by Jeff Curl

Operating a sole proprietorship is a huge topic in bankruptcy that covers a lot of ground.  So let’s take a couple of smaller bites and break down what operating a sole proprietorship means in bankruptcy.  We have the pleasure of working with a lot of business owners, and sole props have their own special issues.

You Cannot “Just File for the Business”

A lot of sole prop owners in financial distress ask if they can file the business only, and not involve themselves personally.  The short answer is no.  Having a license from the city to operate as a DBA (doing business as) does not create a separate legal entity.  Corporations and LLCs are formed as separate entities under the laws of the state where they are formed.  Sole proprietorships do not obtain this legal designation.  So if you are John Smith DBA John’s Auto Shop, you will be filing yourself and business as one.

Filing a Sole Prop in Chapter 7

It is really important to understand what happens when filing Chapter 7 and you are operating a business as a sole prop.  Here are couple of major considerations:

• When you file Chapter 7, all of your assets go into the bankruptcy estate, including the inventory and receivables of the business.  Your Chapter 7 trustee is the trustee of the estate, meaning she or he controls the assets.  Understanding the values of your assets is paramount because you are allowed to exempt and keep a certain amount, but it is not unlimited.  If you cannot protect everything, the trustee may liquidate your unprotected assets.

• The trustee is also responsible for any liabilities that arises from the business. Therefore, there’s a risk that the trustee may demand that you cease operating your business while the trustee administers your assets. This varies by trustee to trustee and varies by the business.  For example, operating a restaurant as a sole prop has many inherent liability potentials, such as payroll taxes, suits by employees against the business owner, and injuries claimed by patrons.  Contrast this with the person working as a consultant with his or her laptop out of their home that raises less concerns from a liability perspective.  This is a factually sensitive discussion you should have with your bankruptcy attorney.

Filing a Sole Prop in Chapter 13

There are several distinction between Chapter 7 and Chapter 13 when it comes to operating a proprietorship.  Here’s a couple of important ones:

• The sole proprietor can continue to operate the business in Chapter 13 without the threat of shutdown by the trustee as can happen in Chapter 7.  A sole proprietor can also opt to shut down the business before or during a Chapter 13 as well.

• A Chapter 13 trustee does not liquidate assets like a Chapter 7 trustee.

In other words, Chapter 13 generally offers flexibilities and forgiveness that are not available in Chapter 7.  But sometimes one chapter is better than the other, or sometimes you only qualify for one.  Operating a business leads to a lot of complicated issues quickly in the bankruptcy world, so please consult with a bankruptcy attorney familiar with these complications.

Photo by elycefeliz

JC Law Group PC is hiring!

JC Law Group PC, with offices in San Francisco and San Mateo is seeking to hire a contract attorney for bankruptcy.  We handle Chapter 7 and Chapter 13 cases primarily in San Francisco and Oakland.

Requirements:

• Managed no less than 25 Chapter 7 and/or Chapter 13 cases from initial consultation to discharge in past 2 years.

• Able to draft and calculate Chapter 13 Plans.

• Familiar with local rules in the Northern District of California.

• Familiar with Motion practice.

• Have ECF access.

• Used and are familiar with BestCase and IGotNotices.

• Reliable transportation to get to/from San Francisco to San Mateo office.

This will be a contract/ hourly position. We anticipate candidate will handle approximately 5 cases per month. Candidate should be able to work autonomously, with minimal supervision.

To apply for this position, please click here and complete the application.

Please do not call or send emails to our office. For more information about JC Law Group PC, visit our website.

I’ve invited San Francisco estate planning lawyer, Amir Rang to discuss why it’s a bad idea to leave property to your children by adding your child to the title. Frequently, I will meet with clients who will put their entire life savings at risk by doing their own estate planning. Penny wise, pound foolish. Here’s Amir on why doing your own estate planning is a bad idea. You can also listen to our Podcast on why cutting your own hair is a bad idea as well as Legalzoom.  

