Most non-dischargeability actions against a debtor are based upon either specific allegations of fraud, under 11 U.S.C. §523(a)(2)(A-B), or a presumption of statutory fraud under 11 U.S.C. §523(a)(2)(C). While the specifics of defending against this type of action for a client is discussed in the article “What is a Non-Dischargeability Action?” (also on this website), it is important to note that any non-dischargeability action must allege sufficient facts to state a claim under one or more sections of 11 U.S.C. §523, and that even if a presumption of fraud is alleged to be applicable under 11 U.S.C. §523(a)(2)(C), that such presumption may be rebutted.

            For example, many junior attorneys often ask the managing attorney of our firm if they should settle an action on behalf of a client with a creditor, merely because such creditor claimed that the “client made luxury purchases within the 90 day period prior to filing bankruptcy.” Typically, such allegations by a creditor are made without any specific facts alleged as to which purchases made were fraudulent prior to bankruptcy, when the fraudulent charges were made, where they were made, and why such purchases might be considered “luxury goods” under 11 U.S.C. §523(a)(2)(C)(i)(I) for purposes of the statutory presumption. Many creditors attempt to make blanket claims of fraud against the debtor which lack substantive merit, thinking that most bankruptcy debtors will never challenge the action, or will settle to avoid paying legal fees and costs to the debtor’s bankruptcy lawyer.

            Accordingly, it is a fair question to ask how a bankruptcy client can afford to pay his or her bankruptcy attorney to defend a meritless non-dischargeability action against the client in a cost-effective manner. The answer is often the statutory language provided in 11 U.S.C. §523(d), which allows for bankruptcy debtors to receive reimbursement for attorney fees and costs from the creditor that sued them, at least where the debtors can prove that such action was meritless (as it often is).

            The bankruptcy code states under 11 U.S.C. §523(d) that a bankruptcy debtor can recover attorney’s fees and costs from a creditor that sued such bankruptcy debtor unsuccessfully, if the court finds that the suit filed by the creditor was not “substantially justified,” unless “special circumstances” would make the award of such fees and costs unjust. 11 U.S.C. §523(d) (2012). Essentially, to obtain an award against a creditor for fees and costs in the non-dischargeability action, the bankruptcy debtor must not only win the case, but also convince the judge that the creditor’s original suit in bankruptcy court had no merit to begin with, and that the creditor can afford to pay the legal fees and costs if awarded. While this might seem like a difficult task in most situations, in reality, most non-dischargeability actions filed are objectively meritless and often insufficient to meet federal pleading requirements. As a result, it is often a good idea for a debtor’s bankruptcy attorney to file motions to dismiss meritless actions under Federal Rules of Civil Procedure 12(b)(6), rather than answer a meritless complaint, as a victory at the motion to dismiss stage will often mean that the court views such complaint as not “substantially justified,” and legal fees and costs will be much easier to obtain. Fed. R. Civ. Proc. 12(b)(6) (2012). In essence, it is much easier to argue that a creditor’s action is not “substantially justified” when the court itself has dismissed the action for failure to state a claim multiple times, as it will be difficult for a creditor to argue that its action “was substantially justified” under 11 U.S.C. §523(d) if the court already found the action to be “insufficient to state a claim for relief.” Additionally, it is the experience of Nova Law Group that most creditors’ attorneys have no idea how to litigate a motion to dismiss adequately, and as a result, often will settle such actions in a manner favorable to the bankruptcy debtor when confronted with skilled opposition from the debtor’s bankruptcy attorney.

            In conclusion, a client should always be sure that the bankruptcy attorney representing him or her is aware of the necessary steps to effectively defend against a non-dischargeability action, as well as the cost-saving provisions of 11 U.S.C. §523(d) for recovery of attorney’s fees and costs in such an action. This provision can not only serve as a very significant cost-savings to a bankruptcy client, but also can operate as a significant deterrent to any creditor contemplating an action in bankruptcy court against the debtor. If you would like to learn more about effective representation of bankruptcy debtors in non-dischargeability actions or would like to consult with a Nova Law Group attorney regarding your individual situation, feel free to contact a bankruptcy attorney of our office and we will be happy to assist you.

            The bankruptcy code lists several factors that are analyzed by a bankruptcy court in determining whether or not a certain debt, which otherwise would be dischargeable, should be rendered non-dischargeable on the basis of the debtor’s conduct prior to the filing of the case. Most of these factors are encompassed in 11 U.S.C. §523, and include fraud, material misrepresentation, intentional malice, and certain criminal behavior. Often these allegations will be raised by a creditor of the debtor and will assert that a certain debt owed the creditor should be non-dischargeable (not eliminated in bankruptcy) on the basis that the debt was procured by fraud, misrepresentation, or some other bad faith action on the part of the debtor. For example, it is sometimes the case that credit card companies who loaned a bankruptcy debtor money within 90 days prior to the time that the bankruptcy debtor filed the case, will claim that such debtor knew that he or she was going to eliminate the credit card debt borrowed from the company, and accordingly, that such credit card debt should be non-dischargeable after the bankruptcy case ends. The credit card company often alleges that such credit card charges were incurred fraudulently, as the bankruptcy debtor represented that she would pay the credit card company back on the money borrowed, but then allegedly never actually intended to, knowing all along that she would file her subsequent bankruptcy case.

            While some bankruptcy clients might normally be concerned that several creditors might commonly challenge the dischargeability of certain debts, in practice, these suits are relatively rare. Part of the reason for the rarity of these actions in most circumstances is that “intent” to commit fraud or misrepresentation is often very difficult to prove. Accordingly, some creditors use what are called “statutory claims” to establish a case for fraud or misrepresentation against the debtor, as the bankruptcy code itself lists certain actions and/or purchases made by the debtor that are presumptively non-dischargeable. For example, using a credit card to pay a non-dischargeable tax claim makes the credit card debt used to pay on the claim non-dischargeable itself. Likewise, luxury goods of more than $600 incurred within 90 days prior to the filing of the bankruptcy case and cash advances taken of more than $875 within 70 days of the filing of the bankruptcy case are presumed non-dischargeable.

