In response to the Covid-19 pandemic, the California legislature substantially expanded the amount of homestead exemption available to bankruptcy debtors claiming exemptions under §704 of California’s Code of Civil Procedure. Cal. Civ. Proc. Code §704.730(a) (2025). At the time of this writing, the allowed homestead exemption under §704.730(a) available for bankruptcy debtors in California varies based on location. For example, in the San Francisco Bay Area where Nova Law Group represents clients, many clients can claim a homestead exemption of up to $699,421, which adjusts over time based on the Consumer Price Index (CPI).

The amount of available homestead exemption under §704 is significantly greater than the exemption that could be claimed under §703 of the California Code of Civil Procedure, and accordingly, many homeowners with equity in their residences generally opt to claim exemptions under §704. However, prior to the amendments to §704, bankruptcy debtors claiming §704 exemptions to protect equity in a primary residence always had to confront one substantial downside—claiming §704 exemptions generally did not allow for much exemption of any funds the debtor had available when filing. In fact, with some narrow exceptions, no exemption for available funds of the debtor claiming §704 exemptions was provided at all.

The new amendments to §704 seek to address this problem and provide bankruptcy debtors with exemptions for funds available. Cal. Civ. Proc. Code §§704.220, 704.225 (2025). These new exemptions include a $2,170 fixed amount for deposit account funds (§704.220), and an additional exemption in a variable amount for deposit account funds to the “extent necessary for the support of the judgment debtor and the spouse and the dependents of the judgment debtor.” (§704.225). The new amendments to §704 create options for clients who need to utilize §704 exemptions to protect equity in a homestead, but who also seek to protect some amount of available funds from creditors. The new amendments also create strategic options for a skilled bankruptcy attorney to argue that any funds left available, after any exemption amount in accordance with §704.220 has been claimed, are nevertheless exempt as “necessary for the support” of the debtor, the spouse, and any dependents, in accordance with §704.225.

The variable amount of the exemption provided by §704.225 might appear ripe for litigation between bankruptcy debtors, bankruptcy trustees, and creditors of the estate, as interested parties seek a determination of what funds are “necessary for the support” of the debtor, the spouse, and any dependents. The amount “necessary for the support” is subject to interpretation and is impacted by the specific facts of the debtor’s lifestyle, financial capacity, and other factors. This analysis would almost certainly require an evidentiary hearing for the court to determine the proper amount of the exemption in an individual bankruptcy debtor’s circumstances, if such matters became contested.

While the general parameters of what is considered “necessary for the support” will continue to be developed in the courts, at the time of this writing (January, 2025), there appears to be only one case with potential precedential authority in the 9^th Circuit describing the process a court might undertake to determine the appropriate amount of a claimed exemption in accordance with §704.225. Zhu v. Li, 19-cv-02534-JSW (TSH), 2024 WL 1122422 (N.D. Cal. 2024). Regrettably, the court’s discussion in Zhu v. Li is not particularly enlightening regarding the standards utilized by a court to determine the parameters of the §704.225 exemption, because the district court readily found that the debtors in Zhu were not entitled to the exemption they had claimed, “given their high income” of $286,296 per annum, relative to the comparatively miniscule, claimed exemption of $6,492.07. Id. at *3. The Zhu v. Li court did indicate that “necessary for the support [of the debtor]” was not limited in its application to merely what is “essential barely to support life, but that it includes many of the conveniences of a refined society.” Id. However, the approximate extent to which the lifestyle and financial capacity of the debtor, his or her spouse, and any dependents, contributes to defining the appropriate amount of the exemption, is not further illuminated.

Due to the ambiguity present in §704.225, and its applicability to a wide variety of cases in which a bankruptcy debtor claims exemptions in accordance with §704, effective representation by a bankruptcy attorney for a client considering such exemption options can result in superior outcomes for a bankruptcy client. This is particularly true when the amount of the claimed exemption may be contested, either due to the amount claimed exempt, or other factors that might cause a party to question the claimed exemption.

As part of the superior level of legal advocacy we provide at Nova Law Group, we regularly advise clients regarding their exemption options and litigate such exemption disputes on behalf of our clients when necessary. Nova Law Group represents bankruptcy clients throughout the San Francisco Bay Area.

If you are considering bankruptcy and would like information regarding your options or have other questions, contact a Nova Law Group attorney today and we will be happy to discuss your needs with you.

HSA’s are tax-advantaged accounts that are created to allow individuals with high-deductible insurance plans to save for their healthcare expenses. Individuals can contribute to the HSA and then withdraw money as needed to pay for qualified healthcare expenses.

While the purpose of HSA’s is to save for healthcare expenses not covered by insurance, technically the money can be withdrawn by an individual for any purpose with a 10% penalty applied (in addition to income taxes) if the individual is under the age of 65. At the age of 65, money in an HSA can be withdrawn for any reason, by paying the income taxes due on such withdrawn amounts. HSA funds are generally considered property of the bankruptcy estate, unless an appropriate exemption applies.

Accordingly, the question remains, are HSA accounts exempt in bankruptcy? At the time of this writing, when applied to individual debtors claiming California or Federal exemptions, the answer is “no.” Federal exemptions do not include any specific exemption for HSA funds. 11 U.S.C. §522(d) (2024). Additionally, there is no separate California exemption for HSA funds at the time of this writing, although legislation has been enacted in other states to separately exempt HSA funds, which may also occur in California in the future. Cal. Civ. Code §§703, 704 (2024).

