid first and in whole, they are actually helped to the extent there is senior unsecured indebtedness, like accounts receivable. Your company can acquire a sort of “insurance” against customer bankruptcies by establishing a non-recourse receivables sale program with a bank or other financial company. The costs of doing so, however, can be prohibitive – a program can shave 3-4 points of cash flow from even a big business with big customers, and can wipe out profits entirely from a small business with small customers. So most companies don’t bother. Other ways companies protect themselves from shaky customers are to tighten payment terms, insist on a letter of credit, etc. Your company was every bit as much a lender to the bankrupt company as the main bank lender, and should take the appropriate caution.

**2) If a business is run like the guy above (nothing in his name), why couldn’t his “backers” be held responsible for his debts? ** In most cases, your receivable is from the limited liability corporation. The company’s backers (including the main guy) are no more liable than the public stockholders of Owens Corning will be as it goes through its bankruptcy. That said, if there were transactions between equity holders and the company in the year prior to the filing, there may be ways to go after the owners. It’s tricky, expensive and usually fails, but it has been done.

**3) Before lending money, why not, somehow, “test” the lendee (is that a word?) to see if they know what the hell they’re doing? ** I do. So do most lenders. (Some lend solely against assets; if they are sufficiently over-collateralized, they don’t care if the business fails or not.) But of course we don’t bat 1.000. In addition to trying to determine the likelihood of a business’ success, we try to estimate our recovery when we are wrong. If we believe recovery values in failure are high, than the lendee (yes, BTW) often gets more “strikes” against it before we deny the loan.

4

Whether your bankruptcy is difficult or simple depends on your specific situation as an individual. If you have a lot of assets that have to be divided up among creditors, with ownership of some assets being shared with a relative or a business partner, if you’re going through a divorce at the same time as you’re filing for bankruptcy, things can get really messy. So secured debt can cause all sorts of problems. Unsecured debt, such as credit cards, can just be discharged.

Chapter 13 (rescheduling of debt) is generally more complicated than Chapter 7 (complete discharge of all debt).

Personal property and household goods generally will not be seized. They’re not going to grab your furniture, your TV, your clothes, etc. up to a certain dollar limit, and the value is estimated at “yard sale” prices. Exceptions would be things such as valuable collections (coins, stamps, comic books, etc.), jewelry and furs, art, or other items of high value. If you file, you can keep your warm winter coat, but you’re giving up those mink stoles and diamonds. Limits vary from state to state, but you’re not going to end up homeless and naked. Also, retirement funds can’t be seized. Generally speaking, any funds you have deposited in a 401K or in a pension fund etc. will not be counted among your assets. (I hesitated to file long after I should have, because I had the misconception that they could take the money I had in my employer’s pension fund.)

In theory, bankruptcies can be contested but in actual practice they seldom are. Unless you’ve done something pretty stupid (e.g. maxing out all your credit cards and then filing for bankruptcy) most creditors will just eat the loss.

If all your debt is unsecured, and you have few or no assets, the process will probably be fairly simple. But not painless. It hurts. That’s experience talking.

I started getting junk mail offers for credit cards within a year after my debts were discharged. They all had very low limits (none more than $1000, some as little $200) and charged usurious rates of interest (always at least 25% annually, not counting expensive annual fees and other non-interest charges). Rebuilding credit is difficult and slow. Count on at least 3 or 4 years, maybe longer, before you are offered credit charging less than ripoff interest rates, and this will happen only if you keep your nose really, really clean. Very likely you’ll have problems getting a mortgage for the rest of your life. Get used to the word “No.” You’re going to hear it a lot.

Some people use the bankruptcy laws dishonestly, but most are simply honest people who need relief from overwhelming debt. Lenders want the bankruptcy laws tightened. I say the laws should be tightened, but so should the laws concerning lending, so that lenders wouldn’t be allowed to offer credit so indiscriminately. At one point I had three credit cards, each having a limit of $7,000 – that would have been $21,000 in high interest, unsecured debt if I’d maxed out my cards. (My actual total wasn’t anywhere near that high.) I was only making about $23,000 a year at the time. Absolutely ridiculous.

5

From my read, the OP was posting about a business filing bankruptcy, and the replies have been mixed responses on personal and business bankruptcies.

How different are the rules and outcomes of the two types?

I’ve been through a personal 7 and 13 bankruptcy, but have no experience with a business bankruptcy. That period of my life was a busy and somewhat depressed blur, so I can’t say a lot for the process, excepting for walking away with the general impression that yes, it’s easy, and if anyone makes it less so, they also need to make it more difficult to put yourself in a position you need to file bankruptcy (which is my agreement on what LonesomePolecat seemed to say at the end of their post.)

-Doug

6

About 9 years ago, I had to file for Chapter 7 Bankruptcy.
The reason was simple: too much medical debt.
I had a case of appendicitis and kidney stones over a 12-month period and only a part time job with no medical insurance. Suddenly I had 12 doctors and 5 hospitals demanding money from me. None of them were reasonable, all demanding minimum payments of $50 to $100 EACH.

Friends and coworkers mentioned “Medical Bankruptcy”. After visiting an attorney I discovered there is no such thing. A creditor is a creditor be it a credit card or a physician.

The whole process was rather simple, listing of assets and liabilities. My attorney figured out with the payment structure they were suggesting I would be paying for 15 years!

