Bankruptcy Attorney #2: This Is Very Complicated

When the bankruptcy laws were revamped in 2005 to make it more difficult for people to file chapter 7 (liquidation) bankruptcy, many attorneys had to find work elsewhere. The second attorney I visited was struggling to keep his business afloat.

Now when I had looked at his picture in the Yellow Pages I thought he looked, well, ineffectual. But I decided not to judge the book by the cover. His ad was well written and covered all the bases I needed covering. Why not? The initial consultation is free. And then when I entered his office my first impression was that this was a mistake.

He had just moved offices, and the office I visited was a mess. He had paperwork everywhere, stacks of file folders on the floor, piles of officeness scattered randomly, and a lone computer in the middle of it all. He was dressed very casually in corderoy pants that looked like they had fit 20 pounds ago. They drooped off his hips. His sweater was equally oversized. I wondered if he had lost weight or if he was simply sloppy. No receptionist was there to greet me. And he talked slower than I would have liked. But, again, book, cover.

My hunches are pretty good. My intuition is strong. But most times I override them by the notion that I shouldn’t judge on appearances alone. That I should give others the benefit of the doubt. The benefit of the doubt. The benefit of the doubt. Say that a few times with meaning and it begins to have no meaning.

What I liked about him was that he was not pretentious. I believe he sincerely wanted to help me. The initial free half-hour meeting turned into two hours. He would suggest something, reverse himself, and then I would throw out a potential scenario. Then he’d say, “This is very complicated.” I was as confused as ever over my options.

He was willing, for about $3,200 up front, to file chapter 7 bankruptcy for me. But I still didn’t know what to do about my business. And the attorney said I couldn’t qualify for chapter 7 because of my income. He didn’t explain the means test to me. So his recommendation was that I not take any salary for several months and we file a few months down the road when I do qualify. Oh, brother!

The means test is a two-step process. The first step compares the debtor’s income to the median income in his state. If his income is lower than the median income for his family size, the test ends there. There is no presumption of abuse, and the debtor can file for Chapter 7 bankruptcy. For most Chapter 7 bankruptcy petitioners, the means test ends there. However, even when the debtor’s income exceeds the median income in his state, he may still qualify for Chapter 7 bankruptcy depending upon his expenses. Early reports indicate that fewer than 5% of potential Chapter 7 bankruptcy filers are disqualified by the means test. — www.totalbankruptcy.com

When my business closes, I will have no income. I’ll have to get a job or create another business (which I hope to do with this blog and associated content). To qualify for chapter 7, my income over the past six months must average less than $3,538 per month, the median income for Eugene. But that’s just my mortgage! I was earning much more than that.

But here’s a new wrinkle. I hired an accountant in Roseburg based on a rich man’s recommendation, and he prepared my taxes for three years. This accountant recommended I convert my business from a sole proprietorship to a C corporation, which I did. At the time I had about $103,000 in inventory.

When I moved to Eugene I hired a new accountant. He had trouble figuring out my tax returns. The numbers just didn’t jive. He was able to get to the bottom of it and correct my tax returns, and last summer he informed me that my corporation owed me about $85,000. You see, I had already paid taxes on the $103,000 inventory as a sole proprietor. When I converted to a corporation and placed that inventory with the corporation, I was essentially loaning it to the corporation! (It turns out my prior accountant had done up the loan paperwork; he just hadn’t told me about it or that the corporation owed me money. Yes, this is why we hire “professionals.” So that we can pay good money to get screwed by the best.)

All last year I could have lived off this loan money, closed the warehouse, moved into my home, paid down my debt. I would have been fine. But instead I was struggling to pay employees, warehouse, mortgage, bills, etc., and didn’t pay my payroll taxes. That’s what sunk me. (Actually, what sunk me was not moving out of the warehouse when I bought my house as I had originally intended. I stayed another year trying this, that, and the other to make my declining business that I hated more profitable. In truth, I sunk myself with help from my accountant.)

This is what happens when you don’t pay your payroll taxes: The IRS eventually assigns a collections officer to your case. They say, “You are allowed $X amount for rent or mortgage. Your mortgage exceeds that, so you have to move.” You’re allowed so much money for living expenses, and if you exceed that amount you have to make adjustments. The IRS wants their money and they get first in line. And IRS taxes survive bankruptcy.

My inventory fills a 1,100 square foot shop (which is partly why I bought this property) and over 1,000 square feet of my home, meaning the living room, hallway, and two upstairs bedrooms, not to mention two off-site storage units. It cost me at least three months’ salary for my employees in Roseburg to pack the inventory and over $5,000 to move it from Roseburg to Eugene. Now I have to move again? Where? Where’s the money coming from?

How do I pack 50 to 100 orders a day and pack and move books all by myself? How do I sell books that I’m in the process of putting into boxes and moving to this a location? I can’t. I have to take them offline, thus reducing my income. So then how do I pay the IRS, my bills, and the mover? If it took one employee three months to pack it all, how am I going to continue to run the business and move the inventory at the same time? It’s impossible. And I can’t close the business, pack the books, move them, and then reopen the business. I don’t have enough money to sustain me. So I have to close the business, which is seriously no heartbreak to me.

And I’m going to find a place that’ll take nine cats? Give up my cats to the shelter? There’s no way that’s happening. My cats will not suffer because of this mess. I’ve read that the shelters are bursting because of all the pets that have been given up by families that have lost their homes. That means a lot of animals are being euthanized. How heartbreaking. I won’t do it. I’ll live in a tent first. I’m willing to give up everything I own, just not my cats. (Mostly because they own me.) We’re family.

So I began drawing off this loan instead of taking a salary to pay the mortgage, the motor home, the car, my credit cards, my utilities ($250 to $300 a month for electric in the winter). One month I was so happy to splurge and buy a salad spinner. Now, is loan repayment considered salary and should it be taken into consideration when determining whether I qualify for chapter 7? This attorney says yes. Screwed again. Is he right?

Anyway, I wasn’t getting anywhere with this attorney. His receptionist worked at home on the day I saw him, so he was answering his phone during our meeting. He also tried printing out something from his computer for me but couldn’t figure it out. I’d say ineffectual was the correct original assessment. I called him the next week with yet another scenario, and he said he’d look into something and call me back. I never heard from him again.

“This is very complicated.”
“Yeah, that’s why I’m talking to an attorney.”

Attorney lesson #2: Bankruptcy is complicated. But for $3,200 I’ll muddle through.
Joanne’s lesson #2: Bankruptcy shouldn’t be complicated to a competent attorney. Move on.