While HSA funds are not subject to a specific exemption under the Federal or California exemptions, individuals who wish to exempt HSA funds in bankruptcy can still exempt such funds by using the “wildcard exemption” provided in both Federal and California exemptions. 11 U.S.C. §522(d)(5) (2024); Cal. Civ. Code §703.140(b)(5) (2024).

If you have questions regarding filing bankruptcy, including the treatment of your HSA account in bankruptcy, contact Nova Law Group and speak with a bankruptcy attorney who will be happy to assist you with your needs. Nova Law Group represents bankruptcy clients throughout the San Francisco Bay Area from our office in Mountain View, California.

The purpose of a negotiation with a bankruptcy trustee can vary significantly depending on a particular client’s interests. Additionally, the chapter of bankruptcy in which the debtor filed has a significant impact on how negotiations with a bankruptcy trustee should be approached. Negotiations with a chapter 7 bankruptcy trustee operate very differently than negotiations with a chapter 13 bankruptcy trustee, as the former is a “possessory trustee” (has a duty to seize and liquidate non-exempt property for the benefit of creditors), while the latter is a “non-possessory trustee” (has no duty to seize property or liquidate non-exempt property for the estate). In chapter 11 cases, the bankruptcy trustee is often the debtor itself, and accordingly, develops its own strategy for liquidating or retaining non-exempt property and negotiating with creditors and third parties to meet its objectives. However, even in cases where the client must negotiate with a non-possessory trustee, the valuation of non-exempt property can be a material issue for many clients, as in chapter 11 and chapter 13 cases, the amount of payments made to creditors must often exceed the projected amount that creditors could have expected to be paid in a comparative liquidation case with the same property (also called “the best interests of creditors test”). In these cases, the valuation determination made as to such property can be critical, even if no trustee is tasked with liquidating the non-exempt property. And finally, experienced bankruptcy counsel should always be sure to determine which, if any, exemptions apply to the client prior to the bankruptcy case being filed. For example, debtor/clients who have recently moved states or jurisdictions may only be able to use certain exemptions specified by the bankruptcy code and state law, and corporate debtor/clients don’t get any exemptions at all, meaning that all estate property will be considered non-exempt upon filing. These substantial variations from client to client make it essential for skilled bankruptcy counsel to determine in advance of filing which exemptions apply to the client, and correspondingly, the strategy for handling any non-exempt property that is likely to exist upon filing. Some of the most common examples are discussed below.

When representing a bankruptcy debtor, an attorney may need to negotiate with the trustee regarding non-exempt property that the debtor wishes to retain and not have liquidated for the benefit of the estate’s creditors. Alternatively, a bankruptcy debtor may want the trustee to abandon certain property, perhaps because it has minimal financial value to the estate, but significant personal or sentimental value to the debtor. Even in bankruptcy cases where a “non-possessory trustee” is appointed, negotiation may occur with regard to valuation of the property for other purposes, such as the “best interests of creditors test.” A skilled bankruptcy attorney must be aware of a client’s interests in property prior to the bankruptcy case being filed, so that the attorney is aware of which property will likely be exempted, and which property, if any, will likely be non-exempt. To the extent property will likely be non-exempt, an attorney should have a discussion with his or her client prior to filing the bankruptcy case regarding whether or not the liquidation of such property would be an issue for the client, and if so, what steps and strategies to take to negotiate the purchase of such property by the client, or the abandonment of such property by the trustee on behalf of the estate.  A discussion of exempt property and non-exempt property between attorney and client pre-filing is critical to effective representation of any client with non-exempt assets (also called an “asset case”), as otherwise, a client may have property that is liquidated for the benefit of the estate and that the client was not aware might be forfeited. Alternately, in bankruptcy cases where a non-possessory trustee is appointed, a client may have to pay significantly more money to creditors over time than the client originally expected, if the value of the client’s non-exempt property is greater than expected. An effective discussion with a debtor/client pre-filing will allow the attorney to assist the client in determining which property might be non-exempt, if any, and whether any remaining non-exempt property is property that the client would rather turnover to the bankruptcy trustee for potential liquidation, or negotiate with the bankruptcy trustee to acquire.

If the debtor/client elects to turnover the non-exempt property to the trustee, then the property will likely be liquidated by the trustee on behalf of the bankruptcy estate if it has value that can be realized after selling costs, holding costs, and administrative costs are accounted for by the trustee. If the debtor/client elects to turnover non-exempt property for which the trustee likely cannot obtain value for the bankruptcy estate after costs and expenses are included, then the trustee may elect to “abandon” such property, which effectively means that legal ownership returns to the parties that owned the property prior to the bankruptcy case being filed (often the debtor).

