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Q&A: Retired Guy Winding down a Business: File Bankruptcy or Settle with Creditors?

I received this inquiry from someone out-of-town, so I will not be representing them as their attorney (some information altered for privacy reasons):

Q: I retired from a public employer in New York State, and started collecting my pension this year. I am also eligible for social security. I've not paid any of my creditors in several years (credit card debt over $150,000)

I started a business several years ago and accumulated credit card debt to finance the business plus my own personal money (all the money went in as cash into the business). The business will probably close down soon. I recently found out my credit score averaged the high 600's. I know that many of the creditors wrote off my debt although I have two judgements against me. I was a paying a court marshall but stopped since I'm collecting my pension now.

Does it pay for me to file Bankruptcy after my business closes or negiotate a deal to pay off my creditiors? I know that since six years have passed and the creditors who didn't file lawsuits against me cannot since there is a statue of limitations.

In the meantime I want to set up a checking account and have my pension directly deposited into that account. After reading your article, I understand that both my pension and social security cannot be garnished. I want a bank that will flag the account to make sure that these deposits will not be touched or frozen. Can you advice me on a bank.

I know you don't practice in my area but I would appreciate your help and a referral to an attorney here.Thank you

A: You are right about one thing; I do not practice in your area. Yours is a complicated situation and would require fairly high level bankruptcy advise.

If your business-related debts exceed your non-business debts (including any home mortgage), yours would be a business case, and your income/expense analysis would not be relevant (that is to say, it wouldn't matter if your income exceeded necessary household expenses if a majority of your debt is business debt.) For the purpose of that analysis, I believe credit card debt incurred for business purposes would be considered business, debt, even though the credit card might be in your personal name.

Another factor for analysis is the tax consequences of settling with creditors at a discount. If you settle, say, a $30,000 account for $10,000, the creditor will issue a $20,000 "cancellation of debt" 1099 at the end of the year. That $20,000 would be considered income for tax purposes unless either you obtain a bankruptcy discharge that year or you are "insolvent" (debts exceed assets.) You should consult a tax professional before settling any debts.

And, of course, it makes no sense to settle any one debt if you are just going to file a bankruptcy anyway. With that level of debt, you would probably need $40,000 to $50,000 to settle all those accounts. Is it worth $50,000 to avoid a bankruptcy?

The statute of limitations on suing on a debt in New York is 6 years after default, but the statute of limitations is a tricky thing. Given the amounts involved, I would act with the assumption that all the larger accounts will be sued out before too long. It is also possible that you have been sued (perhaps at a former address) and you don't know it. You might want to check your credit report for public lawsuits. A credit report may also show accounts that have been sold off to debt buyers for pennies on the dollar.

The fact that a bank has "written off" a debt does not mean that they will not sue on it; it just means they have treated it as uncollectable for their internal profit/loss calculation for tax purposes. They - or more likely some entity they will sell the account to - can and probably will still sue it out.

Your social security deposits, and probably your pension deposits, are 'coded' so if your bank receives a judgment restraining notice they should be able to run a software program and easily identify that these are deposits of exempt funds. But you may still have problems. If you have $4,000 of pension or social security money automatically deposited in a bank, and they receive a restraining notice, they are SUPPOSE to restrain only the amount above $2,500 and they are SUPPOSE to send you a form so that you can exempt the balance above $2,500 and they are SUPPOSE to release the rest of the money unless the creditor gets a court order denying your exemption claim, but I will not guarantee that even major banks in New York are following all these requirements.

I regret I cannot refer you to a bankruptcy attorney in your area. All I can say is you need someone with extensive experience with filing bankruptcy for someone who is winding down a business. A good indicator would be if they pick up on some of the items I have mentioned, such as the tax consequences of debt settlement, or the income analysis in a business debt case.

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