Discharge of Debt Tag

29 Jul Bankruptcy and the MLM Distributor – Part III Income Supression Issues

Over the past few days, I have written two posts about special problems that arise when an MLM distributor seeks to file bankruptcy.  In the last post I spoke about the presumption of abuse problem that could arise if an MLM distributor filed a Chapter 7 immediately after losing his commission stream due to a change in commission schedules or the termination of a program. This post will discuss a somewhat related problem called "income suppression" that can be the basis of a trustee objection. Income suppression refers to a situation in which a debtor intentionally minimizes his cash flow for the purpose of qualifying for bankruptcy, despite his capacity and ability to earn a higher monthly income.   Bankruptcy Code Section 727(a)(5) denies a discharge to any debtor who "has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities." As a practical matter a trustee can argue that the MLM distributor has the contacts, experience and knowledge to rebuild his organization but has chosen not to because he wants to qualify for Chapter 7 and discharge thousands of dollars of credit card debts.
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25 Jul Bankruptcy and the MLM Distributor – Part II Presumption of Abuse

A few days ago, I wrote Part I of a series entitled Bankruptcy and the MLM Distributor.  In that post I described my typical MLM distributor as an entrepreneurial, motivated businessperson who worked full time on his MLM business and ran into debt problems because of a sudden or unexpected change in his compensation plan, a switch from one MLM program to another, or credit card debt arising from business expenses like travel and marketing associated with maintaining a large organization (downline). I also noted that one of my roles as a bankruptcy attorney is to evaluate risk - and specifically the risk of challenges by the trustee or creditors to the dischargeability of a specific debt or to a discharge in general.  I observed that oftentimes, MLM business and bankruptcy do not mix well.  Part II of this series will explain specifically about some of the risks associated with a bankruptcy filed by an MLM distributor and some thoughts about how to minimize those risks. Risk 1: Presumption of Abuse.  As you may know, the Bankruptcy Code provides that all consumer debtors must submit to a median income/means test to determine their eligibility for Chapter 7 and/or their unsecured creditor payment obligations in Chapter 13.  The median income/means test looks at the six month period prior to the month of filing.
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22 Jul Bankrupty and the MLM Distributor – Part I: Why there is Enhanced Risk

Over the past couple of years I have met with several potential clients who were in the MLM (multi-level-marketing) business and were looking to file (Chapter 7) bankruptcy.   Recently I spent a good 45 minutes on the phone with another potential client in the MLM business and this conversation got me thinking about the issues unique to MLM distributors. The MLM business, as you may know, involves the selling of products or services by individuals to other individuals.  Marketed as a "home based business" MLM programs allow an individual with an entrapreneurial streak to earn residual income from resellers in his "down line."  When you become a distributor you can both sell the product or service, and you can recruit and manage others to sell for you.   If others are successful in selling, you get a commission on their sales, and if your recruits are able to recruit others, you get a piece of the sales from those below you on the pyramid. Amway is perhaps the nation's best known MLM program, but there are hundreds of them, selling everything from vitamins to long distance service.  A motivated distributor with an active down line can earn a nice living with long term residuals.  On the other hand, it does take a lot of work to make an MLM business a success and some distributors end up spending a lot of time and money, while earning little or know money. The folks I generally see are serious MLM distributors who have spent months or years building and supporting a large organization (down line).  Often they have incurred thousands of dollars on credit cards for travel, advertising and conventions.  In some cases the financial crisis arises when the sponsoring company suddenly changes the terms of the distribution commission structure, or because sales have dropped off due to the economy or competition in the marketplace.
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19 Jul Can I Bankrupt My Student Loan?

Student loans are not discharged in a bankruptcy proceeding unless repayment of the loan will create an undue hardship for the debtor or the debtor's dependents. The bankruptcy code prevents student loan discharge in most cases. Many courts, including the Oregon bankruptcy court, have adopted a test formulated in 1987 by the Court of Appeals for the Second Circuit and often referred to as the "Brunner Test" to determine the dischargeability of a student loan. When the bankruptcy law was extensively revised in 1978, private student loans were freely dischargeable. However, guaranteed student loans could only be discharged if repayment created an undue hardship or if the borrower had been making payments on the loans for at least five years. The law was later changed to require payment of a student loan for seven years before discharge was possible. In 1998 the seven year payment option was eliminated. This left only undue hardship as grounds for discharge of government guaranteed student loans. The biggest problem with the undue hardship requirement was that congress did not tell the courts what undue hardship means.
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13 Jul Remodeling Contractors – Bankruptcy Considerations Part 1

Over the past couple of years I have met with several dozen remodeling contractors to discuss bankruptcy.  Like many places, the Atlanta area has experienced a downturn in home building and home renovations and building contractors of all sizes have suffered greatly. Clients and potential clients in this profession range from the one man contractor who hires subs on a per job basis to the full time homebuilder who purchases multi-acre tracts of land to build subdivisions. While each case is different, I have noticed some common problem areas.  This blog post will focus on the issues common to remodeling contractors - builders who may develop a spec house or two, but whose main business involves creating room additions or repairing existing homes. The main problem that drives independent contractors into bankruptcy arises from poor cash flow.   Building contractors often take on more than one project at a time and fail to properly estimate their costs and profit margin. I recently spoke to the owner of a web site that offers estimating training to building contractors and he confirmed my suspicions.   According to Perry Reiter of AsktheEstimator.com, there are multiple estimating processes that contractors can use to calculate a bid or estimate the cost of subcontractors.  Some of these processes require a contractor to enter detailed information into a dedicated computer program while other methods require no more than a spreadsheet like Excel.  According to Mr. Reiter, the one or two person shop gets in trouble when they fail to recognize that the cost of materials can change rapidly, as can the labor market in a particular area.  Basing an estimate on assumptions that were valid two years ago will create problems.
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