California Business Bankruptcy Lawyer & Attorney : Klein DeNatale Law Firm : Bakersfield, Kern County, Central California

According to data released by the Administrative Office of the U.S. Courts, and discussed in the Los Angeles Times, nearly one million bankruptcy cases were filed between July 1, 2007, and June 30, 2008--a total of 967,831 cases.  That represents a 28.9% increase over the preceding 12 month period.  And, as discussed on  the ABI web site, based on that same data, bankruptcy filings have increased 29.2% in the first half of 2008 relative to the same time period in 2007.

Leading the way in bankruptcy filings is the Ninth Circuit, in particular California.  Filings in the Ninth Circuit increased by a staggering 60.9%.  This is, of course, no surprise given the catastrophic impact that the real estate downturn has had on the California economy over the last year and a half.

Nationally, Chapter 7 filings increased by 36.7%, Chapter 13 grew by 16.9%, Chapter 11 increased by 30.6%, and Chapter 12 filings actually decreased by 18.7% when compared to the prior 12 months.

As steep as the increases appear, the total number of filings still has a long way to go to match the total amount of filings of even two years ago, as revealed by the Administrative Office's data.  For example, take a look at this spread sheet.  In the period July 1, 2005 through June 30, 2006, the total number of filings was nearly 1.5 million.  Data shows that the years prior to 2006 had similar amounts of cases initiated. 

Therefore, although the new data indicates a steep incline, the aggregate filings are still below historical levels.

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Making headlines today is the release of the Standard & Poors/Case-Shiller Home Price Indices.  According to this index, there was a nationwide decline of 15.8% in home values in May when compared to the same time last year.  In Los Angeles, as noted by the Los Angeles Times, the decline is much more distressing:

The Los Angeles area saw a 24.5% May price decline from a year ago and also hit a record low annual decrease.

As many of you remember, we endured a real estate downturn in the early to mid nineties that resulted in a similar percentage decline, but with a major difference:

The Los Angeles decline from the peak now matches the 1990's real estate downturn, but has occurred in less than two years. In the previous real estate cycle, Los Angeles area prices declined more gradually, falling 27% from 1990 to 1996 before stabilizing, according to the Case-Shiller index.

What does the rapid decline mean to the bankruptcy world?  With the present decline compressed to a period of only two years, versus seven years in the nineties, it seems inevitable that the volume consumer bankruptcy filings will increase--as has already happened--as families come under increasing financial pressure.  This pressure is on all fronts as the price of consumer goods increases and families do not have the fall back reserves of equity that they would usually rely on. 

But commercial bankruptcy is also becoming more prevalent as the real estate and oil price woes are impacting sole proprietorships and closely held businesses, along with the headline-making corporate bankruptcies.  Chapter 11 filings in the first quarter of 2008 were up 61.5% over the same period in 2007 (200 in 2008 and 123 in 2007).  While not historically record breaking when compared to the 1990s,  the quantity of Chapter 11 filings indicates an upward trend that may only now be catching up with the declining economic conditions of the country.

If you would like to go deeper into the home price data, access the historical data for this index at the Standard & Poor's website.

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As if the increase in filings under all chapter of the bankruptcy code and the heavy workload we are all experiencing weren't enough evidence of the demand for competent bankruptcy counsel, a new survey conducted by a recruiting firm and discussed in the ABA Journal confirms that fact:

A new survey has found that lawyers expect bankruptcy to be the hottest growth area for law firms this year. That’s no secret to law firm managers who are already beefing up bankruptcy practices.

One out of four lawyers surveyed said the fastest area of growth would be in bankruptcy work, exceeding the number who designated corporate governance and litigation as the sectors most likely to see increases, the Wall Street Journal reports. More than 300 lawyers from large law firms responded to the survey by Robert Half Legal.

Managers at two law firms told the newspaper they are already adding more lawyers to their bankruptcy and restructuring departments.

Gregory Milmoe, the co-leader of the corporate restructuring department at Skadden, Arps, Slate Meagher & Flom in New York City, said demand for bankruptcy services at his firm has “emphatically increased.” His group has increased by 17 lawyers and he expects three more will be added over the next two months. In January and February, the department billed 45 percent more hours than the same period last year.

Marshall Huebner, who co-chairs the bankruptcy group at Davis Polk & Wardwell, said his lawyers are “extremely busy.” The firm cross-trains lawyers and has moved 15 of them from banking and litigation work over to the bankruptcy department.

The survey results are good news for lawyers with three to five years of experience in bankruptcy practice who want to move to a new job, said Charles Volkert, executive director of Robert Half Legal.

"Hands-on experience really matters,” he told the Wall Street Journal. “Legal professionals who are able to demonstrate a proven track record in that area are in demand."

Now more than ever is a great time for bankruptcy practitioners.  Keep on truckin'!