Lifetime gifting of appreciated property can create unintended and disastrous consequences.  In a loving and generous act, parents (or grandparents) often gift appreciated stocks or real estate to adult children (or grandchildren).  The older generation usually adds the names of adult children to brokerage accounts as joint account holders in order to plan for incapacity and disability.  Or, the older generation adds the names of adult children to title of homes as co-owners in order to avoid a probate court proceeding upon their death.  Here’s why the adult children (or grandchildren) should respectfully tell the older generation, “If you love me, then don’t gift it to me.”

Gift and Estate Tax Consequences:

A donor (i.e., the person giving the gift) must file a form 709 (gift tax return) for any gifts over $13,000 per year per recipient.  Because the current lifetime gifting exemption amount is high ($5 million), usually, there is no actual gift tax due when parents (or grandparents) gift appreciated stocks or appreciated real estate to adult children (or grandchildren).  However, there are two common pitfalls in these situations.  First, the older generation simply fails to file the required gift tax return, exposing the estate to non-filing penalties.  Two, by haphazardly using up their lifetime gifting exemption amount, the older generation is unknowingly reducing their estate tax exemption amount as well.  What does that mean?  In effect, the older generation will be able to transfer less ‘estate-tax free’ wealth at their deaths.

Income Tax Consequences:

A gift recipient, who receives appreciated stocks or real estate, inherits the older generation’s original cost or basis in the property.  This usually leads to a devastating income tax position for the adult children (or grandchildren).  Example: (i) grandma purchased home for $10,000 a long time; (ii)grandma gifts home with a current fair market value of $1,010,000 to granddaughter; (iii) grandma dies; (iv) granddaughter sells home for $1,010,000.   Granddaughter has to pay income tax (fed + CA) of about $200,000.  If grandma had left the home to granddaughter in her will or in her trust (at her death instead of during life), then the granddaughter’s income tax would have been zero.

Liability Consequences:

Oftentimes, the older generation wants to allow the adult child (or grandchild) to claim the mortgage interest deduction for paying the monthly mortgage.  So, they add the adult child to the title of a home without thinking twice.  In fact, adding an adult child to the title of a home (or an investment property) can have disastrous liability consequences.  If the adult child gets into an accident or if the adult child goes through a divorce or if the adult child goes through a bankruptcy, then the older generation’s home and sole sanctuary can be exposed to unknown creditors and drawn out court proceedings.  Parents and grandparents should consult a tax attorney or CPA if they want to allow their child or grandchild to claim the mortgage interest deduction on their home.

Bottom line:

Given the potentially detrimental gift, estate, and income tax consequences and disastrous liability consequences of lifetime gifting of appreciated property, parents and grandparents should consult with their professional advisors before giving away too much!

Amir Atashi Rang is a San Francisco lawyer and he practices estate planning, tax law, and probate. You can reach him at 415-398-7275 or visit his website here. 

Let’s face it. Attorneys are expensive. One of the most common reason for racking up additional attorney fees – being disorganized. You can save yourself money and make it easier for your bankruptcy attorney by following these simple steps.

What happens after you hire a bankruptcy attorney?

Once you make the decision to file for bankruptcy, the next hurtle is gathering and providing all of your financial documents to the attorney. As a general rule of thumb, everything that has to do with your income, assets and debts must be provided. When you finally hire your attorney, you might think he or she will be able to “make it better” or solve your problem using a magic wand. Nope, your bankruptcy attorney needs your help. A common issue we come across is where clients don’t want to do the legwork gathering all the documents and organizing them in an orderly manner.

Keeping your costs down

In general, attorneys are paid hourly, meaning the more time an attorney has to spend on your case, the more you’ll pay. So, doesn’t it make sense to save your attorney as much time as possible? When you hire a lawyer, you are paying her for her legal expertise, not her document organization skills. I want to spend my time figuring out legal issues, preparing your petition, or answering your questions. Not opening unopened bills or sorting through 500 pages of a disheveled pile of mess.

No easy button

There’s no easy button. Only you have access to your documents. I can’t get your bank statements, tax returns, credit cards statements, collection letters, mortgage statements, or medical bills. You have to provide it to me. The average client will produce somewhere in the neighborhood of 500 pages. Imagine having to go through and review 500 pages of document for not just one client but for multiple clients. That’s a lot of information to sort and digest.

