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Nebraska becomes the first bankruptcy court in the nation to allow debtors to sign bankruptcy petitions digitally.

An amendment to Nebraska Rule of Bankruptcy Procedulre 9011-1 became effective February 5 allowing attorney to use services like DocuSign and SignEasy to obtain client signatures on official court pleadings.

The immediate reaction? One central Nebraska attorney emailed me this:

This is fantastic! My client signed, we were notified, I signed, all before I could even drop her hard copy in the mail (mail leaves [our small central Nebraska town] at 12:30, so timing wise we have a completed document before the mail left the building)!  I am so pumped!

Nebraska is a big state spanning 450 miles across. It commonly takes 7 to 10 days to get documents signed and returned in the mail, and that is especially vexing when a client’s wages or bank accounts are being garnished. Allowing the use of digital signatures is truly a blessing for small town debtors who do not have quick access to a lawyer, let alone a bankruptcy attorney. (12 of Nebraska’s 93 counties have no lawyers at all.)

Debtors in our largest cities also benefit by not having to take time off work to sign routine documents they have already viewed via email.

Nebraska bankruptcy attorneys are lucky to receive this historic change in court procedure. Allowing digital signatures will encourage them to make changes to documents that improve the accuracy of bankruptcy schedules since it will be so much easier to get updated signatures on the fly.

Most attorneys will continue to gather old fashioned ink signatures on paper, and there is nothing wrong with that. But for those of us who represent clients in all 93 Nebraska counties and who are in constant email contact with clients to view and discuss developments in their case, the use of digital signatures is truly welcome.

Sincere thanks is due to Judge Thomas Saladino who was willing to review the signature process and to make changes to Nebraska’s court procedures.

Image courtesy of Flickr and Charles Knowles

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Before a person can file bankruptcy they must take an approved credit counseling class and their attorney must file a Certificate proving the class was taken with the court.  The idea is to make sure that consumers are being educated about alternatives to bankruptcy, and when this new requirement was introduced in 2005 there was hope that such a class would significantly decrease the number  of bankruptcy cases being filed each year in the United Sates.

Well, it’s been more than 12 years since these classes have been required, and I have yet to meet a single person who chose not to file bankruptcy because of it. I suppose there probably is a person out there somewhere who was persuaded to avoid bankruptcy, but I can’t name a single person in the thousands of people I have met since 2005 that actually decided to not file bankruptcy because of that class.

Nevertheless, I support the concept of educating clients of each available debt solution. In fact, that is pretty much we do on the initial meeting with new clients.  I’m not here to “sell” anybody a bankruptcy case. My job is to identify possible debt solutions and then to help the client select the appropriate course of action. Ironically, the better I explain how non-bankruptcy alternatives work and how much each alternative costs, the more likely it is that a client will choose to file bankruptcy.

But I have to wonder, what would it be like if those who wanted to enroll in a credit counseling repayment plan had to speak to a bankruptcy attorney first?

I wish Jim and Francine Bostick would have spoken to me before they enrolled in a debt management plan in 2010. They owed $120,000 of credit card obligations at the time.  Jim, age 67, was in the early stages of dementia.  Jim and his wife, Francine, age 57, were persuaded by Housing and Credit Counseling Inc. of Topeka, KS, to enter into a 5-year repayment plan.  Instead of spending time with her husband in his last years of life, Francine took on a second job to make ends meet. When they completed their $2,496 monthly payment plan, the National Foundation of Credit Counseling sent out a press release touting the wonderful job done by their counselors. Not everyone thought this was such a wonderful result. See NFCC Celebrates Utter Stupidity and Puts Older Dementia Patient in Debt Management Plan.

Financial writer Liz Weston has criticized the credit counseling industry for not being forthcoming about the failure rate of credit counseling programs and for failing to point out more feasible debt solutions, like filing bankruptcy.  See Do Debt Management Plans Work?

Yet there’s one change needed that isn’t coming: Borrowers need to be told that bankruptcy could be a faster, cheaper solution.”  Liz Weston.

So what would I have advised Jim and Francine?

  • I would have closely examined a list of all their property to see if any of it would be at risk in a bankruptcy case.
  • I would have reviewed their current and past income to see if they qualified for Chapter 7 relief and, if that income was too high to qualify for Chapter 7, I would have assessed what they would have to repay each month in a Chapter 13 case.
  • I would have looked at debt settlement options and looked for possible assets they could sell to offer creditors without making monthly payments or entering bankruptcy.
  • I would have examined their lifestyle to see if they could downsize their home or sell of unnecessary assets to settle or pay the debts.
  • If their income was very high I may have recommend they look at a credit counseling repayment program, but since they had to take on 2nd jobs I doubt that was the case.
  • I would have considered doing nothing at all.  Elderly debtors living on Social Security income who own no real estate are often best off doing nothing at all.  Social Security cannot be garnished so if they could endure the collection calls and collection letters, senior debtors are often best off doing nothing at all.

But in the end, I am sure I would have recommend that they strongly consider the bankruptcy option and spend more time focusing on Jim’s health.

You see, my job is to help clients chose their optimal debt solution.  I’m not here to sell bankruptcy.

I’m fine if debt settlement was their preferred option since we handle those matters as well.  I frequently advise clients to try credit counseling programs when I think a bankruptcy will do more harm than good. I even encourage clients to manage their own debt reduction plans and to empower themselves by learning about the Dave Ramsey “debt snowball” approach.  It’s all good.  All debt solutions have their place, but when you sit down with a debt professional you should receive an unbiased opinion. That’s what it means to be a professional–to put the client’s needs first.