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There is an interesting statistical tid-bit posted on the American Bankruptcy Institute web site today concerning the increase in consumer bankruptcy filings and their connection to the sub prime mortgage crisis: 

U.S. consumer bankruptcy filings increased more than 30 percent nationwide in January from the same period a year ago, according to the ABI relying on data from the National Bankruptcy Research Center (NBKRC). While the consumer filings for January increased from the previous year, the data showed that the overall January consumer filing totals were flat from December. Chapter 13 filings constituted 40.05 percent of all consumer cases in January, a slight increase over December. “With over one million more subprime adjustable-rate mortgages due to reset during 2008, the payment shock for many households could lead to higher bankruptcies this year,” said ABI Executive Director Samuel J. Gerdano. The overall consumer filing total for the 2007 calendar year (Jan. 1 – Dec. 31, 2007) reached 801,840, nearly a 40 percent increase from the 573,203 filings recorded during the similar period in 2006. Click here to view the updated monthly consumer filing charts.

With consumer cases building in volume, it is logical to conclude that Chapter 11 filings will increase, especially for businesses involved in residential construction and mortgage lenders.  One example of the fallout from the mortgage debacle also appears on the ABI web site just below the above story:

New Century Financial Corp. and its creditors filed a chapter 11 plan yesterday that does not say how the company plans to pay creditors who have filed $35 billion in claims against it, the Associated Press reported yesterday. Once one of the country's largest subprime lenders, New Century raised only about $235 million by selling assets in its bankruptcy liquidation, according to documents filed Saturday in the U.S. Bankruptcy Court in Wilmington, Del. New Century's chapter 11 plan said that negotiations are underway that could cut the amount of claims filed in the case. Creditors filed $23.7 billion in secured claims and $10.5 billion in unsecured claims. Read more.

Another example of sub prime mortgage related failures is the Chapter 11 filing on friday of Wickes Furniture as noted in the Chicago Tribune:

Wickes Furniture Co., hit by the downturn that has hit furniture retailers in the wake of the housing industry's big slump, filed Sunday for Chapter 11 bankruptcy protection.

Wickes, based in Wheeling, is owned by Sun Capital Partners Inc., a Boca Raton investment firm that specializes in leveraged buyouts and other transactions.

In its filing with the federal bankruptcy court in Wilmington, Del., Wickes declared that it has assets of between $10 million and $50 million, and estimated its liabilities at between $50 million and $100 million.

The trade magazine Furniture Today reported in mid-January that Wickes Furniture was asking suppliers to sign an agreement that would postpone the company's repayment of overdue debt until mid-2009.

When viewing these sub prime mortgage related bankruptcy news items, one can't help but get the feeling that this is just the tip of the iceberg.  Things could be become very busy very fast for all reorganization professionals.

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There are two general perceptions regarding the discharge of taxes in bankruptcy. One perception is that all taxes are discharged. The other is that no taxes are discharged. The truth lies in the middle. Several factors determine whether a tax is discharged. This post discusses the dischargeability of several common types of taxes.

The first question when considering discharge of any debt is whether the debtor is an individual. Only individuals can receive a discharge in bankruptcy. Therefore, tax debt will not be discharged if the debtor is a corporation, partnership or other business entity.

Income Taxes

Several rules must be satisfied for income tax to be discharged. First, the tax must be at least three years-old at the time of filing of the bankruptcy petition.  Second, the tax must be assessed more than 240 days before the filing of the bankruptcy petition (this period is extended under certain circumstance). Third, a tax return be filed. If the return was filed late, the late filed return must be filed at least two years before the petition date.  Finally, the tax is nondischargeable if the tax return was fraudulent.

Property Taxes

Property taxes that are more than one year-old are dischargeable. If a property tax is less than a year one, then it is nondischargable. However, there is an automatic lien against real property for delinquent property taxes. Though the tax is discharged, the lien remains attached to the property. When the property is sold, the lien must be paid.

Trust Fund Taxes

Collected or withheld taxes (“trust fund taxes”) cannot be discharged.  Trust fund taxes include: withheld employee income taxes and employee’s share of Social Security taxes. Trust fund taxes are owed by a third-party, and the debtor is required to collect and turnover the tax to a governmental agency. Unlike other types of taxes, there is not time limit affecting the dischargeability of trust fund taxes. A trust fund tax is not dischargeable regardless of how old the tax is.

Employment Taxes

If an employment tax is less than three years-old it cannot be discharged. Employment taxes are taxes an employer must pay when paying salaries, wages, or commissions and include state and federal unemployment taxes and employer’s Social Security taxes. For a debtor to receive a discharge of employment taxes, the debtor must have filed a return that was not fraudulent. As with income taxes, a late filed return must be filed at least two years before the bankruptcy petition is filed.

Excise Taxes

Excise taxes are only dischargeable if they are over three years-old. The following have been held to be excise taxes: sales taxes, estate and gift taxes, workers’ compensation premiums, and occupational taxes. User fees and penalties are not excise taxes.

Tax Penalties and Interest

As a general rule, if a tax is dischargeable, then the penalties and interest associated with that tax are dischargeable—if a tax is not dischargeable, neither are the associated penalties and interest. If a tax is nondischargeable, an associated penalty is dischargeable if the event causing the penalty occurred more than three years before the filing of the petition or the penalty is punitive rather than compensatory.

The discharge of taxes in a bankruptcy case is complex. However, the foregoing summary gives the reader a basic understanding of the dischargeability of taxes in bankruptcy and will help to dispel the myths regarding the dischargability or nondischargability of taxes in bankruptcy.

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