Kentucky Bankruptcy Lawyers Blog

DON'T BANK WITH YOUR CREDITORS

Most people think that when they deposit their money in the bank or credit union, either in a checking or savings account, that the money is sitting in a lock box with their name on it, readily accessible at any time. The reality, however, is somewhat different. When you deposit your money in the bank, the cash does not in fact sit in a lock box with your name on it. The bank uses that money to make loans to other customers. After all, that's how the bank makes money, loaning it out and charging interest. Where do they get the money to do that? From you of course, with the money you have deposited.

So let's say for example that you deposit $1,000.00 in your checking account at Trusty Bank. Let's assume that the checking account pays .25 interest. You have in effect loaned the bank $1,000.00 at a very low interest rate. They will then use your money to make a loan to someone else at a much higher interest rate. The difference between the interest rate they pay you and the interest rate they charge on the money they loan out (your money) is their profit.

Now let's assume that you go to the bank and borrow $1,000.00 and agree to pay the loan back at $100.00 per month. The way the bank looks at it, it's a wash. They owe you $1,000.00 for the money on deposit and you owe them $1,000.00. So if you ever default on your obligation to pay back the loan, the bank can simply retain the $1,000.00 on deposit and use that money to pay themselves back on the money you have borrowed. This is referred to as the right of set-off.

This can be rather devastating in some situations. For if you miss even a single payment, the bank may have the right to "accelerate" the loan, which means declare the entire amount immediately due and payable. This means that any money you have on deposit can be immediately taken to pay back the full amount of the loan.

It is important to note that this right of set-off is only available if your funds are on deposit with the same bank to whom you owe money. Funds on deposit with a different bank are not subject to the right of set-off. So the lesson is, keep your banking and your borrowing separate. Don't bank with your creditors.

Documents to Gather and Organize for Bankruptcy

If you are considering filing bankruptcy in the near future, it is important that you start preparing now. One of the keys to a successful bankruptcy filing is having all of the proper documentation gathered and organized prior to the date you intend to file your case. This will avoid delays in the filing and/or the granting of your discharge.

Below is a list of some of the documents you should start gathering:

1. Your paystubs. When you file bankruptcy you will need to provide up to 6 months worth of paystubs. So start saving them.

2. Bank Statements. Depending on what state you file in, you will need to produce 3 to 6 months worth on any and all bank accounts.

3. Collection Letters. Oftentimes your delinquent accounts will be sold to collection agencies. It is important that you save any letters that you receive from these agencies so that when you file your case, your attorney can notify these companies. If they are not notified, they have no way of knowing that you have filed bankruptcy and will continue to attempt to collect from you.

4 Gather copies of your 2 most recent tax returns. If you are not current with all your tax filings, you should get that taken care of. Failure to have all your tax returns filed will delay your bankruptcy. It is not necessary that you have paid all delinquent taxes, only that the tax returns have been filed.

5. If you own real estate, gather the deed and mortgage.

6. If you own automobiles, gather the titles, as well as your purchase agreements. If you have a loan on your car, the title should show the creditor as a lien holder.

7. If you have any secured debt with finance companies or other creditors, gather the papers relating to it. This is important because secured creditors are treated differently in bankruptcy.

8. Stop charging on your credit cards. Running up your credit cards shortly before filing bankruptcy can jeopardize your bankruptcy.

9. If you own a business, prepare a profit and loss statement for your business for the past 6 months.

10. Gather any legal papers like lawsuits or judgments that have been delivered to you.

Remember, proper documentation and disclosure is the key to a successful bankruptcy. Failure to provide proper documentation or to make proper disclosure could have serious ramifications.

CAN I BANKRUPT MY BUSINESS WITHOUT BANKRUPTING ME?

Many clients have come to me and said, "I don't want to file bankruptcy personally. I just want to bankrupt my business.

This is easier said than done.

The first question that has to be asked is what type of entity are you operating your business as? Are you operating as a Corporation, a Limited Liability Company or as a sole proprietor?

If you have not filed papers with the Secretary of State to establish a Corporation or Limited Liability company, then you are probably operating your business as a sole proprietor. What this means from a legal standpoint is that you and your business are one and the same. All of the assets that your business owns are also your personal assets and vice versa. More importantly, all of the debts that the business has incurred are your personal debts as well. If this is the case, then it is impossible to "bankrupt" your business without bankrupting yourself because there simply is no difference between you personally and your business.

Now if you have taken the extra step of incorporating your business or establishing a Limited Liability Company by filing the appropriate papers with the Secretary of State, then you have created, from a legal standpoint, a separate legal entity. That separate legal entity can own property in its own name and incur debts in its own name. Furthermore, you are not legally responsible for the debt that it incurs in its own name. Thus, in theory, that separate legal entity could file bankruptcy without you personally having to file.

However, most creditors, when loaning money to a Corporation or Limited Liability Company, require what is called a personal guaranty from the individual owners of the company. This is a legal document signed by you an an individual promising that should your company fail to pay the debt to the creditor that you agree to be personally responsible for that debt. If you have signed such a document, then filing bankruptcy on behalf of the company will do you no good, since the creditor will be able to take legal action against you to collect the debt.

So if you are contemplating "bankrupting" your business, you need to find out which of your debts you have personally guaranteed, because those debts will not be eliminated by your company filing bankruptcy. If you are not sure, request from your creditors a copy of everything that you have signed and have your attorney review it.