Which Chapter Should Be Filed
When a client who is considering filing for bankruptcy comes into your office it is important to thoroughly examine their financial picture before making any recommendation regarding bankruptcy relief.
A checklist or routine list of questions is highly recommended. After obtaining basic contact information my first question is: Do you have any interest in any business? If the answer is yes I then want to know how the business is structured. Is it an LLC, corporation or just a dba? What type of tax entity it is? Are you the only owner or member? I then ask about the assets and liabilities of the business. Arte there secured debts? If so what is the value of the collateral? Do you owe any taxing authority money? If so for what type of tax and for what year? Is the business profitable?
Once I think I have an understanding of the business I switch to their personal financial situation. Do you own any real estate? If so how long have you lived there? How much did you pay for it? Who holds title to the property? Is it a single family home? Who holds the mortgage(s) on the property? What is the monthly payment? Does it include a tax escrow? Are you current on the payments? If not how far behind are you? Is there a foreclosure scheduled? What is the property worth in todays market?
After doing this for each parcel of real estate they own I do the same thing for their personal property. What I am trying to determine is whether or not they have any asset which may be at risk in a bankruptcy case. I ask about vehicles, boats motorcycles, guns, savings, stocks, life insurance, retirement accounts, claims against third parties, beneficial interests in trust or probate estates, jewelry, collectibles and antiques. I ask if they have sold or transferred anything to anyone in the last five years, and if they have paid any money to any relative within the last year. It is important to determine if all tax returns have been filed and if any money is owed to a taxing authority.
I then ask where they are employed and their income levels, and if they have changed within the last year. Have you ever filed bankruptcy before? The final question which might seem like the most important but often times is irrelevant is how much other money do they owe to creditors.
Once you have all of this information you should be able explain to the client the different options available and what makes the most sense for them. If the clients income is below the median income for their household size, their assets are clearly within the exemption limits, they are current on their secured debt payments, they don’t have a second mortgage which is completely underwater, and they haven’t filed within the last eight years you would probably recommend that they file a chapter 7 case.
On the other hand if I think there will be a problem with the means test, they are behind on their mortgage and are facing foreclosure, their property is not worth close to what they owe on their first mortgage and there are junior mortgages, they owe money to an ex spouse under a property settlement, they have property which would not be exempt in chapter 7 which they wish to retain, or they owe a taxing authority money I would recommend that they file a chapter 13 petition.