If the debtor/client does not wish to turnover certain non-exempt property to the bankruptcy trustee, then the attorney must obtain the bankruptcy trustee’s consent and agreement to allowing the debtor/client to retain the non-exempt property. Otherwise, this non-exempt property must be turned over to the bankruptcy estate upon request. To ensure that the client has the maximum chance to retain any non-exempt property that is important to client interests, the bankruptcy attorney and client should develop a strategic plan for a negotiation with the bankruptcy trustee regarding the purchase of such non-exempt property from the bankruptcy estate. This strategic plan often includes an active negotiation with the bankruptcy trustee regarding alternative compensation to the bankruptcy estate of “equivalent value” to the property that the debtor wishes to retain. The strategic plan should be developed prior to the filing of the bankruptcy case and developed based on the client’s indicated interest in retaining or forfeiting each item of non-exempt property, relative to the likely cost of doing so.

The development of a strategic plan should include the following analysis at a minimum:

(1) List of all property that is likely to be non-exempt and its economic value, including the portion of such economic value which is non-exempt.

(2) The likely costs and expenses associated with sale of the property by a trustee, including selling costs, holding costs, and administrative costs, among others.

(3) The likely economic value, net costs and expenses, that would likely be distributed to creditors, if all non-exempt property were sold in a liquidation by the bankruptcy trustee.

(4) Analysis of client priorities regarding desired retention or disposition of such non-exempt property, and separately, discussion with the client about which property client would like to repurchase from the bankruptcy estate.

Generally, attorneys should attempt to perform the above-mentioned steps in numerical order. Otherwise, it will be difficult for a client to determine which property the client would like to retain (and pay for), and which property the client would like to dispose of (and decline to pay for), because the client may not know the price that would be persuasive to the bankruptcy trustee to sell the client such non-exempt property.

In calculating the figure to offer the bankruptcy trustee for each item of non-exempt property, it is critical not only to value the property in terms of its economic value to the bankruptcy estate, but also, the amount of time it will take the trustee and other administrators of the estate to sell such property for the benefit of creditors. Property which is easily sold by the Trustee, such as publicly-traded stocks, bonds, and other liquid financial securities or cash, generally will need to be purchased from the bankruptcy estate at full value (100% of fair market value), for the trustee to allow such property to be retained by the debtor. A non-possessory trustee will also require these assets to be valued at full fair market value generally at the time of filing, or at the time of confirmation of the plan, depending on the chapter of bankruptcy filed. In contrast, property which is difficult for the Trustee to sell, such as privately-held stock or limited partnership interests without any active market, assets valuable to a relatively small group of buyers, or assets which are hard to value, may only need to be purchased from the Trustee at a small fraction of their actual value. Most property falls somewhere in between these two extremes, including automobiles, real estate, artwork, and jewelry. While it is beyond the scope of this article to discuss the offers made to Trustees by Nova Law Group attorneys in every situation and with regard to all property types, as a general matter, the more the client values the property and/or the more easily the property can be liquidated by a liquidating trustee for money to pay creditors, the greater the percentage of fair market value (FMV) the interested party should offer the trustee to acquire it. The opposite is also true. In fact, in some cases, valuable property may be abandoned by a trustee, not because it has no hypothetical economic value, but rather, because no buyer can be found. This occurs frequently with difficult to sell assets of significant value, like patent rights and other intellectual property, which may have value only to a very small subset of buyers. A skilled bankruptcy attorney can provide a client with invaluable advice regarding the above-mentioned concepts and help the client to come up with an offer regarding the client’s non-exempt property that will appeal to a bankruptcy trustee, but also obtain the most favorable deal possible for the client to acquire such property.

The above-mentioned concepts and strategies also apply where an attorney is representing a creditor or third party interested in acquiring non-exempt property, except that the creditor or third party client cannot decide for the debtor where he or she will use the debtor’s exemptions, if any apply at all. When negotiating on behalf of a creditor or third party, it is important to be aware that a debtor’s exemptions should be reviewed to ensure that they are legally applicable and accurate, as otherwise, property that may belong to the bankruptcy estate could erroneously be retained by the debtor. Additionally, there are circumstances in which the development of creditor or third party interest in assets of the bankruptcy estate may incentivize the trustee to search for other potential buyers in an attempt to start a “bidding war.” This is increasingly likely for assets that have public markets or significant quantities of buyers, and should be considered prior to a creditor or third party buyer expending the time and resources to contact the Trustee and make an offer. Additionally, Trustees are exempt from certain laws when disposing of estate property and are not required to provide many of the disclosures that would normally be required of sellers. Skilled bankruptcy counsel should be employed to determine if any of the disclosures are relevant to client, and what action, if any, needs to be taken to ensure client interests in the property to be acquired are protected.

Nova Law Group regularly advises our debtor, creditor, and third party clients regarding these issues, and our extensive experience in working with dozens of bankruptcy trustees has allowed us to advise our clients effectively regarding potential deals. This is one of the best ways that a skilled bankruptcy lawyer can add value for a client, and distinguishes “average” lawyers from “exceptional” lawyers in the field of bankruptcy. If you may need to negotiate with a bankruptcy trustee as part of a prospective bankruptcy case, or a bankruptcy case that has already been filed by you or another party, feel free to contact a Nova Law Group attorney and we will be happy to assist you.

This article is not intended as an exhaustive review of all of the legal requirements a corporate debtor must comply with to retain top talent during a bankruptcy case. However, this article will cover many of the basic principles and legal requirements that a corporate debtor must comply with in bankruptcy to retain the various types of talent who work for the company post-filing.