            A creditor could theoretically proceed against the debtor under 11 U.S.C. §523(a)(2)(A) or 11 U.S.C. §523(a)(2)(B) without any statutory basis for claiming that the debt owed the particular creditor is non-dischargeable, but it is often much more difficult to prove intent to defraud or misrepresent a material fact without a statutory presumption stating that a certain act of the bankruptcy debtor constitutes fraud. When a creditor does proceed without a statutory basis for alleging fraud however, a creditor usually cites to relevant case law establishing certain types of acts of the debtor that tend to indicate fraud. There is a detailed list of factors that bankruptcy courts in the 9th Circuit typically look at to determine non-dischargeability in the case of In re Dougherty, 84 B.R. 653 (9th Cir. BAP 1988). Generally, as long as the bankruptcy debtor intended no bad faith with regard to the purchases and intended to repay such debt at the time it was incurred, the creditor will tend to lose these actions where there is no statutory claim for non-dischargeability that applies to debtor’s circumstances. Nonetheless, it is very important for a bankruptcy client to inform her attorney if she has incurred substantial debt within the 90 days preceding a bankruptcy case filing, and possibly even before this time period if such debt was very substantial or out of the ordinary relative to the bankruptcy client’s typical circumstances.

            While it is possible for a creditor to allege that a specific debt owed that creditor by the debtor is non-dischargeable, it is important to note that even if such action by the creditor is successful, it is only that particular debt that becomes non-dischargeable. In other words, the debtor is still entitled to a discharge of all other dischargeable debts in the case, even if the bankruptcy court rules in a particular creditor’s favor with regard to a certain debt.

            It is the opinion of Nova Law Group that most non-dischargeability actions filed against debtors are objectively meritless and should be vigorously litigated when such actions are pursued without substantial evidence against the debtor or without statutory claims being credibly alleged. Our firm has substantial expertise in litigating these types of actions, including on appeal, and we invite prospective clients who are considering a defense against a non-dischargeability action to contact an attorney at our office, who will be happy to assist you.

Bankruptcy Practice Focus and Experience:

                The first important element to consider when hiring a bankruptcy attorney is whether the attorney focuses on bankruptcy as a core field of his or her practice, or in the alternative, is a “general practitioner” who might only try to perform an occasional bankruptcy case and who doesn’t specialize in the area.

                Zachary Tyson, managing bankruptcy attorney of Nova Law Group, thinks it is vitally important for clients to hire counsel who regularly practice in the bankruptcy field, because bankruptcy law can be very complex even for attorneys, and an attorney who doesn’t regularly practice in the field is more likely to make mistakes and be less familiar with the law in this specialized area. It has been his experience that the representation of debtors in bankruptcy is often too complex for attorneys who do not regularly practice in bankruptcy, and it is very important that the client hire an attorney who focuses in bankruptcy to handle the case, and not just “any attorney,” or one who practices in many unrelated fields of law. In essence, clients should not assume that simply because an attorney is “bar certified” or “licensed to practice law” in California, that he or she can handle the client’s bankruptcy case competently, or cost-effectively.

                In selecting a great bankruptcy attorney, there are many sources that a client may turn to in making the selection.

                First, most serious practitioners of consumer bankruptcy law are members of NACBA, which is an acronym for the National Association of Consumer Bankruptcy Attorneys. If the bankruptcy attorney you are considering is a member of this organization, then it is likely that the attorney you are reviewing considers bankruptcy to be a key focus of his or her practice, and is more likely to be familiar with the law in our field. NACBA is a professional organization that helps provide continuing legal education and professional seminars for bankruptcy attorneys, and most serious bankruptcy attorneys are members of this organization, because it helps us stay on the cutting edge of bankruptcy practice. All Nova Law Group attorneys are members of NACBA and most have been for several years.

                Second, the attorney’s website and associated information may indicate whether the attorney focuses primarily on bankruptcy practice, or whether bankruptcy is only one of many fields in which he or she focuses. When viewing the websites of some attorneys, it becomes clear that the attorney doesn’t really practice bankruptcy law at all, and therefore, should not be selected. Other factors might include whether or not the attorney has informative bankruptcy content on his or her website,  whether the attorney’s website seems credible, the representative engagements of the attorney and demonstrated experience he or she has in bankruptcy, and the organizations the bankruptcy attorney has worked for prior to entering private practice.

                Third, it is advisable to check the educational history of your attorney and what law school he or she attended, as the quality of attorney practitioners who went to law schools of high caliber and those who did not can be very substantial. These qualifications are often posted on the attorney’s website, but if not, then the client can ask the attorney he or she meets with at the initial consultation where the attorney received his or her legal training. High caliber schools like Cornell, Harvard, Stanford, UC Berkeley, Duke, University of Chicago, Columbia, and other top-tier schools are very selective in their admission standards, and as a result, attorneys who graduate from top-tier institutions tend to have significantly better critical and analytical thinking ability, oratory ability, and writing ability than attorneys trained at less selective schools. The educational credentials of all Nova Law Group bankruptcy attorneys are posted in the education section of the attorney’s personal bio on our website.

                Fourth, ask your attorney what experience he or she has in handling bankruptcy cases, and whether bankruptcy is a large portion of his or her practice. Do not make the mistake of assuming that an “older attorney” is necessarily a more “experienced attorney.” There are many older attorneys practicing in the bankruptcy field who have no clue how to successfully complete a bankruptcy case of moderate complexity, either because they never learned how to perform legal research or don’t handle complex cases, or because they only recently started handling bankruptcy cases. Please remember that not all bankruptcy attorneys are created equal—every attorney has different levels of expertise, personality, critical and analytical thinking ability, oratory ability, and willingness to work diligently toward the successful completion of the client’s case. Hiring a bankruptcy attorney is not like buying a gallon of milk at the store, and price is definitely not the only variable to consider when selecting a great bankruptcy attorney.

Bankruptcy Attorney Relational and Communication Ability:

                The second element of hiring a great bankruptcy lawyer is also often one of the most overlooked by clients—the ability of the attorney to communicate effectively with the client in a professional and respectful manner. A client should hire an attorney who is courteous, professional in appearance, and who responds to the client in a timely and efficient manner. For example, at Nova Law Group we strive to return all client communications within 24 hours, and often much sooner, but this is not common practice at most bankruptcy firms. Quite to the contrary, there are some bankruptcy attorneys practicing in the field who return client calls late (or not at all), appear to client meetings in jeans and a T-shirt, fail to communicate with clients regarding important court dates, and in some cases, fail to attend the mandatory court dates at all.

                At Nova Law Group we strive to not only return all client communications promptly (almost always within 1-24 hours), but also have extended office hours to service our clients. Nova Law Group bankruptcy attorneys schedule client meetings at the client’s convenience, and are available between 9AM and 9PM Monday through Friday, and on weekends by request to schedule meetings. We understand that often clients who are going through financial hardship cannot always take time off work to go see a bankruptcy attorney, and the bankruptcy attorneys of Nova Law Group hold extended evening and weekend hours at our offices in Mountain View, CA for this reason to accommodate our bankruptcy clientele.