10 tips for getting organized and reducing your attorney fees:

Review. Look over the list of documents and get an understanding of what we need.

1. Which documents do you have? What are you missing? Mark those documents you have and highlight those you are missing.
2. Gather. Start with the documents you have.
3. Open. If you’ve been avoiding opening your mail and have piles of unopened envelopes, open them. (Enlist the help of a friend or family if necessary.)
4. Put into chronological order. For each type of document, put in order from most recent to the oldest. For example, if you have three credit cards with Chase, separate out each account and put into order.
5. Get the missing documents. Anything you are missing, call the bank, credit card company, CPA, etc. and request it.

If you are providing electronic documents:

1. PDF. If you are scanning the documents, make sure it’s in pdf file. Not jpg. Remember to scan the document right side up!
2. Chronological Order. Same as paper file. Make sure you scan the file in chronological order.
3. Name it properly. It’s not fun trying to figure out what 000123.pdf is. Much easier if it’s called “Chase – Feb 2012.pdf”
4. Create and organize it into folders. Dumping 500 files into a single folder makes it difficult for us to locate the file we need. Creating folders for the different file type makes it easier.  You don’t need to create 100 folders, but a few categories can go a long way.

Can you file my own bankruptcy? Yes. Can you cut my own hair? Yes. But, I don’t recommend either. 

In this podcast, Jeena talks about her attempt to cut her own hair and the disastrous result. We also talk about why acting as your own lawyer is penny wise but pound foolish. Then we move onto LegalZoom, a popular DIY website for many legal issues.

We address frequently asked questions:

• Can I file my own bankruptcy?
• What can go wrong?

Do you have questions? Schedule a consultation. We'll sit down review your options.

We hate spam just as much as you

This is a guest blog post by attorney Alec Segarich. Alec practices employment law and also handles general business matters.  The post is very timely since we recently recorded a podcast about why you shouldn’t cut your own hair or use LegalZoom.  Stay tuned for the podcast. 

You have seen the ads: your small business can be incorporated with just a few clicks, at incredibly low costs. But does this service really work? As lawyers who have helped many small businesses, we say “no way.”

Here are ten key reasons we believe LegalZoom and similar online business formation sites will never match the value a real attorney-client relationship provides.

1.  LegalZoom is slow. The company’s normal turnaround is 20-35 business days, unless you spend hundreds of additional dollars for a “rush” 7-10 business day service. Many of our colleagues turn around applications in 3-5 business days (or sooner, if need be).
2. You’re stuck with their prices. When you work with a lawyer, you can negotiate a flat fee or hourly rate depending on your needs. With online services, that is not an option.
3. The advertised prices are not what they seem. $149 for a corporation? That may be true in the abstract, but if you want quick service, advice on other registration matters, or anything else, you will easily spend hundreds of dollars more. The company charges $79 extra to get you a Federal Employer I.D. Number, something you can do online with the I.R.S. for free in less than five minutes.
4. No advice on which entity is best for you. Deciding which business entity is best for you is critical, with serious tax, liability, and other legal implications. Every business has different needs, and only by speaking with a lawyer about your goals and plans can you make an informed choice about the right business type.
5. You miss out on the latest options. Business entity law is changing. Many states now offer hybrid entities like benefit corporations and flexible use corporations that are helpful to companies pursing both profits and charitable goals. Lawyers versed in their state’s laws can keep you up to date on these developments.
6. The basic packages are incomplete. Most online formation deals cover basic filings with the Secretary of State, like corporations’ articles of incorporation. But, almost every city and county government requires additional business licenses and fictitious business name registration, not to mention unemployment insurance or industry-specific laws. You can pay LegalZoom hundreds of additional dollars to take research these filings, but a live lawyer will know and advise you as part of a normal formation.
7. Generic operating agreements and bylaws. Organizational documents like corporate bylaws are the foundation of your business. Wedging your business’s needs into cookie-cutter documents will cost you later on, especially in dissolution or bankruptcy, when you are bound to terms that don’t actually give you the rights and responsibilities you want.
8. Generic legal documents. Online formation sites offer access (for a fee, of course) to generic legal letters and agreements. Like their bylaws, these documents are merely models. A real lawyer can tailor contracts and documents to your business’s needs, so you have protection that makes sense for you.
9. No advice on existing or planned policies. Many laws and regulations affect small businesses. In the employment area alone, wage and hour, discrimination, harassment, retaliation, unemployment, and workers’ compensation laws regulate how you interact with your employees, and these laws change often. LegalZoom is not equipped to review your practices to ensure you are in compliance from day one.
10. No on-going relationship. Your business is up and running and all of a sudden, a legal issue comes up. While online companies offer access to lawyers to answer your questions (for more money), you essentially get a customer service hotline. This is nothing like the value of a lawyer who already knows you and your business, can get right to the heart of the problem, and is a partner in getting you to a legal solution.