To begin, compensation of officers, directors, management, and all other employees, and regardless of whether such talent are insiders or non-insiders within the company, is broadly defined by 11 U.S.C. §503. 11 U.S.C. §503 (2020). When analyzing compensation in bankruptcy, it is generally useful to make a distinction between “insider” employees and “non-insider” employees, as discussed in greater detail below.

The bankruptcy code defines an “insider” under 11 U.S.C. §101(31)(B) as a “director, officer, or individual in control of the corporation, or a relative of such individual.” 11 U.S.C. §101(31)(B) (2020). The definition of “insider” is very relevant to an analysis of how such talent can be retained by the company, because compensation of insiders, particularly with regard to retention payments and severance payments, are permitted in a far more limited manner than for other non-insider talent, for which the requirements have greater flexibility.

Non-insider talent can often be retained to work for the company by offering reasonable wages, bonuses, severance payments, incentive plans, and other programs, as long as they are approved by the bankruptcy court. These payments can be approved as administrative expenses of the bankruptcy estate, which get extremely high priority in bankruptcy, to ensure that employees and other talent who work for the bankrupt corporate debtor get paid as agreed. 11 U.S.C. §503(b)(1)(A)(i) (2020). These plans are sometimes called “Key Employee Retention Plans” (KERPs) and in general are reviewed under the “business judgment rule,” which is a much more flexible standard where the bankruptcy court will generally approve the compensation if reasonable and not determined in a capricious or nonsensical manner. KERPs are also subject to the requirements of 11 U.S.C. §503(c)(3), which prohibits payments that are outside the ordinary course of business and that are not justified by the facts and circumstances presented in the case. 11 U.S.C. §503(c)(3) (2020). In general, most pre-petition compensation plans negotiated between arms-length parties and without collusion will pass this standard and obtain bankruptcy court approval for post-petition use or continuation. Many bankruptcy attorneys apply for approval to pay critical employees within a short period after the company files bankruptcy, and many times, as part of “first day motions” submitted to the bankruptcy court.

In contrast, retaining insider talent is much more heavily restricted and there are a multitude of provisions which render certain types of compensation to insiders effectively not worthwhile for most corporate purposes. Insiders can receive wages, bonuses, severance, and incentive payments, similar to non-insiders, but bankruptcy law restricts compensation to insiders in a plethora of ways listed in 11 U.S.C. §503(c)(1). 11 U.S.C. §503(c)(1) (2020). In general, the onerous restrictions required by §503(c)(1) with respect to the employment of insiders, make retention programs for insiders generally ineffective for most corporate debtors, particularly for any corporate debtor where insider management employees make significantly more income than non-insider “rank and file” employees. For many of the same reasons, severance packages are no longer used for insider management employees, because the restrictions of 11 U.S.C. §503(c)(2) often do not properly incentivize critical executive talent to stay, given that severance for “rank and file” employees is not generally enough to result in a proper severance package for a key executive. 11 U.S.C. §503(c)(2) (2020). While this very frequently impacts public company debtors, it can also frequently impact corporate debtors which are closely-held companies, such as family businesses, as it is generally the case that closely-held corporations will have more employees relative to the size of the company that qualify as “insiders.”

So how does a bankrupt corporate debtor compensate essential insiders of the company for post-petition work to retain them? Corporate debtors generally use what are called “Key Executive Incentive Plans” (KEIPs), which are not subject to the onerous requirements of 11 U.S.C. §503(c)(1), as they are not technically “retention plans” or “severance packages.” Id. KEIPs are essentially “pay for performance” plans which incentivize key executives to stay with the company by compensating them if they achieve certain “goals” or “targets,” which may be quantitative or qualitative in nature. These “goals” are often things like “raising revenues by 20%,” “obtaining a consensual plan,” “cutting expenses by 30%,” “selling XYZ property or technology to a buyer for more than ABC dollar amount,” or other easily verifiable metrics that can be achieved. Additionally, the bankruptcy court will not look favorably on “goals” which are set too low for executives, as these are often interpreted by the court as simply “retention plans” in disguise. In essence, accomplishing the goal needs to add value to the corporate bankruptcy estate in a manner that is challenging to achieve, but lucrative if success is obtained. These goals and other metrics should be authorized by the court prior to an executive starting to accomplish said goals, as otherwise the court may view such accomplishments as less challenging in hindsight than they actually were to complete.

If you are an officer, director, or other manager seeking advice regarding corporate bankruptcy for an entity filing in the San Francisco Bay Area, feel free to contact Nova Law Group and an attorney will be happy to assist you. Nova Law Group services clients throughout the Bay Area, including the cities of the peninsula (such as Mountain View, Palo Alto, Los Altos, Sunnyvale, Cupertino, Menlo Park, Redwood City, and East Palo Alto), the south bay (such as Campbell, Santa Clara, San Jose, Gilroy, and Santa Cruz), and the north peninsula, including San Francisco (San Mateo, Brisbane, Burlingame, Foster City, SSF, etc.). Nova Law Group assists debtors, creditors, and third parties as clients in all of the above communities in the San Francisco Bay Area. We also represent clients in associated bankruptcy litigation as needed.