                In addition to the attorney’s availability, prospective clients should consider the attorney’s personality and whether the client can envision working successfully with the attorney on the bankruptcy case. Clients should find an attorney who can communicate effectively, speaks in a respectful manner, listens to client needs and wants, and answers client questions. Great bankruptcy attorneys are often also available to meet in person with clients, and in most cases, a client should be very skeptical about hiring any attorney who refuses to meet in person, or is frequently unavailable to talk with the client, as the attorney is likely to treat the client with the same level of indifference during the bankruptcy case as well. As stated previously, Nova Law Group bankruptcy attorneys are always available to our clients, whether by phone, email, fax, or in person for a face to face consult, and are often able to book meetings within a 1-3 day timeframe based on client needs. The superior customer service that Nova Law Group bankruptcy attorneys provide our clients is one of the defining characteristics of our firm, and we believe, the reason our bankruptcy firm is rated so highly by clients and recommended so frequently through referral. Whether you are seeking a bankruptcy attorney in Mountain View, CA, or in the Greater Bay Area or San Jose Metro Area in general, feel free to give a Nova Law Group bankruptcy attorney a call and we will be happy to assist you.

Bankruptcy Attorney Location and Geographical Area of Practice:

                The third element of hiring a great bankruptcy attorney actually has nothing to do with the attorney’s credentials or personality, but rather is simply a consideration of where the bankruptcy attorney is located relative to where the client needs to file his or her bankruptcy case. The location of any prospective bankruptcy attorney is not only relevant in terms of convenience to the client and the ability of the client to meet with the attorney in person, but also is legally relevant, as bankruptcy attorneys generally only practice before certain bankruptcy courts and might not practice in the bankruptcy court where the client needs to file.

                For example, as of the time this article was written, Nova Law Group’s bankruptcy attorneys are based in Mountain View, CA, within Santa Clara County. From our offices in Mountain View, our bankruptcy attorneys practice in the bankruptcy courts in San Jose, San Francisco, and Oakland, which service clients filing in almost every county throughout the Greater Bay Area. As a result, Nova Law Group bankruptcy attorneys can service clients in almost every county in the Bay Area, but there are bankruptcy courts in other states, or in Southern California, or up in Sacramento, where our bankruptcy attorneys do not practice at this time. Even though our bankruptcy attorneys are based in Mountain View, CA, we service clients filing in Morgan Hill, San Francisco, Walnut Creek, and everywhere in between, including almost all cities throughout the Greater Bay Area region.

                It is important for all clients to note that the Bankruptcy Code itself often mandates where the client must file a bankruptcy case. For example, in the vast majority of situations, personal bankruptcy clients must file their bankruptcy case in the bankruptcy division of the bankruptcy district where they have lived for the greater part of the last 6 months prior to filing. An illustration of this rule is the following:

John Doe moved from New York, NY to Palo Alto, CA four months before he planned to file his bankruptcy case. John Doe still owns a home in New York, NY, and most of his belongings are still in New York, as he didn’t have the money to move most of his possessions to Palo Alto, CA when he moved.

John consulted a Nova Law Group bankruptcy attorney in Mountain View, CA and asked where he should file his bankruptcy case. The Nova Law Group bankruptcy attorney told John that he must file his bankruptcy case in the San Jose Division of the United States Bankruptcy Court, because the San Jose Division serves Palo Alto, CA, and he has lived in Palo Alto, CA for the greater part of the last 6 months (John has lived in Palo Alto, CA for 4 months). Consequently, John will need to file bankruptcy in the bankruptcy court which services Palo Alto, CA (in this case San Jose Division), because he has lived there for the greater part of the last 6 months—where he lived before or where his belongings are is irrelevant.

                This requirement, called “venue,” is a very important element for clients to consider when selecting a bankruptcy attorney, as it will help ensure that your prospective attorney practices in the division in which you must file your bankruptcy case.

Bankruptcy Attorney Fees and Costs:

                The fourth important element of hiring a great bankruptcy attorney is cost, but it is evaluated last in this article, because it is often the least important element of hiring a bankruptcy attorney. That is right—it is the opinion of our firm that cost is the least important element of hiring a bankruptcy attorney to handle your case. Why you might ask? The following illustration should help clarify:

Suppose you are told by a reputable heart surgeon at an established hospital that you are about to have a heart attack, and that without a complex, time intensive surgery that only a specialist can perform, you might die within a few months time. This reputable doctor then gives you medical data that substantiates his opinion regarding your condition, proves to you that the surgery is needed, and says that he believes if he performs the surgery himself that it will cost you $10,000 for him to do the work.

Imagine now that you are approached by another surgeon, who you see on “Craigslist,” or meet at the local coffee shop, or see in a tiny web advertisement with cheesy catch-phrases (etc.), and with whom you happen to share your condition when you find out he also “performs surgery” (supposedly). He listens to your story, and then states that he’ll do your entire heart surgery for $500!

                If you were in the situation described above, would you hire surgeon #1 or surgeon #2 to perform your life-saving heart surgery? I hope your selection was surgeon #1, or you’d likely end up getting a great bargain, but winding up dead on the operating table.

                I give this illustration for one very important reason—to demonstrate to clients that when it comes to hiring a bankruptcy attorney, not all bankruptcy attorneys are created equal. Hiring a lawyer is not like buying a gallon of milk—price comparisons are largely meaningless. This is because so many elements go into the cost of hiring an attorney—experience, intelligence, effective communication, geographical location, quality of work product, attentiveness to client needs, efficiency, reputation, and many others. As a result, a client should never assume that a bankruptcy attorney charging $500 for a bankruptcy case is a “great deal” compared to another bankruptcy attorney charging $2,000 for the same bankruptcy case, as it is likely that the client will get very different levels of service and quality of representation from these two attorneys.