If credit counseling clients had to see me before they started a debt repayment program, I’m guess half would opt not to start the program.  Given that 50% to 75% of all credit counseling repayment programs fail, it appears that credit counselors are pushing clients into programs to make the agency money regardless if that is their client’s best option.

If you are trying to figure out how to get out of debt, look at all your options.  Get the best advice from the most professional folks in Nebraska.  Consider these options.

Image courtesy of Flickr and Rachel Kramer

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I meet lots of people who desperately need to file bankruptcy, but they lack the money to file. A typical Chapter 7 case costs $1,300, and paying the fee is probably the biggest stumbling block to filing a case.

A company called BK Billing provides an answer: borrow the money.  Under the BK Billing model, bankruptcy attorneys divide the Chapter 7 case into two parts: Services rendered before the bankruptcy petition is filed with the court, and services provided after the petition is filed.  In bankruptcy lingo we refer to this as pre-petition and post-petition services.

Attorneys using the BK Billing system charge clients a small amount for pre-petition services, typically from zero to $500, to get a case filed. They limit pre-petition services to filing an “emergency petition” that reports nothing more than a list of the creditors.  Then, after the case is filed with the court, the client must enter into a new fee agreement to complete the post-petition services, including the filing of asset and liability schedules, income and expense schedules, attendance of the court hearing before a Chapter 7 Trustee, etc.  BK Billing then buys the account from the attorney at 70% of face value for the the post-petition services.  Since the post-petition fee agreement is signed after the case is filed it is not discharged.

In theory, the BK Billing system makes it easier to file Chapter 7.  Instead of having to come up with $1,300 or more to file a case, they just have to pay a small initial deposit.  Bankruptcy attorneys win too since they can file more cases and increase profits.  What could go wrong?

The Ashcroft Firm of Murrieta, California recently found out how much can go wrong.  They advertised “$0 Down Same-Day Filing” bankruptcy services using the BK Billing business model and increased their monthly filings by more than five-fold.  But the US Trustee’s office recently sued the law firm for multiple counts of misrepresentation and violations of the bankruptcy code.

There are multiple problems and complications presented with the bifurcation business model for Chapter 7 services.

First, the vast majority of chapter 7 work MUST be performed before the case can be filed.  An ethical and competent chapter 7 attorney cannot just file a skeletal petition consisting of nothing more than a list of the creditors.  To file a case in such a manner is to commit gross professional malpractice.  BEFORE a case can be filed the attorney MUST review ALL of a debtor’s assets to determine if any are unprotected.  Whether these asset and exemption schedules are filed with the petition is immaterial.  The fact is, to competently represent a debtor the attorney must prepare the asset and exemption schedules.  The attorney must also prepare income and expense schedules to see if a debtor even qualifies for chapter 7 since debtors with too much disposable income cannot receive a chapter 7 discharge.  The attorney must also prepare a Means Test review prior to filing a case to see if the income received by a debtor in the preceding 6 months is too high to qualify for chapter 7. Property transfers must also be scrutinized to see if fraudulent conveyances have occurred.  Bankruptcy attorneys have an ethical and legal duty to perform a “due diligence” investigation before any case is filed, and that means that the majority of legal work must necessarily be performed prior to filing a case.  The BK Billing business model suggests that most of the work can be performed after the case is filed, and that assumption is simply false.

Second, even though there are many services that must be performed after the bankruptcy petition is filed, it is clear that such services are so essential and fundamental to the bankruptcy case that they cannot be severed or unbundled.  For example, attendance of the Trustee Meeting occurring 30 days after a case is filed is fundamental to the bankruptcy process, and attorneys cannot ethically sever their duty to attend such a hearing with a post-petition contract.  The Idaho legal ethics committee has recently issued an opinion on this topic underscoring the inherent danger of attempting to unbundle legal services in bankruptcy cases.

Another recent opinion involving BK  Billing was issued by the Idaho bankruptcy court,  In re Grimmett.  In that case the Idaho court ordered the debtor’s attorney to disgorge all fees paid under that agreement.

The concept of bifurcating chapter 7 attorney services into pre-petition and post-petition categories is inherently flawed.  Too much of the attorney services are essential and fundamental to the bankruptcy process to be severed. It is difficult to show that debtors give an informed consent to such a division of services. A better option is to file the case as a Chapter 13 proceeding and then to convert the case to Chapter 7 after the required attorneys fees have been paid pursuant to a court-approved plan.

Image courtesy of Flickr and Iqbal Osman

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Bankruptcy courts across the country have embraced the electronic filing of court pleadings since 2001. This system, known as Electronic Case Files or “ECF”, allows attorneys to sign and file documents with an electronic signature instead of using “wet ink” signatures on paper. The system is a great improvement over the older paper file system it replaced. Back in the old days we used to make five photocopies of a bankruptcy petition (one for our files, one for the Trustee, one for the US Trustee, one for the national archives, and one for the court) and then rush to the federal courthouse to file the case before a garnishment or foreclosure took place. ECF made it possible to file cases and motions 24 hours a day and almost every day of the year. It also made it possible for anyone to view court records electronically.

But even though this new electronic filing system allowed attorneys to sign documents electronically, debtors were still required to sign paper petitions with a wet ink signature. Attorneys are required to maintain this document until the case is over and typically for a few years thereafter. Upon request of the court or an interested party, the debtor’s attorney must produce the original document. Such requests are exceedingly rare (I’ve never had to produce an originally signed document since the ECF system was established in Nebraska), but in cases where a debtor has hidden assets and is subject to criminal prosecution for bankruptcy fraud, it is common for federal prosecutors to request the originally singed pleadings.