We hope you consider these downfalls before going with an online service to form your business. You want your business to be the best it can be, and there is no reason to cut corners on the legal foundations of the company itself. Good luck!

Alec Segarich represents businesses and individuals at his firm, Sager Segarich LLP in San Francisco. You can check out his blog, Partners in Overtime, here.

By Jeena Cho, San Francisco Bankruptcy Attorney

Recently, I was talking to a family law attorney who commented that most of her clients were fighting over allocation of debt instead of division of assets. One specific example she gave was a couple who had about $80,000 in credit card debt. Husband earned $120,000 per year and wife earned $50,000. They were considering selling their home so that each spouse can assume their share of the credit card debt and not have to worry about servicing the mortgage.

I asked her, “have they considered bankruptcy?” She looked at me and said, “no, because they make too much money.”

This is a common misconception among many professionals about bankruptcy – if a person earns above the “median income” or “too much income” he or she does not qualify for bankruptcy. In my example above, if the couple chose to file for bankruptcy before the divorce, they would most likely qualify for Chapter 7 bankruptcy because they can use the mortgage payments to offset their income.

If they chose to file, either jointly or separately before the divorce, they can discharge all of the credit card debt. This would obviously give them more options in terms of keeping or selling the home. It also eliminates disputes concerning how the debt will be divided.

Another example is when the couple is considering selling their home with equity to repay unsecured debt. Again, bankruptcy may make sense in this situation as well. A family unit can protect up to $100,000 in equity ($175,000 in some circumstances) through Chapter 7 bankruptcy in California. So, using my example above, if there is less than $100,000 of equity, the couple can file for Chapter 7, protect all of the equity and discharge their debt.

In the event that the couple can’t qualify for Chapter 7 bankruptcy due to too much income or too much equity, Chapter 13 may be a viable option. Chapter 13 is a partial repayment plan, which is determined by their “disposable monthly income” or “liquidation analysis.”

Chapter 13 can also be useful in dealing with missed mortgage or car payments and taxes by offering up to 5 years to “catch-up” on the payments.

Bankruptcy can be a strategy to deal with overwhelming debt, either before or after the divorce.

Did you find this post useful?

Receive new blog posts in your inbox. Your email address will never be shared.

The bankruptcy code actually categorizes each and every type of debt into a pecking order.  One of these categories is what is called a priority unsecured debt.  This means they are special.  Priority debts include taxes, criminal restitution, child support and spousal support, among others.  Generally that means they are non-dischargeable (not forgiven).  If you meet certain technical requirements, taxes are dischargeable.

Priority is much more than about dischargeability.  It is about reorganizing your financial affairs in a manner that eliminates a nondischargeable debt.  I know.  You’re probably asking “How do I eliminate something you just said I could not get rid of”?  Through Chapter 13.  I love using Chapter 13 for someone that owes a pile of debt that includes priority unsecured debts.

Let’s say you owe $15,000 in arrears for child support, $10,000 for income taxes incurred last year, and $100,000 in credit card debt.  We calculate your income and expenses and determine that you can afford to pay $500 a month for 60 months, i.e., $30,000.  Since the priority debts in this case (child support and taxes) are not dischargeable, they must be paid in full.