                Over his career, Zachary Tyson, the founder and managing attorney of Nova Law Group, has seen the work product of thousands of attorneys. While there are many great bankruptcy practitioners who generate excellent work product and service the needs of clients in an exemplary manner, there are definitely a significant subset of bankruptcy attorneys who do not. Many, although not all, of the bankruptcy attorneys who perform work that is completely unacceptable or fail to meet basic professional standards, come from bankruptcy firms who offer “bargain rates” or other gimmicky sales pitches to lure in clients. Many of these ads, some of which claim that the client can hire a bankruptcy attorney for “$99,” or perform the entire case for “$799,” come from bankruptcy firms that are less than reputable or lack the expertise required to counsel the client effectively. For example, Mr. Tyson has personally witnessed attorneys of other firms, many of which represent “bargain firms,” negligently counsel their clients in all of the following ways:

1. Inform clients that their family-owned bakery business could be kept open in a Chapter 7 case, even though the business was not incorporated. Outcome: The Chapter 7 Trustee shut down the clients’ bakery business permanently and called the U.S. Marshall out to ensure its closure, depriving the attorney’s clients of their only means of support.
2. File a Chapter 7 bankruptcy case for two clients without checking the value of the clients’ home, resulting in significant non-exempt equity in the home that belonged to the Chapter 7 Trustee and the bankruptcy estate. Outcome: Chapter 7 Trustee informed shocked clients at the 341 meeting that he would likely sell their house for the benefit of the estate, ousting them from their home.
3. Attorney arrived at the 341 meeting 30 minutes late with no excuse and then proceeded to sit and look bored, while completely ignoring what the trustee or her client was saying.
4. Attorney arrived at the 341 meeting and didn’t know who the Chapter 7 Trustee was, or even what the Chapter 7 Trustee was there for at the meeting. He also didn’t know that the meeting was recorded, and seemed to have no idea regarding the purpose of the 341 hearing for his client, or how to represent his client.

                The real-life situations above are just a sample of the attorney negligence of some practitioners of other firms, and we would advise clients to use caution when dealing with any gimmicky bankruptcy firm quoting a bargain-basement rate for legal services. Never has the following old adage been more true when hiring a bankruptcy attorney: “you get what you pay for.”

                At Nova Law Group, we strive to provide exemplary service to our clients along with superior work product at an affordable price. Nova Law Group bankruptcy attorneys are neither the least expensive bankruptcy attorneys, nor the most expensive, but rather we believe we provide the best overall value to clients hiring a bankruptcy attorney. For bankruptcy law firms of our caliber and professionalism, we provide a very high-quality of legal work to the client at an affordable price. If you would like to inquire how a Nova Law Group bankruptcy attorney can service your needs in connection with a bankruptcy case, feel free to contact us and we would be happy to assist you.

The Chapter 7 Trustee is an individual person that all clients who are filing a Chapter 7 bankruptcy case will meet at the 341 hearing, which normally occurs 20-40 days after the filing of the client’s bankruptcy case. The Chapter 7 Trustee has several duties, which include, among other things: 1.) preserving the value of the estate and maximizing the amount of money given to unsecured creditors; 2.) ascertaining whether or not the debtor has hidden assets or committed other types of bankruptcy fraud; 3.) recovering monies that were improperly transferred out of the bankruptcy estate prior to filing (such as preferences or fraudulent transfers); and 4.) distributing any non-exempt assets that exist to pay creditors, if any exist at all. In a Chapter 7 bankruptcy case, the trustee will attempt to determine from the debtor’s statements and schedules, as well as any other information provided or that the trustee can find, what exempt property the debtor gets to keep through the bankruptcy case, and correspondingly, what non-exempt property the debtor must give up to pay creditors (if any). While most Chapter 7 clients do not have any non-exempt assets and get to keep all of their property through the bankruptcy case, some clients that have substantial assets might need to give up some of those assets to pay creditors, and it is the Chapter 7 Trustee’s job to liquidate these non-exempt assets and pay creditors the proceeds to the extent required by law. Many of the exemption rules regarding what property can be kept by the client through the bankruptcy case and what property must be abandoned are very complex, and the assistance of competent counsel is highly recommended to ensure that the maximum amount of client property is protected. If you have questions regarding what property of yours might be exempt in a bankruptcy proceeding, feel free to contact a Nova Law Group attorney and we will be happy to assist you.

The Chapter 13 Trustee is an individual person that all clients who are filing a Chapter 13 bankruptcy case will meet, both at the 341 hearing scheduled 20-50 days after the filing of the client’s bankruptcy case and also at other relevant court hearings regarding plan confirmation. The Chapter 13 Trustee has several duties, which generally include: 1.) ascertaining the value of the client’s exempt and non-exempt property, even though the Chapter 13 Trustee will not liquidate that property; 2.) ascertaining whether or not the debtor has committed any kind of bankruptcy fraud or transferred assets pre-bankruptcy that are disallowed; 3.) distributing available assets to creditors in connection with the payments that are proposed in the client’s bankruptcy plan; 4.) ensuring that the client’s bankruptcy plan pays creditors the proper amounts required by the bankruptcy code; and 5.) ensuring that the client is eligible for Chapter 13 bankruptcy and has secured and unsecured debt below the Chapter 13 debt limits. It is important to note that it is not the Chapter 13 Trustee’s duty to liquidate non-exempt assets and distribute them to creditors, unlike the Chapter 7 Trustee, because in Chapter 13 bankruptcy the client is able to retain even non-exempt property as long as the debtor pays equal value to creditors over the duration of the bankruptcy plan. This is one major advantage of Chapter 13 bankruptcy over Chapter 7 bankruptcy for any client with substantial non-exempt funds, as Chapter 13 allows the client to retain the property anyway by paying creditors an equivalent amount over the next 3-5 years of the Chapter 13 bankruptcy case. If you are in a situation where you think you might have substantial non-exempt assets were you to file bankruptcy, or are considering Chapter 13 bankruptcy for other reasons, feel free to contact a Nova Law Group attorney and we would be happy to service your needs.