Since the ECF system was introduced in 2001 a new technology has grown in the area of Digital Signatures. A digital signature is a an electronic signature that has been secured by a process know as cryptography. Once a document is signed digitally, the contents of the document are encrypted and secured. A digital document is typically stamped with an alpha-numeric code on the top margin of every page of the document.  If the document is changed in any way the digital signature panel warns viewers that the signatures are no longer valid. Documents that have not been altered typically flash a green check-mark symbol, but altered documents commonly display a red X mark. The leading company in the digital signature industry is DocuSign.

Department of Justice prosecutors worry that individuals who commit bankruptcy fraud by failing to disclose assets, income or property transfers may attempt to avoid liability by denying that they signed a bankruptcy petition digitally. What if a debtor denies clicking on a “Sign Here” button? What if a debtor’s roommate or child clicks on the digital document? How can prosecutors be sure a debtor signs a bankruptcy petition digitally?

And this is the problem. Because the DOJ is worried that digital signatures may compromise their prosecution efforts they are throwing down a roadblock before the bankruptcy rules committee. Without DOJ acquiesce to the use of this technology, courts are reluctant to adopt this convenient signature method.

The ironic aspect of the DOJ opposition is that these same prosecutors seem to have no problem obtaining tax fraud convictions against taxpayers who file tax returns electronically. This is especially confusing since taxpayers do not enter a federal courthouse shortly after filing tax returns to testify under oath that they signed the tax return electronically, but bankruptcy debtors do just that in every case filed. How can the DOJ convict individuals for tax fraud without any sworn testimony about how a tax return was signed but not convict debtors of bankruptcy fraud when such testimony is present? Fears raised by the DOJ to digital signatures seem exaggerated and disingenuous.

THE REAL PROBLEM: ATTORNEYS ALTERING SIGNED DOCUMENTS

What the DOJ should really be concerned about is the fact that bankruptcy attorneys commonly alter bankruptcy schedules after they have been signed. Why does this occur? Because attorneys who prepare bankruptcy cases are under constant pressure to file cases to stop paycheck garnishments or home foreclosures and their clients generally have not supplied them with all the necessary tax returns, paycheck stubs, bank statements, and creditor statements to completely prepare a case prior to the signing.

Bankruptcy clients frequently are slow to provide documents to their attorney until garnishments strike. And when those garnishments hit, debtors flock to their bankruptcy attorney to file cases in a panic. Of course, signing a case under such circumstances is frequently disorganized and messy.

Under pressure to stop creditor activity an alarming number of bankruptcy attorneys have clients sign incomplete petitions or just have clients sign blank signatures pages.  After clients leave the office the attorney then completes the petition and files it electronically with the court.

This process has been documented by the United States Trustee.  In the case of In re Harmon the US Trustee found that debtor attorneys made material alteration to signed bankruptcy petitions in 82% of the files it audited.  In a report prepared by the bankruptcy practices committee, bankruptcy trustees complained that debtors are frequently asked to sign petitions they have not reviewed.

Unfortunately, there is an attorney in my district [who] does not think his clients need to review the petition, schedules, financial affairs before filing and sign these documents with a wet signature.  I have reported his practice to the US Trustee with proof.

This is the real problem the DOJ should be worried about. It is well documented in multiple cases that attorneys frequently change the contents of signed bankruptcy petitions or that they do not allow their client to preview what they sign. If a person charged with bankruptcy fraud can establish the existence of unauthorized changes made after the petition is signed the prosecutor is going to have a problem. Identifying such alterations is not difficult. One such indicator of document tampering is the bank account balance reported. If a case is signed on the 5th day of the month but the case is not filed until the 20th day yet the bank account balance reported exactly matches what was on deposit on the 20th day, it is clear the petition was altered.  (Bankruptcy attorneys frequently call clients on the day the case is filed to update the bank account balance.)

If debtors can prove that the document they signed was altered the DOJ will have a problem prosecuting bankruptcy fraud. Paper documents are inherently unsecured and unreliable. The only thing a wet ink signature on paper proves is that a debtor singed a signature page.  It is not proof that the rest of the document was not materially altered.

HOW DIGITALLY SIGNED DOCUMENTS HELP THE DOJ PROSECUTE BANKRUPTCY FRAUD

If a debtor were allowed to bankruptcy petition digitally, the DOJ would have a much easier time of prosecuting a bankruptcy fraud case.

  1. Debtors have the opportunity to review documents before they are signed.
  2. Every page of a digitally signed document is stamped with an alpha-numeric code which makes it nearly impossible to make alterations to the document after it is signed.
  3. Debtors get an immediate copy of what they sign digitally.  They have proof of what they signed and that discourages the other party to change the contents of the signed document.
  4. Digitally signed documents are encrypted and secured.  The paper schedules of a bankruptcy petition are not secured by anything and are frequently altered.
  5. Debtors must attend a meeting with the bankruptcy trustee about one month after cases are filed.  At such meetings the debtor must testify that they signed the digital documents.
  6. Digitally signed documents provide an “audit trail” showing when the document was signed, how long a debtor reviewed the document, the IP address of the signers and other information that helps prosecutors prove that a document was signed.

