Employment Status and Bankruptcy

I get a lot of questions about employment status and how it affects a person’s ability to file bankruptcy. There are a lot of scenarios that could come up, but I would like to at least provide a brief overview.

People will ask whether they need to be employed to file a bankruptcy, or conversely, if current employment is a problem with filing. Generally, when speaking about Chapter 7 bankruptcy, being unemployed is not a problem unless you have secured debt which you were trying to keep current. The secured debts that are most important are mortgages and car payments. If you want to keep either of these payments through chapter 7 bankruptcy, you have to be able to show the court that you can afford to do so. This normally requires you to have income and a job. However, if you have a non-following spouse or relative who is making the payments, or you have non-employment income such as Social Security, a pension, or even unemployment, you should be able to keep your secure debts such as a car or home through bankruptcy.

In chapter 13, not having employment can be a problem for the same reasons. In chapter 13 bankruptcy you are required to make a monthly payment to the United States Trustee. Just as above, this is normally more possible if you have regular employment. But if, you have the other types of household income that I mentioned above, Chapter 13 bankruptcy may still be feasible.

The bottom line for filing bankruptcy is that there needs to be money coming in to either support a Chapter 13 bankruptcy payment or to keep secure debts in a Chapter 7 bankruptcy. That money coming in doesn’t necessarily need to be regular employment.

Now, if you have too much employment (that is, you earn too much money) it could be an issue with filing Chapter 7 because it may push you above the means test threshold. I discuss the means test extensively elsewhere in this blog and won’t go over it here. But, if you are working it will be important to know exactly how much you are earning.

Finally, in some scenarios it will be important for your bankruptcy attorney to know if you will be losing your job in the near future. If you are losing your job, you may not be able to support a Chapter 13 bankruptcy that you are planning to file. Also, if you are losing your job, you may be able to get beneath the means test and file Chapter 7 bankruptcy by waiting a bit longer.

Call us at 412-414-9366 if you have any questions about bankruptcy and your employment status. I would be happy to set up a free consultation and discuss your situation!

Small Business Debt

When someone calls me with a small business that is struggling I always need to find out what type of debts they have and how much they owe. Many people will say that the business had taken out some loans and they want to file bankruptcy on those debts, but they don’t necessarily want to file personal bankruptcy. In these cases it is important to find out whether or not the individual personally guaranteed the loans of the business.

In most small business scenarios, the individual probably did personally guarantee the loans, whether they realize it or not. This is especially true of SBA loans, which normally require the individual to personally guarantee the loan. Why is this important? Because if you personally guaranteed the loan, filing a bankruptcy only for the business and not for yourself will not do any good. The holder of the can still come after you personally.

Many people who reach out to me assume that the business took out the loan , but once we dig into it and look at the loan, many times they find out that they in fact did personally guarantee it. People often misunderstand the idea of limited liability for a business, and take it to mean they will not be liable for debts accrued by the business. Unfortunately, this is not the case. A personal obligation survives even if the business does not.

While the idea of only filing bankruptcy on the business, and not personally, feels less problematic for individuals, it may not do any good. If your small business is struggling and you are considering bankruptcy, you may want to go back and look at the original loan documentation. This goes for business lines of credit and credit cards. If you are a small business facing debt issues, feel free to call us at 412-414-9366. We can discuss your situation and see whether or not the business can be saved. If not, we can talk about the best way to shut down operations, account for the debt, and help to move your life forward. One of the purposes of bankruptcy is to encourage small business creation by providing an outlet for the times when the business does not succeed. The process is meant to help, not hurt. Call us with any questions.

Inflation and Bankruptcy

A lot of people have been asking me how I think the current high inflation will affect the future of bankruptcy filings. I definitely think it will be an issue with wide-ranging effects and is worth discussing, as some economists argue that it is higher than any point in the last 40 years.

Inflation makes almost everything more expensive. Food, energy, household items, and rent can all cost more, sometimes dramatically. Used cars and housing are already more expensive due to supply chain and stock issues. These all make up the bulk of most household budgets. Now, to combat the high inflation the federal reserve has increased the base interest rate which will make mortgages, credit cards, and loans more expensive as well. In short, everything is more expensive right now.

Higher interest rates are meant to encourage savings and decrease spending. However, for most people you cannot decrease spending on food, utilities, rent and mortgages, and household items, at least below a certain point. More worryingly, salaries are not increasing at a rate to match the inflation. When things cost more and people earn the same amount, it is easy to figure out what will happen. People will need to burn through savings or increase their debt. And this will lead to more bankruptcies, unless salaries begin to increase or the government provides stimulus money.

It is not clear that any more stimulus money is forthcoming, and some economist believe this would only increase inflation further by putting more money in circulation to spend. Also, even though unemployment is historically low, there has not been a corresponding increase in household income. All of these factors make it fairly likely that bankruptcies will spike in the coming year (or years).