The United States Trustee is a branch of the United States Government, closely intertwined with the Department of Justice, which has two primary duties that are performed in both Chapter 7 and Chapter 13 bankruptcy cases. These two duties are: 1.) investigate bankruptcy fraud and other misconduct by both debtors and creditors; and 2.) in Chapter 7 bankruptcy cases, determine whether any client obtaining a Chapter 7 discharge, as opposed to a Chapter 13 discharge, would constitute an abuse of bankruptcy process [11 U.S.C. §§ 707(b)(2), 707(b)(3)]. The first duty of the United States Trustee, to investigate bankruptcy fraud and other misconduct, can take many forms. The United States Trustee, for example, might look into whether or not the client has not reported any assets or liabilities on the bankruptcy statements or schedules, has not reported all of his or her income, has transferred or otherwise hidden assets from the trustee, or has lied about his or her eligibility for bankruptcy. The United States Trustee has very broad powers to look into the financial affairs of any bankruptcy debtor, and in many cases, can subpoena financial records and other documents to uncover bankruptcy fraud or misconduct. However, as long as the client is entirely truthful in all dealings with the court and with the Chapter 7 or Chapter 13 Trustees, the client will never have a problem with the United States Trustee. The one exception to the above has to do with the U.S. Trustee’s second duty, which is to investigate whether or not the use of Chapter 7 bankruptcy by a client would be an abuse of bankruptcy process, and whether that client should be forced to obtain a discharge only in Chapter 13 (or Chapter 11 in rare cases). This duty, a part of which is called evaluating the “Means Test” under 11 U.S.C. § 707(b)(2), is a method the U.S. Trustee uses to determine whether a client could actually pay back a portion of his or her debt in Chapter 13 bankruptcy, and therefore, should not be allowed to file a Chapter 7 bankruptcy. Additionally, the United States Trustee is entitled to make an equitable argument under 11 U.S.C. §707(b)(3) claiming that the debtor’s use of Chapter 7 bankruptcy is “unfair,” and constitutes an abuse of bankruptcy process, the argument being that the debtor can actually afford to pay off his or her debts. It is the experience of Nova Law Group that the United States Trustee generally only objects when the Trustee perceives that the client can actually afford to pay back a portion of his or her debts over time, and due to the overwhelming debt that most clients face going into bankruptcy, these objections are rare. Nevertheless, it is very important to seek competent legal advice in evaluating the “Means Test” and the exceptions to the “Means Test,” as there are many sections of the law regarding this matter that can be effectively raised by competent counsel and sometimes qualify even a high-income debtor for Chapter 7 bankruptcy, even where some amateur practitioners or non-lawyers wouldn’t think it possible. Nova Law Group has extensive experience advising clients regarding the Means Test and similar matters, as well as experience actively litigating such matters with the United States Trustee. If you have questions regarding whether or not you can pass the Means Test or qualify for Chapter 7 bankruptcy, feel free to contact a Nova Law Group attorney and we will be pleased to assist you.

The simple definition of a short sale is a sale in which you sell your home for less than the amount of money you owe to all of your creditors on the property. Short sales require the consent of all lenders, lien holders, and other secured creditors who you owe a debt to secured by your house, and unanimous consent must be obtained. In other words, every creditor you owe money to that is secured by your home must agree to a short sale, and on properties with multiple creditors holding liens, this can be a very challenging goal, particularly where there are multiple mortgages on the property.

For example, if you own a home that is currently worth $600,000, and you owe your first mortgage company $800,000 and your second mortgage company $200,000, then your home cannot be sold for at least the value of the debt that you owe on it. In this situation, if you wanted to sell your home, maybe because you can’t make the payments on the house, you could consider a short sale, if you could obtain the permission of every lender who loaned money to you on the property. In the situation above, to sell your home in a short sale, you would need to convince the first lender to accept only $600,000 for its claim of $800,000 on the property, and somehow obtain the approval of the second lender, even though that creditor would normally get nothing, as there is no money from the sales price that can be used to pay them if the home sells for $600,000. When a second lender does approve a short sale transaction, it is often because either the first lender or the seller has agreed to compensate them in some way, for example, by paying the second lender $5,000 to approve the short sale and waive the remaining $195,000 ($200,000-$5,000) of the second lender’s claim. If unanimous consent from all lenders is obtained, then the property can be sold through a short sale, if there is a willing buyer for the property.

It is the opinion of Nova Law Group that short sales almost never benefit the client, but there are circumstances where merely talking to lenders about a potential short sale might be. For many clients, merely discussing the possibility of a short sale with a lender might buy the client months of living in the house without the lender moving toward foreclosure, as some lenders figure that foreclosure is not cost-effective if you are willing to sell your home to a qualified buyer anyway. This can benefit a client, because it basically means that while your realtor or the lender attempts to find a buyer, you may get to live in the house free of charge, possibly for months or even years. This is particularly true where real estate has dropped significantly, because there may not be many buyers looking to purchase property and it may take a long time for the lender or your realtor to find a buyer, giving you more time in your home. This is of course only true if your lender is willing to stop all foreclosure proceedings during the negotiation of the short sale. Without this, there is really no benefit to the client in talking with them.

While talking with a lender about a short sale can sometimes be beneficial to a client for the reasons stated above, actually completing a short sale is rarely, if ever, a good idea. While the list of reasons why a short sale is generally a terrible option for clients is too large and complex to put in one blog post, some of the biggest reasons are discussed below.

First, when you complete a short sale, you often lose the home right away, or within about a month of the time the transaction is completed. Losing the home quickly in a short sale to a buyer means that you can’t live in the property free of charge, for months or even years on end, because you have voluntarily given it up. For example, if you agree with a lender to do a short sale, and the lender finds a buyer within 2 weeks for your home at a tremendously reduced price, then you might need to leave your home in a total of 6 weeks or so, when the deal closes and the right to possession of the property is transferred. In contrast, if you were to simply do nothing at all and let the lender evict you, you would get a minimum of 90-180 days in your home during the notice of default period (depending on the applicability of Cal. Civ. Code Sections 2923.52, 2923.53), and then another 20 days during the notice of sale period, resulting in a total time in your home of 4-7 months. Additionally, it often takes the foreclosure department of a bank a lot of time to get its act together and actually commence foreclosure proceedings, meaning additional time living in your home free of charge. As a result, it is almost never a good idea to effectuate a short sale on your home, because it deprives you of the ability to live in your house for many months or years free of charge, allowing you to save a lot of money for a subsequent move or other purposes.

Second, it is sometimes the case that a lender will sue you after selling your home in a short sale, for the amount of the difference between the money you owed them and the amount they received in the short sale for the property. This occurs regularly, even in situations where the lender can’t legally sue you, because the lender hopes that you’ll be too broke to hire an attorney to defend your rights, and that they will get away with obtaining a judgment against you for the deficiency as a result. Some deficiency judgments can be for several hundred thousand dollars, and while a short sale does not ensure that you won’t be held responsible for a deficiency judgment, bankruptcy almost always does. Additionally, don’t simply take the lender’s word that they won’t sue you for a deficiency judgment after completing a short sale, as many lenders are not honest with their former clients in this regard. All short sale agreements should be reviewed by a competent attorney to ensure that there is no liability on the client’s part after the short sale. However, it is the opinion of Nova Law Group that a short sale should never be done at all.