The fear that debtors may deny signing a document digitally is understandable.  But if courts update their local rules to add sensible safeguards to the signing process these concerns can addressed.  Such safeguards may include:

  • Requiring debtor attorneys to file a copy of the digitally signed petition with the court so that court is not dependent on the debtor’s attorney for safeguarding the petition.
  • Requiring debtor attorneys to mail a hard copy of the digital document to the debtor with a cover letter to advise of the digital signing.
  • Sending a copy of the digital document to the appointed trustee so they may ask additional questions at the court hearing about how the document was signed.
  • Require debtors to sign an Authorization form, similar to to IRS Form 8879, with a wet ink signature on paper.

Digitally signed bankruptcy petitions are coming. It is time for the bankruptcy court system to craft new procedures to balance the needs of debtor attorneys to obtain updated signatures quickly with the need of the courts and DOJ to have confidence in the integrity of the bankruptcy documents.

Image courtesy of Flickr and Ged Carroll

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Most collection lawsuits result in judgments obtained by default. A Default Judgment is awarded when the defendant fails to file a written response to the lawsuit within the required time period, typically 30 days.  Over 90% of collection lawsuits filed in Nebraska result in a default judgment.

The concept of allowing default judgments seems fair enough. If a debtor fails to respond to the lawsuit it is pretty clear they probably owe the money. The problem with default judgments, however, is that in a significant portion of these lawsuits the debtor never actually receives a copy of the complaint. There are a variety of reasons for this.  Some debtors evade service of summons by refusing to answer the door when a sheriff comes to deliver the court summons. Many debtors are simply not home when summons are delivered because they are working.  Most commonly, the debtor has moved to another address. This is a problem for a creditor because no judgment can be issued, including default judgments, until the court has proof that a debtor was served with notice of the lawsuit and has had 30 days to respond to the complaint.

So, what does a creditor do when a debtor cannot be personally served with a copy of a lawsuit? They ask the court to allow an alternative form of service call Constructive Service. This allows a creditor to serve a copy of the complaint by taping it to the debtor’s door and simultaneously sending a copy via U.S. First Class mail. Less commonly, service of summons may be accomplished by publication of notice in a local newspaper when there is no known residence.

This is the background in the case of Kountze v Domina Law Group decided by the Nebraska Court of Appeals. Domina sued Edward Kountze for unpaid legal bills totaling $103,548 in the District Court of Washington County, Nebraska. Unsure of where Kountze resided, Domina obtained a Westlaw Peoples Search that provided 15 possible addresses, 3 of which were post office boxes. Believing, incorrectly, that service of summons could not be obtained via a post office box, Domina sent a copy of his complaint to each of the 12 residential addresses by certified mail.

Domina received a signed certified mail receipt from the summons mailed to a Portland Place address in Boulder, Colorado. When no response to the lawsuit was filed, Domina moved the court to issue a default judgment. The court awarded Domina’s motion and issued a judgment against Kountze for $103,548 plus court costs of $82.50 in April 2014.

According to an affidavit signed by Kountze, he had no knowledge of the lawsuit or judgment until one of his attorneys brought it to his attention in June 2015. Kountze then filed a Complaint to vacate the default judgment.

The Washington County District Court granted the motion to vacate the default judgment because Domina failed to send summons to the PO Box in Colorado that Domina sent regular billing statements to Kountze over the past 6 years. Next, Kountze’s attorneys file a motion to dismiss the underlying collection lawsuit because Domina failed to serve the summons within 6 months of filing his lawsuit in violation of Nebraska Statute 25-217. The court granted the motion to dismiss the underlying lawsuit and Domina filed an appeal.

VACATING THE DEFAULT JUDGMENT

The District Court and the Appeals Court harped on the fact that Domina failed to send summons to the PO Box in Boulder Colorado that Domina sent regular billing statements.

Due process requires notice to be reasonably calculated to apprise the defendant of the pendency of the action and to afford him the opportunity to present his objections. . .  Indeed, “[t]he means employed must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it.

According to the appeals court, Domina failed to meet this due process standard and his efforts to apprise the debtor of the pending litigation was not reasonably calculated to provide notice because a summons was not mailed to the address Domina used to send regular billing statements–the Boulder, Colorado PO Box.

But what if Domina had actually sent summons to this post office box? Why would that make a difference?  According to the Kountze affidavit he did not reside in Colorado. Rather, according to the affidavit, Kountze lived in Florida. So how would a summons mailed to an address in a state the debtor did not reside in magically transform Domina’s efforts from unreasonably calculated to provide notice to reasonably calculated?  The court’s logic is somewhat bizarre.

To the contrary, the fact that Domina obtained a Westlaw People Search and mailed summons to 12 physical addresses throughout the United States seems to be the essence of making a reasonably calculated effort to apprise a debtor of pending litigation.

Mailing a summons to the Boulder post office box would not have provided notice to a fellow who lives in Florida.

Why does it make a difference whether the service of summons was reasonably calculated to provide notice? Isn’t the real issue here the fact that the defendant did not have actual notice, not whether plaintiff reasonably attempted to provide notice? Does non-service of summons become service when it is reasonably calculated? Apparently so.

There is no real dispute that the judgment should have been vacated since Kountze did not receive a copy of the lawsuit, but the court’s analysis is puzzling.

MOTION TO DISMISS UNDER NEBRASKA STATUTE §25-217

The real power of this decision comes from the court’s ruling that the underlying lawsuit should be dismissed under Nebraska Statute 25-217 for failure to serve summons within 6 months. The crushing impact of that ruling is that the Statute of Limitations has now probably run and Domina may never be able to sue Kountze for the unpaid debt. (Creditors generally have 4 to 5 years from the date of last payment to sue on an unpaid debt.)