Spending on discretionary items (think luxuries, travel) and saving towards retirement is likely to decrease. On the plus side for some people who have wanted to buy a home but have been priced out of the overheated market, higher interest rates should cool off the housing market to some degree. The question will be how much housing stock is available. If it does not increase, housing prices may stay higher than normal. As mentioned above however, higher interest rates make home payments increase dramatically . The difference between 6% and 3% on your monthly mortgage interest rate could be the difference of $600 or $700 per month in your monthly payment.

Hopefully if you are reading this you will weather this coming storm with minimal problems. However, if the toxic mix of inflation, stagnant wages, supply chain issues, and increasing interest rates begins to eat away at your household savings, or even causes your debt balances to increase dramatically, you should keep the possibility of bankruptcy in mind. The process is intended for a fresh start, and the gathering conditions discussed above are the reason that it exists. If you have any questions or wish to set up a free consultation, call me at 412-414-9366.

Why "Liquidaton" Is Not Always A Concern

A common fear expressed by new callers when asking about bankruptcy is that all of their property will be liquidated. Or sometimes they believe they will lose their home, their car, or retirement or savings accounts. In most cases, this could not be further from the truth.

The problem arises because individuals do a good thing… they look for information about their problem! But, in doing so, when researching bankruptcy law you will sometimes come across references for a “liquidation” bankruptcy in Chapter 7. Even bankruptcy attorneys will sometimes use this title in shorthand. However, this can cause great confusion and misunderstanding. The reality is that very few bankruptcy cases end up involving liquidation of assets.

The only time this occurs is when you have assets that are not exempt from your creditors. Under bankruptcy law, there are exemptions that are used to protect your personal property. These exemptions are not unlimited, but they are normally sufficient for most people looking to file bankruptcy. In some cases the exemptions actually ARE unlimited. Qualified retirement accounts have an unlimited exemption. Personal injury settlements that are needed to support the debtor are also unlimited. For most other types of property there are limitations. This includes the homestead exemption for your home, the vehicle exemption for your car, in the wildcard exemption that is normally used to protect cash or savings. In most cases, at least in Pennsylvania where the federal exemption are allowed, there is enough to protect everything. So, when people call me up and say, “I don’t want to file bankruptcy because I know I’ll lose my car”, in reality it is just not a problem. Liquidation bankruptcy is an issue that normally does not come in to play.

However, what happens when the exemptions are not sufficient to protect your property? In that case there are two options. One, you can allow the property to be liquidated. Oftentimes, unless the property is of significant value, it is not even worth the time of the trustee to liquidate the asset, and they will abandon it.

The second option is to file Chapter 13 Bankruptcy and pay back your unsecured creditors dollar-for-dollar for the unexempt amount. This sometimes occurs when a debtor has too much equity in a home. Whether or not this makes sense will depend on how much you owe to your creditors and how much you will need to repay. In some cases it will still save you tens of thousands of dollars .

Call me at 412-414-9366 if you have questions about whether or not your property will be fully exempt or will need to be liquidated. As discussed above, in many cases where debtors are concerned about liquidation, in reality they will not lose anything. I would be happy to discuss your situation with a free consultation! Don’t let the word “liquidation” scare you. It is rarely a result.

Some Random Thought on the Bankruptcy Means Test

The bankruptcy means test income thresholds have changed as of April 1, 2022. I discussed this change in my last blog post. Now is a good time to post a few things to remember while dealing with the bankruptcy means test. Just some random thoughts and information…

-Household size is generally determined by your federal income tax dependent claims and your marriage status. If you claim a kid on your taxes, you can likely claim them as a dependent in bankruptcy.

-The means test has a very broad definition of income. It includes things such as bonuses, commissions, gambling winnings, unemployment, second jobs, and the even one time windfalls such as lottery winnings. It does not include Social Security and VA benefits.

-While the means test thresholds are expressed in yearly amounts, it is actually only the six months previous to the month of filing that are considered.

-You may be exempt from the means test if either your debts were accrued while you were on active duty in the military, or your debts are primarily business in nature.

-The means test includes the income of both spouses, even if only one spouse is intending to file. This can be a little confusing for bankruptcy filers, but the fact you must disclose your non-filing spouse’s income will have no impact on them. They are not a part of the bankruptcy filing.

-The means test income threshold‘s are updated every year on April 1st.

-Means test deductions are generally based off of IRS standards, but actual taxes paid and insurance costs can be used.

These are just a few things to keep in mind if you are considering filing bankruptcy and you don’t know whether or not you will pass the means test. If you have any questions about Bankruptcy or the means test, please reach out to us at 412-414-9366. I would be happy to set up a free consultation and discuss your situation!