Third, many people consider a short sale even on a home they would like to keep, simply because they can’t afford the full payment on the home, or can’t afford to bring the back payments (arrearage) current. At Nova Law Group, we encourage our clients to evaluate whether a bankruptcy alternative might be a more powerful resolution to keeping a client’s home or resolving the debt, instead of completing a short sale that may be completely unnecessary. For example, it is possible in a Chapter 13 bankruptcy to force a secured lender to accept small monthly payments for the arrearage on your house, instead of a lump-sum payment as the lender often demands. In a hypothetical situation where you owe $60,000 in back payments (arrearage) on your home, you might be able to force the lender to accept $1,000 per month over 5 years, instead of all $60,000 upfront, and keep your home instead of selling it. However, this strategy requires that the client be able to afford to make not only the small arrears payments each month, but also the full mortgage payment as well, although other creditors often do not need to be paid (like credit card debt and other unsecured debt). At the same time, making up the arrears is not the only way bankruptcy offers vastly more options to keep your home relative to a short sale, which often quickly disposes of it. For example, in a Chapter 13 bankruptcy it is sometimes possible to permanently remove a junior lien, like a 2nd, 3rd, or 4th mortgage from your home permanently, which often means you never need to pay on the loan ever again. This allows some people who can afford the first mortgage, but not the second or any subsequent mortgage, to strip those liens permanently off the property and keep their home in the process.

In essence, bankruptcy offers many opportunities that simply don’t exist in a short sale to either keep your home, or to live in your home free of charge for as long as possible, saving money in the process. If you are in a position where you are facing foreclosure, Nova Law Group encourages you to consider bankruptcy options in addition to options regarding a short sale, as it is our opinion that bankruptcy is generally a far superior alternative. Although it may sometimes benefit a client to “talk” about a short sale with a lender, it almost never makes sense to actually complete a short sale transaction, and at Nova Law Group we advise our clients accordingly. If you would like to explore bankruptcy options as they might apply to your individual situation, a Nova Law Group attorney would be happy to assist you.

            The purpose of this document is to provide a demonstration of merely some of the myriad ways in which the California High-Speed Rail Authority’s (“CHSRA’s”) revised business plan fails to comply with AB 3034. The CHSRA is required to demonstrate compliance with AB 3034 to proceed with the project, and both the “Peer Review Committee” established by AB 3034 and the Senate Transportation and Housing Budget Sub-Committee are committees responsible for ensuring compliance with AB 3034. These “watchdog” committees function appropriately as a check on the compliance (or lack thereof) of the CHSRA’s business plan with AB 3034 and other applicable California law, and have the right to deny funding requests made by the CHSRA should this compliance not be demonstrated.

            It is the position of the author of this article that the CHSRA’s revised business plan has not demonstrated compliance with AB 3034, and that further funding requests should be restricted or denied until the Authority complies with the statute and other applicable law.

LEGAL ANALYSIS

• THE REVISED BUSINESS PLAN FAILS TO DEMONSTRATE THAT A MINIMUM OF 50% OF ALL FUNDS USED TO CONSTRUCT ANY INDIVIDUAL RAIL CORRIDOR OR SEGMENT WILL BE OBTAINABLE FROM NON-STATE FUND SOURCES.

The AB 3034 amendments to the California Streets & Highways Code require that at least 50% of the construction cost of each corridor or usable segment thereof come from sources other than California state bond funds.

“Proceeds of bonds described in paragraph (1) of subdivision (b) of Section 2704.04 shall not be used for more than 50% of the total cost of construction of each corridor or usable segment thereof of the high-speed train system, except for bond proceeds used for purposes of subdivision (g).” Cal. Sts. & High. Code § 2704.08(a) (2010). The California legislature makes clear that the remainder of funding to build the high-speed rail network is to come from federal, local, and private investment, when it states: “the authority shall pursue and obtain other private and public funds, including, but not limited to, federal funds, funds from revenue bonds, and local funds, to augment the proceeds of this chapter. Cal. Sts. & High. Code § 2704.07.

Furthermore, the CHSRA is required to demonstrate that the construction cost of any rail corridor or usable segment thereof is completely funded before any state bond funds are released. This means that the CHSRA must obtain funding commitments from federal, local, and private parties, before it can utilize any of the state bond funds for construction. AB 3034 states in relevant part: “Prior to committing any proceeds of bonds described in paragraph (1) of subdivision (b) of Section 2704.04 for expenditure for construction and real property and equipment acquisition on each corridor . . . the authority shall have approved and concurrently submitted to the Director of Finance and the Chairperson of the Joint Legislative Budget Committee the following: (1) a detailed funding plan for that corridor or usable segment thereof that (A) identifies the corridor or usable segment thereof, and the estimated full cost of constructing the corridor or usable segment thereof, (B) identifies the sources of all funds to be used and anticipates time of receipt thereof based on offered commitments by private parties (emphasis added), and authorizations, allocations, or other assurances received from governmental agencies.” § 2704.08(d).

            Even a cursory review of the CHSRA’s revised business plan indicates a substantial failure to comply with the requirements of AB 3034.

            First, the CHSRA states that it will receive $4-5 billion from local governments to fund construction of the high-speed rail system. (CHSRA Business Plan, p. 99). This estimate is entirely unsubstantiated in the plan, even though the CHSRA is required to identify the sources of all funds to be used and anticipated time of receipt by presenting offered authorizations, allocations, or other assurances received from governmental entities. (CHSRA Business Plan, p. 99); Cal. Sts. & High. Code § 2704.08(d). Not only is the claim regarding local funding unsupported by any evidence, but the amount of projected funding is also highly-suspect, given the CHSRA’s description of statements made by local governments depicted in the business plan. For example, the CHSRA states in the business plan that Orange County, one of the largest counties in all of California, has signed an MOU committing $7 million to construction of the high-speed rail line through the Orange County Transportation Authority. (CHSRA Business Plan, p. 100). There are 58 total counties in California, of which only a fraction are served by the proposed high-speed rail line. Additionally, given that Orange County is one of the larger and wealthier California counties, it stands to reason that $7 million is likely to be one of the larger amounts contributed by any California county to high-speed rail. Consequently, for purposes of this analysis, I will generously assume that half of all California counties will subsidize the high-speed rail project, and that all of the 29 counties somehow afford to donate the same amount that Orange County has provided, an extremely generous assumption given the lower wealth and population of many other counties. Even under the extremely generous assumptions described above, the CHSRA would only stand to receive a total of $203 million from local governments for high-speed rail, a far cry from the $4-5 billion they expect to receive for the project. This enormous discrepancy between the expectation of local funding the CHSRA has indicated in the business plan and the actual likely subsidy from local governments makes it probable that the CHSRA will have to get most of the $4-5 billion projected from other sources, or lack adequate funding to complete the project.