During this unprecedented time, individuals and businesses can sometimes utilize bankruptcy as an effective means of assisting with the financial situation engendered by this pandemic. Bankruptcy has always existed to allow individuals and businesses to obtain a “fresh start” by eliminating debt obligations or by reorganizing debt obligations in a manner that is more affordable. In this regard, bankruptcy can sometimes allow individuals and businesses to deal with completely unexpected shocks to the financial climate and emerge relatively unscathed, at least compared to what the situation might look like without bankruptcy. The goal of this article is to describe some of the many ways in which bankruptcy can be helpful to individuals and businesses dealing with the unexpected economic impact of the corona virus and other similar major shocks to the economy.

The first section of this article will discuss different methods in which bankruptcy can assist individuals with financial hardship, such as that caused by the corona virus and “shelter in place” restrictions. The most common types of bankruptcy filed by individuals are chapter 7 cases, chapter 11 cases, and chapter 13 cases. We will discuss each in turn.

Chapter 7 bankruptcy cases for individuals are designed to allow the filing individual, called the “debtor,” a fresh financial start. In chapter 7, an individual gets to retain certain exempt property that he or she owns and has to surrender any non-exempt property to a bankruptcy trustee to be sold for the benefit of his or her creditors. Property is often determined to be either “exempt” or non-exempt” depending on a variety of factors, most of which are dependent on state law. In California, there are two types of exemption systems debtors may choose, often with the assistance of counsel—those listed in California Code of Civil Procedure §703 and §704. In general, §703 provides for greater exemptions for personal property and is often the exemption schedule of choice for most people, whereas §704 provides a much greater homestead exemption for those debtors with significant home equity and is often the preferred choice for debtors in this situation. Chapter 7 bankruptcy will eventually grant most individual debtors what is called a bankruptcy “discharge,” which effectively forever prevents the filing individual from any obligation to pay anything on the debts he or she owed at the time of filing bankruptcy. For all practical purposes, the bankruptcy discharge operates legally as a permanent injunction against the enforcement of most types of debt against the debtor, such that the individual can move on with his or her financial future without paying most debts that he or she had at the time of filing the bankruptcy case. While not every type of debt can be discharged, the vast majority of debts can be, with limited exceptions. For example, John in Mountain View, CA, gets corona virus while performing his job as a doctor at the local hospital in Los Altos, CA, and accordingly, is mandatorily sent home and cannot work. He is promptly terminated and applies for unemployment, but the unemployment checks he receives are barely enough to cover his rent and living expenses, let alone payments on the $100,000 in credit card debt he owes. Six months later, John has used up most of his savings making credit card payments and doesn’t know what to do. John hires Nova Law Group to help assist him with his situation. Nova Law Group recommends a chapter 7 bankruptcy, because John doesn’t have any property that exceeds the California exemption limits and gets to keep all of his property in bankruptcy. John also gets a complete discharge of his debt in chapter 7 bankruptcy and never has to pay anything on his credit card debts ever again. Although John is on unemployment and can’t work, he now is able to pay his living expenses with unemployment money he receives, because he no longer has any credit card payments. He can now afford to live until he can regain a job as a doctor after recovering from corona virus. John is able to obtain a debt-free fresh financial start and subsist on unemployment until he is ready to go back to work and recovers from being infected by corona virus.

A second major type of bankruptcy is called Chapter 13 bankruptcy. Chapter 13 bankruptcy cases are designed for many specific situations in which a debtor can afford to pay a portion or all of the debts the debtor owes, but needs to repay them on a different schedule or in a different amount than that originally agreed to by the creditors. Chapter 13 bankruptcy is particularly helpful to individuals who own property with non-exempt equity that they don’t desire to give to the trustee, individuals who owe tax debts, individuals who are facing home foreclosure, and certain individuals who might earn too much money to qualify for chapter 7 bankruptcy. In a chapter 13 bankruptcy case, the debtor proposes what is called a “plan” to a government appointed official called the “chapter 13 trustee.” The “plan” is essentially a business plan for the debtor’s return to financial health over either a 36-month or 60-month term, depending on the debtor’s income. Chapter 13 bankruptcy debtors pay back a portion of what they owe creditors, but not necessarily all that is owed. Additionally, even chapter 13 debtors who pay back everything they owe creditors, called a “100% plan,” do not actually end up paying the same amount to such creditors that they would owe outside of bankruptcy. Chapter 13 bankruptcy allows debtors to pay back many types of debts at much, much lower interest rates than could normally be obtained on the open market or through the creditors themselves. Additionally, some creditors do not file claims with the bankruptcy court and never become entitled to payment during the chapter 13 case. These debts, after a period of a few months, become not entitled to payment and such creditors can no longer recover against the debtor as long as the debtor completes his or her chapter 13 plan and obtains a discharge. Accordingly, most chapter 13 debtors save significant amounts of money reorganizing their debts in chapter 13, relative to less advantageous plans like debt settlement, paying such debts in full outside of bankruptcy, or “doing nothing.” Chapter 13 bankruptcy can also be used by individuals to reorganize significant amounts of tax debt or prevent home foreclosure, even permanently in some instances, if a debtor is able to make payments on the debts owed over time. For example, Mary in Palo Alto, CA works for Facebook in Menlo Park, CA. Mary has worked in tech for a decade, but until recently, was unable to get a job in her career field for three years until she became employed at Facebook. Mary is three years and $120,000 behind in her mortgage payments on her Palo Alto, CA home and is two weeks away from foreclosure, in which her home would be sold at auction. However, Mary has the ability with her high salary at Facebook to afford her mortgage payments now—she just can’t “catch up” on the $120,000 in mortgage arrears she owes the lender from the time she was unemployed. Fortunately, Mary hires a Nova Law Group attorney to advise her regarding her bankruptcy options in chapter 13. Nova Law Group informs her that using chapter 13 bankruptcy, she can split the $120,000 in mortgage arrears she owes her lender into 60 monthly payments of $2,000/month each, which she will pay on top of the normal mortgage payment to the lender monthly. While substantial, the chapter 13 bankruptcy will save Mary’s home from foreclosure and at the end of the five-year period, Mary will be fully caught up on her mortgage payments and out of default on her loan. Unlike a “loan modification,” Nova Law Group informs Mary that the lender does not need to consent to this payment plan and that the court can force the lender to accept it. Furthermore, the bankruptcy case can also be used to reorganize other debts Mary owes at the same time, like credit card debt, medical debt, personal loans, and tax debts. However, chapter 13 bankruptcy, unlike chapter 7 and chapter 11 bankruptcy, can only be filed by living, breathing individuals (like Mary)—it is not available to corporations and other “legal” entities which are not actually people except in law.