This result seems patently unfair. Domina did receive a signed certified mail receipt to one of the 12 summons mailed to Kountze within the six-month requirement, although later Kountze claimed he did not sign the receipt and has no idea who actually did sign it. It would appear that is was reasonable for Domina to assume that Kountze had received actual notice of the lawsuit.

What the appeals court is not considering is that thousands of default judgments are awarded to plaintiffs in Nebraska annually when summons are mailed to addresses where the debtor no longer resides. Further, although Domina obtained a Westlaw People Search and mailed summons to 12 of 15 possible addresses, in the typical collection lawsuit such reports are rarely obtained and default judgments are normally awarded after creditors get court approval to utilize constructive service.

Is the Nebraska Court of Appeals saying that if a creditor fails to obtain a Westlaw Peoples Search and then to mail summons to ALL possible addresses on that report then the creditor has failed to provide a reasonably calculated notice to apprise the defendant of the pendency of the action?

Up to now this lawyer has assumed that a successful motion to vacate a default judgment only voided the judgment and that it was then necessary for the defendant to then file an answer to the complaint. Now it appears that, assuming service was not perfected within 6 months, the next step is to file a motion to dismiss the case under Neb. Rev. Stat. §25-217. That’s a game changer, especially when the statute of limitation has expired.  I suspect that thousands of default judgments entered in Nebraska may not only be vacated, but the underlying lawsuit may be dismissed entirely because the statute of limitations has now expired.

Image courtesy of Flickr and angela n.

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I belong to the National Association of Consumer Bankruptcy Attorneys (NACBA), the only national organization devoted exclusively to serving consumer bankruptcy attorneys and their clients. The NACBA has over 4,000 members located in all 50 states.

The NACBA is a resource I use every day in my practice. Their website is filled with useful information for attorneys and for people wanting to learn more about the bankruptcy process. Every single day I receive emails from the NACBA Listserv where attorneys ask questions and receive answers from member attorneys throughout the nation.

NACBA’s Listserv is a vital resource for me. It allows me to ask questions to the brightest consumer bankruptcy attorneys in the nation. Sometimes I ask technical questions and other times I just want an opinion about how others have approached situations I am facing.

When you really get to know an area of law and you begin to feel like you have become an “expert” in your area, a strange thing happens. You begin to realize how much you really don’t know. You begin to question the deeper meaning of a legal phrase or section of the law. When you are young you assume things mean what they appear to say, but as you get older you keep running into examples of how a term can be defined in two opposite ways. You notice examples and cases where creative lawyers read the law differently than you do. What you assumed was safe now seems dangerous. That’s when you turn to the NACBA Listserv to see if others have dealt with the issue before. It’s a great help.

The NACBA helps me break the isolation of trying to figure out everything myself.  Although I am deeply involved in our local bar association and I do frequently quiz the brightest bankruptcy minds in Nebraska, you reach a point where local attorneys have not encountered an issue before. Nebraska is a small state with a small number of bankruptcy cases filed each year.  To get the best answer sometimes you need to ask a larger audience, an audience filled with the smartest consumer attorneys in the nation.  NACBA fills that need.

NACBA does more than just sponsor a Listserv.  It also sponsors the very best educational seminars on consumer bankruptcy topics.  Last week the NACBA held its annual convention in Orlando, Florida and it conducted a 3-day seminar on the newest bankruptcy topics. The conventions spit out volumes of outlines, case law reviews, and practice guides that are delivered by nationally recognized speakers including law professors, judges, and prolific consumer attorneys.

Unfortunately, few local attorneys attend the NACBA conventions.  They are not cheap and when choosing to spend travel dollars to attend a legal seminar or to take the family to the beach, most of us opt for the later.  Most attorneys attend local educational seminars and the deciding factor in choosing a seminar is usually cost and location. (Nebraska attorneys must attend a minimum of 10 hours of continuing legal education each year.)

The good news is that NACBA seems poised to start the process of strengthening local consumer groups. According to conversations I have had with some of the national leaders, NACBA will begin to offer local Listservs in each circuit court area (Nebraska is in the 8th Circuit court system that includes Iowa, North Dakota, South Dakota, Minnesota, Arkansas, and Missouri).  Such Listservs would be a great service since all of the attorneys in this region must apply the bankruptcy decisions of the 8th Circuit Court of Appeals. In addition, such Listservs have the tendency to sponsor a greater regional community because attorneys who frequently ask and answer questions in the forum start a process of getting to know each other.

NACBA would be well served to focus its efforts on empowering local consumer attorney groups and to allow their great educational resources to be utilized in state-based educational seminars. The sharing of such resources and the creation of lawyers-helping-lawyers local Listservs would lead to increased membership and a renewed enthusiasm in consumer bankruptcy practice.

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The writing is on the wall and your company must close. Despite throwing everything you had into making the business successful, it’s not working. The funding is depleted. You have drained all your personal resources, emptied the retirement nest egg, mortgaged the home and you are out of cash. You have talked to all the right people–the bankers, the accountants, other business owners–but no one can provide the miracle cure. Payroll is due again, and your not sure where the cash will come from. It’s time to cut your losses. It’s time to close the doors, and you know it.

Somehow you miscalculated the market and you committed yourself to large fixed expenses–rent, equipment purchases, marketing campaigns–that cannot be cut quickly enough. The business is generating cash, but not profits. If you could start all over you would do it differently, but it is too late for that. It’s time to close the doors and start over, but how do you do that?

There is a right way and a wrong way to close a business.