            Second, the CHSRA states that it expects to receive $17-19 billion from the federal government to fund the construction of the high-speed rail system. (CHSRA Business Plan, p. 94). However, it is entirely unclear how the CHSRA intends to receive $17-19 billion from the federal government when this amount is more than the entirety of all federal funding to be distributed throughout the nation. As the CHSRA accurately states in other parts of its own business plan, the American Recovery and Reinvestment Act only provides for $8 billion total for high-speed rail systems throughout the entire country, with an additional $5 billion total over 5 years ($1bil./year), for a total of $13 billion. (CHSRA Business Plan, p. 96). These are amounts to be distributed to projects in all states by the federal government, and as a result, it is likely that California will only receive a portion of this available funding for its project. Indeed, the CHSRA seems to recognize this fact when it projects that it will receive only $6 billion of the initial ARRA funding, and that only $4.7 billion will be devoted to the high-speed rail system. (CHSRA Business Plan, p. 96). Consequently, if we assume that the CHSRA receives the same portion of future ARRA funding that it projects to receive of the initial ARRA funding, then the CHSRA stands to receive only $4.7 billion plus (.75)($5 billion), totaling only $8.45 billion from the ARRA. With regard to funding under other federal programs, the CHSRA has provided no evidence or other indication that it has applied for, or been granted, financing under any of the other federal programs. (CHSRA Business Plan, p. 94-100). AB 3034 requires that these funding commitments be described with great specificity as to the amounts, sources, and timing of disbursements of funds, and the CHSRA business plan fails to provide sufficient data to comply with the statute. Cal. Sts. & High. Code § 2704.08(d). As a result, the CHSRA’s claim that $17-19 billion of the construction cost of the high-speed rail project will come from federal funds is highly-suspect, and more clarity is needed on this point before state bond funds are released under the premise that at least 50% of the cost of any corridor will come from non-state bond fund sources.

            Third, the CHSRA states that it expects to receive $10-12 billion from private investment sources, even though the CHSRA presents no evidence that it has obtained any funding commitment or letter of intent whatsoever from any of the financial firms it claims have interest in the project. See generally, CHSRA RFEI, CHSRA Business Plan. Furthermore, it seems that the CHSRA has only found a total of 5 financial institutions interested in providing funding for the project, on terms undetermined and in amounts unstated. (CHSRA RFEI, p. 3). In fact, the CHSRA states that even among the 5 financial institutions it claims are interested in the project, that many have “specific concerns centered on the extent to which private investment is to be repaid through ridership revenues.” (CHSRA Business Plan, p. 105). These concerns are likely justified, as for an unexplained reason, the CHSRA has predicted that between the years 2000 and 2030 the population will increase 42%, but rail traffic will supposedly increase five-fold, by 400%. (CHSRA Business Plan, p. 68). Given that this prediction of future demand for rail goes to the heart of the profit assumptions by the CHSRA to pay on private debt, it is a dubious assumption that the high-speed rail network will obtain private funding for the project, and the CHSRA has demonstrated no evidence to the contrary. Combined with the likely inadequate local and federal funding on the project, the lack of private investment will cause the CHSRA to have insufficient funding to complete the proposed segments of the project, and render compliance with AB 3034 improbable.

• THE REVISED BUSINESS PLAN FAILS TO PROVIDE FUNDING FOR PUBLIC OUTREACH TO REMEDY THE CHSRA’S CURRENTLY INADEQUATE OUTREACH PROGRAMS.

The CHSRA states in the revised business plan that “public outreach” is critical to the scoping and alternatives analysis required by law. (CHSRA Business Plan, p. 28-29). This purported goal by the CHSRA is consistent with the recommendations of the Senate Budget Sub-Committee, including specific comments by Senators Simitian and Lowenthal, made to ensure a public discourse of important issues regarding the project.

Given the purported commitment of the CHSRA to “public outreach,” and the explicit advice of the Senate to engage in enhanced public outreach, it is shocking that the revised business plan has no budget for “outreach” whatsoever. (CHSRA Business Plan, p. 8). In fact, according to the CHSRA’s own statement of funds expended, the CHSRA has expended nothing on “outreach” since 2006, when it expended only $50,000. (CHSRA Business Plan, p. 8). There are two logical deductions to be taken from the CHSRA’s failure to list any outreach expenditures in the business plan, but both demonstrate the inadequacy of the CHSRA’s plan. First, it is possible that no expenditures were listed in the chart when expenditures were in fact made. However, this possibility would then seem to indicate that all of the data in the chart should be suspect, as potentially incorrect. Second, it is possible that the CHSRA spent no funds on “public outreach” over the last 4 years, or such inconsequential funds that the failure to state this funding should constitute an admission that very little outreach funding existed. Under either assumption, the CHSRA’s lack of funding for public outreach is a material concern of many residents, who feel disenfranchised with the process.

Furthermore, although the CHSRA states that “statewide and regional outreach efforts have always included significant steps to engage, inform, and take input from California’s diverse communities,” and that “Multi-lingual printed materials and legal advertising have been a compulsory part of the Authority’s outreach,” the author can find no link whatsoever from the main page of the CHSRA’s website to receive documentation in any other language than English. (CHSRA Business Plan, p. 56; CHSRA’s website at www.cahighspeedrail.ca.gov). Additionally, the author performed a search for over ten minutes on the CHSRA’s website, individually clicking on each major section of the site, which requires English-language proficiency, and could require only one single promotional video in one language (Spanish), that provided any information regarding the CHSRA’s plan. This video also contained almost no detailed information regarding the project, and appeared to be only a marketing video for high-speed rail, clearly inadequate to reach an educated disposition regarding the costs and benefits of the project. The CHSRA should be required to provide meaningful data and documents in other languages, so that an educated decision can be reached among non-english speaking California residents.

• THE REVISED BUSINESS PLAN FAILS TO PROVIDE PLAUSIBLE RIDERSHIP FORECASTS AS REQUIRED BY AB 3034.

The CHSRA is required by AB 3034 to provide accurate ridership forecasts and projected operating revenue for the high-speed rail project before state bond funds are released. Cal. Sts. & High. Code § 2704.08(c)(2)(E). While the CHSRA revised business plan attempts to provide such figures, these estimates are totally implausible and should be considered highly-suspect without further verification.