A third major type of bankruptcy is called Chapter 11 bankruptcy. This type of bankruptcy is often used by individuals in bankruptcy who owe very significant debts or who need significant financial flexibility in the type of bankruptcy plan they intend to file with the court. Chapter 11 bankruptcy is by far the most complex, time intensive, and expensive type of bankruptcy, but it can be the right option for some clients with very complex cases or very high quantities of debts and who wish to reorganize those debts. Chapter 11 bankruptcy cases can be used to reorganize an unlimited amount of debt owed by individuals, unlike chapter 13 bankruptcy, which is subject to the debt limits contained in 11 U.S.C. §109(e). This is a primary use of chapter 11 bankruptcy in the San Francisco Bay Area, and more specifically, in areas where bankruptcy debtors tend to have high amounts of secured and unsecured debt, like San Francisco, San Jose, Cupertino, Mountain View, Sunnyvale, Palo Alto, Los Altos, Los Altos Hills, East Palo Alto, Atherton, and Menlo Park. A full description of chapter 11 bankruptcy is beyond the scope of this article, but many chapter 11 debtors propose to retain many assets while potentially selling off other assets or creating money through other means, like operating a business or working, to fund their proposed “plan.” Creditors are entitled to vote on the plan and so it is important to understand how plan voting works and have an experienced bankruptcy attorney guide a debtor through this complex process to avoid a plan being rejected by the debtor’s creditors. Chapter 11 bankruptcy is frequently used when the debtor intends to introduce plan provisions that are very unusual or where payments will be made over an unconventional timeframe or from unconventional sources, which might be more objectionable in a chapter 13 bankruptcy case or even impossible. For example, Bob is a major real estate developer who lives in Los Altos, CA. Bob owns multiple investment properties in Sunnyvale, CA and San Jose, CA, a home in Los Altos, CA, and a home for his mother in Atherton, CA. Bob owns multiple businesses that have been terribly impacted by the “shelter in place requirements” enacted to prevent the further spread of the corona virus, and is worried that in six months, he may be unable to catch up on his mortgage payments for his home and his investment properties, even if business returns to normal. He is concerned he will face mass foreclosure on his properties and that he and his mother will be out of their homes. Fortunately for Bob, he consults with a Nova Law Group bankruptcy attorney who advises him that chapter 11 bankruptcy might be a good option for Bob’s needs. Although Bob owes a total of $20,000,000 in secured debt on his twelve properties throughout the San Francisco Bay Area, there is no debt limit in chapter 11 bankruptcy (unlike chapter 13), and accordingly, Bob can reorganize his significant debts and save his investment properties and home from foreclosure, by curing the arrearages on all of his properties over time. He can even reorganize his credit card debt, tax debts, personal loans, and other unsecured debts at the same time. Bob chooses a bankruptcy plan that is seven years (7 years) in length and convinces his creditors to support his plan of reorganization—a time period for repayment that would be impossible in chapter 13, for which the longest term would be five years (5 years). Bob is able to save his home and his investment properties and utilize chapter 11 to rebuild his finances after corona virus.

The second section of this article will discuss how various types of bankruptcy can be used to benefit business entities, such as LLCs, corporations, LLPs, LPs, and other types of entities. Please note that sole proprietorships and other types of business ownership that do not involve separate legal entities fall under the same umbrella legally as the assets and liabilities of the individuals that own them, and so, people owning these types of businesses include the business assets and liabilities on their own personal statements and schedules when filing for bankruptcy.