Some owners get nervous and greedy when closing a business. They know the bottom is going to fall out so they stop paying bills, sell off or transfer equipment and stuff money in their own pockets before it all blows up. Maybe they start a new firm and transfer all the assets of the old firm to a new company in the dark of night. This would be the wrong way to close.  Like the cheating spouse who packs his bags and drains the marital bank account before his wife comes home from work leaving a note that says “sorry, I found someone else who makes me feel alive again,” you can imagine the bitter litigation that will ensue.

There is a better way to close a business, a way that leaves your dignity and honor in place.  A way that allows you a fresh start while leaving creditors unhappy but understanding and accepting of the situation.

  • Will you Start a New Business? First, you must decide whether you will continue the business under a new company in the future or if you will work for someone else as an employee. Closing a business is simpler when you plan to work as an employee in another business. In fact, taking a break from being an owner may help distill the lessons of a business failure. But if you will start a new business immediately with all the painfully acquired knowledge of how not to start a business–a wisdom and knowledge you should not undervalue–then you need to consider many things.
  • Incorporating a New Business:  If you will start a new business, it is important that you start with a clean slate.  You should not start a new business using the old corporation and existing company bank accounts. That company is probably “toxic” with liens, judgments, debts, and other baggage. The first step in starting the business over again is to incorporate a new entity with a new taxpayer identification number and with new bank accounts opened at a new bank. New business goes in the new company and old business stays in the old company. Hire an experienced business attorney if possible to organize the new company.
  • Bank Liens, SBA Loans & UCC Statements:  Chances are your old company has a bank loan that may be a Small Business Administration (SBA) guaranteed loan that is secured to all of the equipment, receivables, cash and assets of the old company. You cannot simply transfer assets subject to a bank lien (typically secured by a Security Agreement and perfected by a publicly filed UCC Financing Statement) to the new company without violating the bank’s security agreement. Violating a security agreement is a serious matter. The banks consider this fraud and it is a basis to deny a discharge of the your debts in bankruptcy. Banks can go after assets transferred to the new company improperly. Transferring assets from the old company to the new company is dangerous and should not be done without hiring a competent (i.e., “expensive”) corporate attorney. Generally, it is best to avoid transferring assets at all.
  • Chose a Closing Date:  You need to decide on a date you will close the business.  Maybe you need to finish one last work order. Maybe you feel obligated to deliver a product to a customer or to collect a big receivable first. But you do need to pick a day that you will close the doors and turn over the key to the landlord.
  • Talk to Your Banker:  Your banker is smart. They probably already know the business is struggling and they are watching your account closely. When you decide to close a business start by making an appointment to see your banker. Tell them of your decision to close. Give them a plan of action. There are accounts to collect, equipment to sell, and taxes to be paid. What you are tying to avoid here is an abrupt bank seizure of your assets and freezing of the company bank account. The most qualified person to sell the business equipment is you. Your banker knows that. Since the banker has a lien on all business equipment, they must authorize the sale of the assets. Tell the banker your plan of liquidation. In most cases, the banker is relieved if you can liquidate the assets and turn over the proceeds to the bank.  But why should you go through that effort?  What is the benefit to you? Why not just walk away from the business and let the banker liquidate? That, my friend, is why you need to chat with the banker. This is negotiable. Cut a deal with the banker to keep some of the sales proceeds so you can pay yourself and feed your family for the next month or two. The alternative is to do nothing and let the banker sell the property at an auction. Banks know they get very little at auctions. So, if you know how to liquidate the assets by selling to a competitor or customer, etc., suggest a plan of action to the banker and make the banker sign off on the plan.  You need something in writing from the banker to keep some of the sales proceeds.  If they will not commit to a plan in writing, then sell nothing and let them clean up the mess.
  • Talk to the landlord:  Chances are you are in the middle of a 5-year business lease agreement. Maybe you can no longer pay the full rent. When you know you are closing the doors, call the landlord. Be honest and explain that you are closing the business. If you need time to move the equipment out of the premises, negotiate a date you will have the property removed. Perhaps the landlord would agree to accept a lower rent while you liquidate the business. In fact, don’t ask the landlord for lower rent, just tell them you will pay half the normal rent for the next two months while you wrap up business. It is better to pay something than nothing. Most landlords will grudgingly accept lower rent if you communicate what is happening and give them an exact date you will turn over the keys.  Landlords know it takes many months to lease a property. They have bills to pay too. By giving them advance notice they can advertise the space for lease and benefit from your partial rent payments in the meantime.
  • Pay the Accountant:  When deciding what creditors to pay with the limited cash you have, always pay the accountant first to get the final tax returns filed. Maybe you stopped filing quarterly payroll tax returns because you didn’t want to receive a bill from the IRS.  Bad decision. Get those tax returns filed now. Pay the accountant in advance to complete the year-end tax returns. Importantly, when you do close the business you must check a box on the final quarterly payroll and sales tax returns to say that “this is the final return for this business.” Checking that box tells the IRS that the business is closed and no further returns are required. If you don’t check that box the IRS assumes you are still in business and will file returns for you based on the last return filed.
  • Collect the Receivables:  Once you announce that the company is closing and word spreads that the doors have closed, some customers will stop sending payment. If a big receivable is owed you may want to time the closing after the account is collected. If a bank lien is present, you should negotiate with the bank about how much of the receivables you must turn over to the bank and how much you may keep. The bank would prefer that you do the collection work and will normally agree to some type of split of the receivables.
  • Who Owns the Business Website and Telephone Number?  This is an especially important detail if you plan to continue the business in a new corporation. Did you register the website and phone under your personal name? If so, you may personally own the website and telephone number that may be used in the new company. If the company owns these rights it may be subject to the bank’s lien. Proceed with caution when transferring these to a new company.
  • Talk to the Employees:  This conversation strikes fear in business owners because the moment you tell employees that your business is closing they start to look for new jobs. Another concern is that employees talk, and I mean they talk a lot. Employees who blab about the company closing cause hurricane force rumors to spread throughout your community and competitors and customers pick up on that fast.  So, should you tell employees what is coming their way now or should you wait for that last week and make a surprise announcement? It really depends. Most employees already have a visceral notion that the business is closing, so why not be open about it and talk through the transition? That will make it easier to let nonessential employees go now and it gives employees a head start in looking for new employment. Some will leave sooner than you like, but most will stay to the last day and appreciate every work hour you can give.
  • Don’t Cheat Your Employees:  If you can’t afford to pay employees for their wages, let them go now.  Don’t keep them working only to announce that you don’t have enough cash to pay their wages now but that you will try to pay them later.  They say that Hell hath no furry like a women scorned, and cheated employees are not far behind.  If you scam them they will poke back with sharp objects.
  • What to Tell Creditors: When you can’t pay invoices on time, the phone will ring. What do you tell creditors? If bankruptcy is going to be filed, that is usually the best thing to say. When creditors hear that you are filing bankruptcy they usually stop calling and wait for the court notice.
  • Get Organized:  If filing bankruptcy is in your future, your bankruptcy attorney will need a complete list of the debts showing the name and address of each creditor, the amount owed to each creditor, tax returns for the past 2 years, bank statements for 6 months, and a Profit and Loss Statement for the past 6 months.