Here, that works out pretty well because you are going to pay the Chapter 13 trustee $500 each month.  The trustee in turn is going to take that money and distribute it to your creditor based on priority.  The child support arrears are considered highest priority and would be paid first, followed by the taxes.  Since the child support and taxes add up to $25,000, our five year, $30,000 plan will cover these priority debts.

If there is any money available after the priority debts are paid, they go to less important creditors such as general unsecured debts like your credit cards.  In this example, the credit cards would get the remaining $5,000 (5% of what you owe them) during the final months of the plan.  Since credit cards are dischargeable, the remaining $95,000 or 95% of the debt would be discharged upon completing all Chapter 13 plan payments.

Please note that the plan payment calculation I used as an example is oversimplified.  Plan payment calculations are much more sophisticated than this example, but it serves to illustrate the general goal of dealing with priority debts.

Photo courtesy of Leo Reynolds.

Offer in compromise (“OIC”) allows you to settle your tax debt for less than the full amount you owe.  Sounds good, right?  It is if you can get a good deal and afford to pay it.  I don’t know what the success rate is for obtaining an OIC, but I know from my tax attorney colleagues and clients that have tried it is quite low.  And to be frank, the fact that offers in compromise are the subject of cheesy late night commercials and even posted on cardboard signs at exit ramps does not inspire a lot of confidence on my part.  But I know good offers are accepted by the IRS on occasion.

So what does an OIC have to do with bankruptcy?  First, bankruptcy may be an alternative to an offer in compromise (or vice versa).  Second, if you need bankruptcy protection, there are times when an OIC can harm you.

Bankruptcy or Offer in Compromise?

Part of my job as a bankruptcy attorney is to suggest feasible alternatives to bankruptcy.  If you owe back taxes to the IRS or State Franchise Tax Board (FTB), do yourself a favor and look at both options.  Speak to professionals versed in bankruptcy and tax settlement.  We can get rid of taxes in bankruptcy so that you don’t have to pay any back, so long as certain criteria are met.  Read here for the three year, two year and 240 day rules in discharging taxes.

But maybe there are other complications with your bankruptcy that merit exploring alternatives.  Maybe you just don’t want to file bankruptcy (who does?) and want to look at the options.  I’m all for this.  But I am for this only if you speak with qualified professionals that give you frank and practical advice.  If you read that cardboard sign at the off ramp and count your lucky stars that you found your solution, you are not making an informed decision.  You are just hearing what you want to hear.

How an Offer in Compromise Can Harm You

Let’s say you meet the criteria for discharging your taxes in bankruptcy, but you want to try an OIC.  By applying for an OIC, the criteria for discharging taxes is changed.  Applying for an offer in compromise tolls the 240 day rule by at least 90 days.  That means you have to wait at least another three months to file bankruptcy and get the taxes discharged, i.e., now you must wait at least 330 days in total since the last assessment.  If there is no rush, then maybe it’s a non-issue.  But if there is urgency, this can be really problematic.  And note that I said “at least” 90 days.  This tolling period is the subject of some controversy, and some courts may view the tolling period as longer in certain circumstances.

And look at your total financial world.  If you have other debts, don’t get tunnel vision surrounding your taxes.  An OIC deals with taxes only.  If you pay the IRS ten cents on the dollar, that’s great.  But what if you are behind on the mortgage, swimming in credit card debt or buried under student loans?  If you are going to need bankruptcy protection anyway, don’t send a pile of money to the Internal Revue Service without first understanding your options.  If you end up filing bankruptcy and could have included your taxes, don’t throw your hard-earned dollars away.

Image courtesy of chrisinplymouth.

San Francisco bankruptcy lawyers Jeena Cho and Jeff Curl are seeing more clients with unmanageable student loan debt.  Jeff and Jeena rant about the state of student loans, and then discuss solutions both in Chapter 7, Chapter 13 bankruptcy and outside of bankruptcy.