There are two main types of corporate bankruptcy typically filed by business entities which are legally incorporated, like C-Corporations, S-Corporations, LLCs, LPs, etc.—Chapter 7 bankruptcy and Chapter 11 bankruptcy. Chapter 7 bankruptcy cases are used by business entities which want to liquidate and shut down the business and pay off creditors to the extent possible. Chapter 11 bankruptcy cases are used by business entities that wish to reorganize the debts of the business entity in an attempt to continue to operate the business as a going concern while paying the debts of the business over time, albeit perhaps on a different schedule or at a different interest rate than was previously anticipated by the creditors. The main elements of chapter 7 bankruptcy and chapter 11 bankruptcy applicable to business entities are discussed above in the sections on individuals filing for bankruptcy in each chapter. However, there is one very important distinction between individuals filing for bankruptcy and business entities in the same bankruptcy chapters—business entities do not receive a bankruptcy discharge. Only real, breathing people can receive a discharge in bankruptcy. While business entities can utilize bankruptcy to liquidate and wind down their operations in chapter 7, or reorganize the payment structure, payment schedule, interest rates, and other elements of repayment in chapter 11, they may not ever discharge any debt owed and they do not get any exemptions to shelter assets or property. For this reason, chapter 7 corporate bankruptcy is mostly designed to allow for liquidating a business in a manner that will be respected by creditors and other stakeholders as court-approved and final, as a business entity will not receive a discharge of any debt in chapter 7 bankruptcy. Chapter 7 corporate bankruptcy will not generally enable the company to operate again, unless the company is sold as a going concern in the chapter 7 case by the bankruptcy trustee. Likewise, Chapter 11 may be used by business entities to reorganize debts and obligations, but not to eliminate debt entirely through discharge, even though chapter 11 may be used to eliminate debt as part of negotiations with the debtor’s creditors if such creditors agree.

If you have a question or would like to discuss your situation or your business’s situation with a Nova Law Group attorney, feel free to give us a call to schedule a consultation.

Nova Law Group represents both debtors and creditors in bankruptcy cases and associated bankruptcy litigation throughout the San Francisco Bay Area from our headquarters in Mountain View, CA. Nova Law Group frequently represents clients in all major divisions of the Northern District of California, including San Jose Division, San Francisco Division, and Oakland Division of the United States Bankruptcy Courts.

I always recommend to prospective clients who are making the decision of which bankruptcy attorney to hire that they select an attorney who is “local” in the sense that he or she knows the bankruptcy trustees, the bankruptcy judges, and other bankruptcy professionals in the area in which the case will be filed. This is important because a “local” attorney in this sense will generally have more credibility with these various professionals, trustees, and judges, and may obtain a more favorable outcome for the client than if he or she was completely unknown within the bankruptcy community. Most bankruptcy communities, including the one in the San Francisco Bay Area, are very small. This means that most frequent practitioners of bankruptcy know the other attorneys who commonly practice in the area. The more complex the bankruptcy case, the more important it is to have local bankruptcy counsel representing the client, as in complex cases, there is a much greater chance that multiple hearings and communications will be needed with the court, the trustee, and other professionals. A client represented by good local counsel with significant bankruptcy experience will almost always be able to obtain a more favorable outcome for a client than bankruptcy counsel with equivalent experience, but who is unknown in the community and has no intrinsic credibility with the court, the trustees, or other professionals.

At the same time, “local” bankruptcy counsel need not mean counsel that is literally in the same city as the client. Frequently, counsel only needs to be “local” enough to have a good relationship with the court, the trustees, and other professionals. Accordingly, usually hiring counsel who frequently practices anywhere in the same district as the bankruptcy court in which the case will be filed is sufficient. For example, Nova Law Group is located in Mountain View, CA and meets with bankruptcy clients at its office location. However, Nova Law Group represents clients throughout the entire San Francisco Bay Area, including Mountain View, Sunnyvale, Los Altos, Los Altos Hills, Menlo Park, East Palo Alto, Palo Alto, Cupertino, Santa Clara, San Jose, San Francisco, Oakland, and many other communities throughout the South Bay, East Bay, North Bay, and the mid-peninsula. Accordingly, Nova Law Group can expertly represent a bankruptcy client who needs debtor or creditor representation regarding bankruptcy cases filed anywhere in the greater San Francisco Bay Area, including the San Jose, San Francisco, and Oakland divisions of the United States Bankruptcy Court for the Northern District of California.

Stated differently, Nova Law Group practices bankruptcy law and is “local counsel” anywhere in the San Francisco Bay Area, and as a result, a client need not be in Mountain View, CA or even the mid-peninsula to retain Nova Law Group. This provides important flexibility for clients, because there are many other factors to consider when hiring a bankruptcy attorney, such as skill, intellectual ability, experience as a bankruptcy attorney, cost, availability, customer service and personality, and dedication to serving the client, all of which matter just as much or more than geographical location.

Accordingly, whether you or your company is a resident of Mountain View, CA, or anywhere else in the Northern District of California, Nova Law Group can assist you with your bankruptcy needs. We also assist individuals and companies as creditor counsel located anywhere in the world, as long as the bankruptcy case in which the client is a creditor is pending in the Northern District of California. Please call a Nova Law Group attorney if interested and we will be happy to assist you.

A common misconception about bankruptcy is that it ruins the debtor’s credit score forever and that no one will ever lend to the debtor ever again. This false assumption is further perpetuated by many “debt consolidation agencies” because they want to dissuade debtors from filing bankruptcy and force them into debt repayment plans, which are not the best option for all people who owe significant debts.

The impact of a bankruptcy filing on the credit score of an individual person is highly-dependent on the chapter of bankruptcy the individual is filing and how the individual acts to repair his or her credit after the bankruptcy is filed.