When you know a business must be closed, don’t go it alone.  Get expert advice now from experienced counsel.  Set an appointment to chat with an attorney who knows how to land a Boeing 747 on a two lane highway.  Click here to schedule a consultation.

Image courtesy of Flickr and timetrax23.

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The Eight Circuit Bankruptcy Appellate Panel (8th BAP) affirmed the discharge of a $27,000 of federal student loan debt despite the fact that the debtor, Sara Fern, was eligible to pay nothing in an Income Based Repayment (IBR) plan.  See In re Fern.

The debtor is a 35 year old single mom of three children, ages 3, 11 and 16.  She originally sought a degree as an accounting clerk, but after being unable to complete the required coursework she changed studies and obtained a degree as a beautician.  After graduating she attempted to start her own business and rented space in a tanning salon, but her efforts failed. For the past 6 years she has worked for the same employer earning $1,506.78 of take-home pay.  She also receives food stamps and rental assistance but does not receive any child support. Her income has been consistent and she has no savings.  The court noted that her income is not likely to improve.

Based on these factors the Department of Education opposed the debtor’s discharge request for the reason that she qualifies for a zero monthly “payment” under an Income Based Repayment plan. The 8th Circuit has previously stated that student loans should not be discharged when a debtor can afford to make a modified payment through an income-based repayment plan.  Educ. Credit Mgmt. Corp. v. Jesperson, 571 F. 3d 775(8th Cir 2009).  The DOE argued that if the monthly income-based payment would be zero, how could the loans be a hardship?

The bankruptcy appeals court disagreed.

We do not interpret Jesperson to stand for the proposition that a monthly payment obligation in the amount of zero automatically constitutes an ability to pay.

The court distinguished the Jesperson opinion from a case involving a low-income debtor who qualifies for a zero monthly student loan payment.  The Jesperson case involved an attorney who graduated with $300,000 of student loan debt. The debtor in Jesperson was young attorney in good health with no dependents, and he had the ability to substantially increase his income. Jesperson was a case where the debtor’s self-imposed conditions limited his income. In contrast, Sara Fern was working to her full potential while raising three minor children with no assistance. And, even though a zero monthly payment does not affect a debtor’s current monthly income, it does constitute an emotional burden and it causes long-term damage to the debtor’s credit rating thus affecting the cost of borrowing for car loans, etc.

Is the 8th Circuit becoming lenient on student loans? Nobody could ever argue that the conservative judges of the 8th Circuit are lenient, but they have become more skeptical of income-based repayment plans when there is no evidence that a debtor’s income will ever change.

Image courtesy of Flickr and Chuck Falzone.

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Here is the advertisement spam in today’s inbox:

Attorneys Get Started with Team India

Published by Actuit India on 20th January 2008

Hire Bankruptcy Petition Preparation Services

Since 2008 Actuit has a disciplined team of paralegals to help your bankrutpcy practices. Our digital outsourcing process make sure that team is efficient with your time and you get the best of the outsourcing experience. We make sure that you get benefited from the highest quality system design we have to offer. So that each new client experiences the best that our offshore expert paralegal has to offer

We do limit the number of clients handled by each team.

Save time to manage your bankruptcy practice, spend less & watch your practice grow while we work as your paralegal back office form New Delhi, India.

Is that how you want your bankruptcy case prepared?  Do you want your most personal financial information stored on computers located in India or China?

There is a lot of economic incentive for lawyers to outsource this service:

  • Outsourcing removes the number one overhead cost of most law firms: employee wages.
  • Outsourcing transforms paralegal costs from a fixed overhead item to a variable cost expense.
  • Outsourcing means you need less office space, so you save on rent.
  • Paralegals in India do not receive overtime.
  • Payroll tax burdens are eliminated with overseas outsourcing.  It eliminates the need to file quarterly reports with the IRS.
  • The burden of hiring and firing is eliminated.