The CHSRA claims that “the [ridership] forecasts assume that high-speed train travelers will not face airport-style security checks and processing time.” (CHSRA Business Plan, p. 69). This tremendous assumption by the CHSRA results in one of two substantial problems. If the CHSRA is correct, and no substantial security is implemented on high-speed trains, even those traveling at 200+ miles per hour through densely populated areas, then it would seem that substantial security risks would arise, particularly with regard to terrorism or other sabotage of the rail network. A high-speed train traveling through densely populated areas would likely be a prime target for any terrorist, and any likely “incident” would cause billions in damage. This fact will not be lost on the Department of Homeland Security, and it is likely that any high-speed rail network of the kind planned in California would require substantial security, delaying travel times for high-speed trains between destinations and increasing cost. In fact, given that high-speed rail is a vastly slower mode of transportation than air travel, the only advantage of traveling on a high-speed train from a consumer perspective is, perhaps ironically, the lack of security, which for reasons aforementioned, is likely to be promptly required. Given the likelihood that security on the high-speed rail network will be as extensive as airport security, there are no substantial comparative advantages from a consumer perspective to utilizing a high-speed train over air travel. Therefore, it is likely that the CHSRA’s estimates of ridership, and the corresponding estimates of revenue, are grossly overstated.

CONCLUSION

            While the CHSRA’s revised business plan provides somewhat greater detail than its predecessor, substantial work must be done for the CHSRA to prove compliance with AB 3034. Until the requisite statutory showing is made, the CHSRA should be prohibited from tapping state bond funds for construction of the high-speed rail project. This compliance with AB 3034 must be demanded of the CHSRA to ensure that the intent of the Californians who voted for the project be realized, and that if the high-speed rail project is to be “done,” that the project is “done right.”

The first and most common method of contesting a foreclosure action against the borrower’s primary residence is to bring a lawsuit against the lender for violations of the Truth in Lending Act and its related provisions. While in some cases the lender may have complied with the provisions of the Act, in many cases, the lender has failed to comply with one or more provisions of federal law. Certain provisions allow for rescission of the note and deed of trust, and when claimed as a defense to a foreclosure action, can result in a temporary or permanent stop to a foreclosure action if a good faith claim can be made against the lender. Common TILA violations are too numerous to count, but some important examples include: interest rates above the maximum cap defined by statute, inaccurate disclosures on the Truth in Lending Statement, failure to give two copies of the right of rescission to the borrowers after the loan closing, negative amortization provisions in some instances on home equity loans, and non-disclosure of finance charges or hidden fees. While not every loan will state a good faith cause of action for a TILA violation, there are many situations in which the lender has made material errors in the loan documentation, and these errors can sometimes form the basis of a good faith cause of action for a TILA violation and a valid foreclosure defense.

A second common method to contest a foreclosure action is to assert a violation of California state law, and in particular, a violation of the foreclosure statutes California recently passed to combat the deleterious effects of the foreclosure crisis. For example, California Civil Code Section 2923.52 requires lenders in most instances to discuss loan modification options with borrowers and then wait 3 full months before posting a notice of sale on the property. Unfortunately, many lenders refuse to comply with the statute or maintain in bad faith that the property is non-owner occupied, and therefore, that they don’t need to comply with the statute. Often people have to sue the lender or otherwise block the foreclosure action to obtain relief as California law requires, but this relief is available in some instances.

A third common method to contest a foreclosure action is to assert a violation of California Civil Code Section 2923.5, which requires lenders to take steps to offer borrowers financial options before a notice of default is posted on the property. Sometimes lenders will proceed to post a notice of default on the principal residence of the borrower without ever contacting the borrower to work out options, and this kind of behavior by the lender is illegal. Violations of Section 2923.5 can sometimes offer borrowers a basis to challenge the foreclosure action and delay foreclosure until the lender complies with the California law.

Not all of the above options apply to all clients or all situations, but a Nova Law Group attorney would be happy to assist you in determining which options might apply to your individual situation and if any good faith claims can be made against the lender in your circumstance.

Chapter 11 is the corporate reorganization chapter of the bankruptcy code and is designed to allow for the continued operation of the debtor’s business when this is needed to maximize its value for creditors. Chapter 11 typically allows the debtor to remain in control of its business as the “debtor in possession,” although it must get approval from the bankruptcy court to carry out most major transactions after filing. Many corporate debtors are able to emerge from a Chapter 11 bankruptcy months or years after filing and operate as a viable business once more.

Within a few months of the filing of a Chapter 11 bankruptcy petition, the debtor in possession typically proposes a corporate reorganization plan to creditors and the court for confirmation. Interested creditors vote on the plan, and if sufficient votes are present, the plan can be confirmed by the bankruptcy court. Debtors in possession normally have a time period in which they have the exclusive right to propose a corporate reorganization plan, often 120 days. After that time, creditors may also propose corporate reorganization plans for possible confirmation. When confirmed, the plan will dictate the elements of the corporate reorganization process. If a debtor in possession is no longer able to comply with the plan, the plan can sometimes be modified, or the debtor can convert the Chapter 11 restructuring into a Chapter 7 liquidation bankruptcy.

Filing Chapter 11 bankruptcy has many advantages for the debtor in possession and its management. The debtor in possession is allowed to gain access to below-market rate financing through the ability to grant new debt higher priority than other similar pre-existing debt. In addition, the bankruptcy court can allow the debtor to cancel contracts and other executory obligations if the termination of these obligations would benefit the bankruptcy estate. Generally the management team of the debtor in possession stays on board to manage the company, as they are typically the most familiar with the debtor’s business operations.

If you own or manage a business and are considering a Chapter 11 bankruptcy filing, Nova Law Group is pleased to offer you a free consultation to discuss the legal needs of your organization.

Chapter 7 bankruptcy is an appropriate solution to permanently end the operations of a distressed business. Chapter 7 is not an appropriate solution where the board or officers decide that the business should be operated for an extended period of time to achieve maximum monetization of business assets for creditors. If continued operations are essential to maintaining the value of the business assets, then a Chapter 11 bankruptcy filing or a General Assignment for the Benefit of Creditors are the more appropriate contexts to resolve the distressed financial situation of the business.

When a Chapter 7 corporate bankruptcy case is filed by the debtor, a Chapter 7 trustee is appointed by the court to liquidate the debtor company. The court-appointed trustee may, but need not, hire any professionals or employees of the company to wind-down the debtor’s business. While Chapter 7 bankruptcy trustees generally are familiar with winding down company operations, they are not always experts in the particular aspects of the debtor’s business. This frequent lack of expertise relevant to the business of the specific debtor can lead to inefficiency in the administration of the debtor’s assets and difficulty liquidating the estate within a time frame that provides maximal monetization of a debtor’s assets for creditors. Consequently, where the best monetization of the debtor’s business can be obtained by a trustee with specific expertise in the debtor’s industry, Nova Law Group recommends considering a General Assignment for the Benefit of Creditors, where the debtor selects the assignee (role of trustee) itself.