Chapter 13 is basically a joke. The idea is that you try to be an honest guy and pay off some of your debt. The problem with this is that it is just as debilitating as a Chapter 7. Creditors don’t care if you filed Chapter 13 or Chapter 7: bankruptcy is bankruptcy. Why pay off creditors?

I have to admit that over these 9 years it has been difficult to get credit, but at the same time it is a benefit. I don’t have to worry about racking up credit card debt, cause no one gives me credit cards. I look at those 25% rates and basically laugh as I shred the offer in the trashcan.

I do get angry sometimes because my bankruptcy was caused not by poor handling of my finances, but rather bad luck with unforseeable medical bills and a job market that wouldn’t give a new grad a full time job with health insurance.

Looking forward to October 2001 when my bankruptcy will be off my credit report!

7

Just to add a bit to manhattan’s comments, one of the major reasons to form a corporation or LLC is to avoid personal liability. That’s why you can’t touch Mr. Smith’s personal assets when Smith Corp. goes down the tubes. However, in my experience, lenders to small corporations require a personal guarantee by the principals involved. Then if Smith Corp doesn’t pay up, the bank can file suit against Mr. Smith personally.

However, this doesn’t always happen. I have attmepted to file suit against many a little corporation that has pulled up stakes and disappeared, and there is really no recourse. If you don’t protect yourself with a personal guarantee at the beginning, you are taking a big risk extending credit to a small company.

As for bankruptcies being contested, I one major cause is when people lie on their initial filing. People have the (erroneous) idea that they can say, “Well, I don’t want to include my boat in the bankruptcy.” If they leave the boat off the inventory of assets, the bankruptcy can be denied or overturned.

8

I once knew someone who had gone bankrupt in the past, and she was able to get what I call a “go and sin no more” credit card.

It’s like a probationary card, with a low limit and probably high interest rate, which you can use (responsibly) to help re-establish a good credit rating.

I don’t know how they’re obtained, but RainbowDragon, it sounds like something you could probably get.

9

This may be off the OP (since it’s a personal bankruptcy, and not a corporate one), but even so…

In New Jersey, it was very simple for me to file. I had to pay a lawyer to take care of it (I realize I could have done all of the work myself, but I’m no lawyer. Why waste my time and money while doing a half-assed job?), and luckily he lived next door to me. Then we gathered up all my creditors’ information, and he notified them that all communication must go through him from now on, which was a huge, huge load off my mind.

Once I filed, I was scheduled for bankruptcy court. The stress leading up to the hearing was far worse than the hearing itself. I had envisioned a sort of Spanish Inquisition, with a judge sitting much higher than me questioning every purchase I had made for the past 20 years. Not so. The bankruptcy judge sat at a table with an audio recorder in the middle. He asked me a few questions (all of them were yes/no, too), then it was over. In about 90 seconds!

I think the official line is that the bankruptcy stays on your record for 7 years, so buying a house or a car is out of the question. But I just acquired a new credit card (with a low limit and high rates) - even though I filed only a couple years ago! My feeling is that credit card companies will give just about anyone a card. This is a good thing in this case, because a credit card could conceivably allow me to rebuild all that shoddy credit. The bankruptcy discharged me of all debts, yes, except for student loans and a credit card that wasn’t in my name, but was my debt nonetheless.

Anyway, bankruptcy is a good idea, I think, if: 1) you have absolutely no other recourse and 2) you are well aware of the consequences. Don’t go into it blind!

10

Since we’ve left the OP behind to some extent (business vs. personal), my contribution to clear some things up.

Bankruptcies stay on your credit report for 10 years; loans, cards, lines of credit, etc., stay on for 7.

The majority of personal filings are Chapter 7. Once you are discharged from a Chapter 7, the law prohibits you from getting another discharge for- I’m pretty sure it’s 7 years, but don’t quote me. The point is, some credit card companies go after people who’ve just been discharged because they know they can give you a really high rate and you’re on the hook for the next 7 years. “Let’s see them file bankruptcy now!”

Secured cards can have a lower rate, but you have to make a deposit.

RainbowDragon, in many circumstances, Chapter 13 has advantages over Chapter 7- for instance, if you’re married, have a lot of assets, or have certain substantial debts (i.e., taxes, child support, etc.), a 13 may be better.

11

That’s true, but the emphasis is on the “some” – I had a lot of cred companies decline my applications. It was only now, a few years later, that one approved. And of course, if you did file again - which is possible but very strongly frowned upon, from my understanding - you’d presumably have no shot at getting any additional cards. Fool 'em once, shame on them…

12

The thing that pisses me off about people like the guy in my OP is that everyone knows what he’s doing. “No, that’s not my truck, it’s in my wife’s name. So’s my house, my equipment, etc. Let’s see you get it! BWAHAHAHAHAHAHAHAHA!!!”

Since he has “nothing” to lose, he can continue going about his business under a different name and probably do it all over again!

13

My (personal) bankruptcy was final 03/97. Within a year from that date I had 2 new unsecured credit cards. (HIGH INTEREST - AFAIC - emergency only) I have been really surprised at the rate which my credit rating has recovered.

14

Is this true? I thought his wife’s assets and his assets would be one and the same. Can the husband declare bankruptcy while the wife keeps the stuff and her good credit?

15

In my bankruptcy, my husband of many many years was completely unimpacted by my filing. All debt was due to credit cards and all credit cards had been in my name, not joint accounts. This may vary by state law, but here in CO, because the credit had been approved on the basis of my sole income, he was not affected.

16

During the precedings I was asked, under oath, if I had transferred any money or properties to avoid repossession of the items or to conceal assets.