I’ve never outsourced my paralegal staff.  I doubt I ever will.  Why not?

For starters, I have found the cost savings illusory.  Sure, I can outsource the labor cost of preparing a bankruptcy petition for maybe $100 to $150 per case.  But outsourcing has many drawbacks.

  • Quality Suffers.  Workers in India simply do not understand life in America (and we don’t fully understand their life either). When you don’t understand your client fully, how are you to ask the client questions to fully explain their financial situation to the court? Paralegals from India are probably fine technicians, but they don’t get the culture and they do not have the experience to explain and document my client’s financial situation.
  • Communication Problems.  I believe that one attorney and one paralegal should be assigned to each client. You speak to the same team every time you call our office.  You know your attorney/paralegal team and they know you. They know your kids names and your favorite football team and a million other details about your family. Bankruptcy cases can last for up to 5 years. That’s an important relationship.  Because we know you better we can serve you better.  Do you think a worker from India can match that?
  • Cost Savings are Illusory.  It may cost less to outsource case preparation, but knowledgeable workers save money in other ways. By providing one-on-one interaction with clients, they perform their job better and that leads to more client referrals. They do their job more efficiently because they have a fuller understanding of the client’s background.
  • Protecting Confidential Client Information.  Bankruptcy attorneys gather a lot of personal information, including tax returns, paycheck stubs, bank account statements, retirement statements, etc. You want that information stored on some computer in India?

It’s one thing to have a car part or a computer chip manufactured overseas.  As a consumer I benefit from the cost savings.  But when it comes to legal services, the push to outsource work is inherently risky.  When I hire a local attorney I don’t want my file sent overseas.

Sam Turco Law

Proudly Made in America

Image courtesy of Flickr and Juan Antonio F. Segal

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UNLV law professor Nancy Rapoport asks a series of questions in her latest article published in www.ConsiderChapter 13.org.

To what extent must a debtor’s attorney personally meet with the client prior to filing the petition on behalf of the client, and how meaningful should the meeting be?

More specifically, how much can the attorney safely and ethically delegate to non-lawyer staff: Intake interview? Filling out forms? Obtaining and reviewing documents like mortgages and paystubs? Telling the client that s/he needs to file chapter 7 or 13? Telling the client what the attorney’s fee will be and getting the client to sign the retainer agreement? Going over the petition and schedules with the client and getting the client’s signature? If the attorney is reviewing the non-lawyer’s work along the way but does not personally meet or talk with the client, is that adequate supervision? What if the only contact the attorney has with the client prepetition is one “facetime” or skype video call, but the non-lawyer assistant does everything else?”

Let me answer the first question very directly: An attorney must substantially communicate with a client prior to filing a bankruptcy petition.  In fact, the communication must be more than just chatting about filing a petition. It goes much deeper than that.  Should the client even consider filing bankruptcy as opposed to some other debt solution, like consumer credit counseling or debt settlement or lifestyle downsizing?

Beyond the discussion of which debt solution is best for the client, it is important for the attorney to figure out the real cause of the money problem. Financial problems are often secondary to a more general personal or family problem.  I may have two clients with identical financial problems but may recommend completely different courses of action based on their personality, education level, age, physical condition, emotional issues, etc.  You must understand the client before you can really understand their financial problem.

Having said that, I am a big believer in building high quality systems of practice.  Delegating tasks to paralegal staff is essential.  In fact, to be unable to delegate is in its own way failing the client.  If an attorney cannot return phone calls because they are too busy doing clerical tasks that could and should be delegated, that is a problem.  Building standard operating procedures driven by checklists and attorney review procedures benefits clients.  Having a paralegal staff trained to think as lawyers and who can respond to client requests quickly is appreciated by clients. Systematically training of staff on all parts of the bankruptcy process is at the core of building a great firm. Delegation is not the problem.

Bankruptcy practice is susceptible to machine-driven operation for many reasons.  Bankruptcy petitions are prepared on standardized federal forms. The process is basically the same from state to state since it is a federal law that plugs in local state exemptions that are very similar, so forming firms that operate in multiple states is common.  Most bankruptcy firms utilize the same computer software packages as well, so the work performed by an attorney or paralegal in New York is almost exactly the same as those who work in California.  Client management software and cloud computing and internet-based telephone systems increasingly allow attorneys to expand geographically. The Matrix is real.

The problem is not caused by staff delegation or the use of technology.  The problem associated with diminishing attorney-client contact is decisional.  The attorney either decides to stay connected to the client or they decide to bum off the job to staff and technology.  You decide to be accessible or you do not. You can build a system either way.

I’ve chosen to build a firm that uses every ounce of talent my staff has and to utilize technology to help us achieve our mission, but to require that each client has a personal relationship with their attorney and their paralegal.  That’s an expensive way to build a bankruptcy practice.  Good paralegals are not cheap and they tend to be sassy.  Great attorneys take years to train and they leave unless they are provided with proper compensation and a sense of self-control.

It’s a lot more profitable to build a bankruptcy mill on cheap labor and technology, but invariably those firms at some point blow up at some point.  They thrive for a while but eventually collapse.

Communicating with clients exclusively over the telephone, Skype, Facetime, or video conferencing is all fine.  The medium does not matter.  It’s the attorney’s commitment to professionalism, caring and the client that matter in the end.  Clients know when they matter. They know when calls are returned, emails are answered, and when the attorney fusses over details.

I think Nancy’s point is that attorney contact with the client must be continuous throughout the case and that some firms are limiting that contact a a quick 10-minute sales consultation.  I could not agree more.

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