Bankruptcy is a sensitive subject to discuss – especially now during the COVID pandemic when unprecedented numbers of people and businesses worldwide are facing financial hardship.
An unnecessary stigma is associated with the word, “bankruptcy,” and many people have the false impression that it means failure. As children, we are taught that bankruptcy is how people lose in Wheel of Fortune and Monopoly. The reality is that bankruptcy can be the best financial decision for individuals, families and business owners.
The purpose of bankruptcy, as stated by the Supreme Court in 1934 is to give “the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”
Overall, bankruptcy is a powerful tool which can eliminate or restructure debt. For an individual or family, it means that credit card debts and personal loans are eliminated. For a business, it means that the business is shut down and its assets sold by a bankruptcy trustee to pay creditors in order of priority under the Bankruptcy Code.
Restructuring debt is more complicated. Secured debt simply means that whoever made the loan can take the collateral if the debt isn’t paid. For an individual or family, secured debt often comes in the form of a car loan and home mortgage. For a business, commercial loans can be secured by medical equipment, restaurant equipment and “all assets of the business,” which include bank accounts and accounts receivable.
If someone doesn’t pay their car note, the car can be repossessed. If someone doesn’t pay their mortgage, their home can be foreclosed upon. If a doctor who financed a piece of medical equipment doesn’t pay on that loan, that equipment can be seized.
Individuals in debt may have a reduced credit score. Consequently, when they buy a car, their interest rate will be much higher and they may have a longer term of the loan – 72 months is not unusual. Usually, the value of the car is less than what’s owed on it. Bankruptcy can restructure this secured debt. The principal amount can be reduced to what the car is worth, the interest rate can be reduced to 4.25 percent, and the term can be modified to three to five years.
By virtue of the automatic stay, bankruptcy stops foreclosures for households who have fallen behind on their mortgage. Through a three- to five-year payment plan, the arrears owed on the house can be paid back, and the mortgage also can be paid back over three to five years, instead of all at once.
If a business owns three rental properties with mortgages on each, plus one property with no mortgage that isn’t generating income, bankruptcy can extend the term of the three rental properties with debt over 20 or 30 years. It also can enable the business to sell the property with no mortgage and use the proceeds to fund operations. All of that unsecured debt, such as lines of credit, can receive pennies on the dollar.
In conclusion, bankruptcy is often seen as a last resort, but there should be no shame involved. Rather, bankruptcy is like powerful medicine that helps thousands of people save their homes and businesses, and live without having to worry about the next collection call, letter or lawsuit.
- Named to Super Lawyers 2020, Eric Steiner has helped business and consumer clients throughout Maryland discharge millions of dollars of debt. His practice focuses on commercial and consumer bankruptcy, and commercial litigation. As managing member of Steiner Law Group, LLC – a Baltimore law firm that is NGLCC certified as an LGBT-owned business, Mr. Steiner takes pride in counseling clients with compassion, empathy and understanding, while acting as a zealous advocate for them during times of difficulty. He also serves as secretary of the LGBTQ Bar Association of Maryland, a member of the Maryland LGBT Chamber of Commerce and a council member of the MSBA’s Consumer Bankruptcy Section. For more information, visit www.steinerlawgroup.com.