The first impact on an individual person’s credit score as a result of a bankruptcy filing is the chapter of bankruptcy being filed. If an individual is filing a chapter 7 bankruptcy, he or she will generally notice a greater decline in his or her credit score upon filing than if the same individual were to file chapter 13 bankruptcy. Many individuals will notice a 100-200 point drop in FICO score when a chapter 7 bankruptcy is filed and a 75-150 point drop in FICO score when a chapter 13 bankruptcy is filed. This will vary based on the pre-bankruptcy credit score of the borrower and other myriad factors which are not within the scope of this article. Generally, the higher the credit score pre-bankruptcy, the more points are deducted from an individual’s FICO score when he or she files. Individuals with bad credit experience less of a drop because in many cases these people already have a low credit score due to missed payments, high borrowings relative to total debt, and other reasons. The credit reporting agencies often view chapter 7 bankruptcy as “worse” than chapter 13 bankruptcy because creditors often receive higher distributions statistically from chapter 13 cases than chapter 7 cases. However, in many cases, chapter 7 bankruptcy will often allow individuals to rebuild credit faster than the same individual can in chapter 13 bankruptcy, because chapter 13 bankruptcies usually last much longer (3-5 years) than chapter 7 bankruptcies (3-6 months). Additionally, chapter 13 debtors are prohibited from incurring new debt without approval from the bankruptcy court, which can make it more difficult for chapter 13 debtors to establish new credit and rebuild a credit score. Generally, debtors filing chapter 7 cases can begin rebuilding credit with secured credit cards, auto loans (at higher interest rates), or other loans very soon after receiving the bankruptcy discharge, which usually occurs within 3-6 months of filing for bankruptcy. Some creditors will even lend money to a chapter 7 debtor while in bankruptcy, but generally it is recommended to avoid incurring new debt during the chapter 7 case unless it is an emergency (car breaks down, medical emergency, etc.). In contrast, chapter 13 debtors must wait to accumulate new lines of credit until after bankruptcy unless such debt is incurred with bankruptcy court approval. This can mean that chapter 13 debtors will not actually be able to obtain new credit for 3-5 years after filing bankruptcy, unless a sufficient reason is given for the court to allow the new debt, such as an emergency need to finance a car or other item needed for the debtor’s business or profession. Accordingly, even though chapter 7 bankruptcy often results in a larger credit decline initially than chapter 13 bankruptcy, many debtors filing in chapter 7 can rebuild their credit faster than comparable debtors filing in chapter 13 bankruptcy.

The second impact on an individual person’s credit score as a result of a bankruptcy filing is the action that such individual takes post-bankruptcy to rebuild his or her credit. This credit rebuilding phase usually can begin within 3-6 months after filing for chapter 7 debtors, and 3-5 years after filing for chapter 13 debtors. During this phase, Nova Law Group recommends that a client slowly apply (not more than one application for credit every six months) for new credit lines until they reach a minimum of three. These credit lines can be credit cards, bank lines of credit, auto loans, installment loans, or any other type of loan from a creditor that reports to the credit reporting agencies. However, a client should only obtain credit if it is useful to the client. For example, a client should never get an auto loan if the client doesn’t need a car. With regard to credit cards, even if a client never wants another credit card, Nova Law Group recommends that a client simply obtain enough credit cards to reach the minimum of three credit lines, and then the client can stop accumulating credit for credit rebuilding purposes. As part of rebuilding credit, a client should utilize the credit line or credit offered each month, but can utilize a very small amount of the credit if desired. For example, if a credit card obtained has a limit of $500, a client can simply charge $1/month for a cup of coffee on the card and then pay the credit card off, in full, and on time, every single month. This usage is then reported to the credit reporting agencies and will generally increase a client’s credit score significantly over time as each monthly bill (however small) is paid off in full, and on time, each month.

For the reasons stated above, filing for bankruptcy does not always mean a large credit decline upon filing. Furthermore, most former bankruptcy debtors can quickly rebuild credit over a one to four-year period simply by utilizing the steps listed above for credit repair after the debtor’s chapter 7 bankruptcy or chapter 13 bankruptcy case (or less commonly, chapter 11 bankruptcy case) is completed. Many former clients of Nova Law Group have improved their credit scores 100-200 points over a one to four-year period through the above methods and have gradually developed excellent credit over time. While every client’s situation is different and the above methods are effective to different degrees for each client, the above methods can assist all post-bankruptcy debtors with rebuilding credit to a significant extent.

If you are an individual interested in bankruptcy or have questions regarding the credit impact resulting from a bankruptcy case, feel free to contact Nova Law Group and an attorney will be happy to speak with you. Nova Law Group’s office is located in downtown Mountain View, CA, and we serve bankruptcy clients from all over the San Francisco Bay Area, including mid-peninsula cities like Palo Alto, Menlo Park, Los Altos, Sunnyvale, and Los Altos Hills, as well as from the major metro areas of Oakland, San Francisco, and San Jose, including all cities surrounding such metro areas in the greater SF Bay Area. Feel free to contact us regarding your bankruptcy needs and we will be happy to speak with you.

            Most non-dischargeability actions against a debtor are based upon either specific allegations of fraud, under 11 U.S.C. §523(a)(2)(A-B), or a presumption of statutory fraud under 11 U.S.C. §523(a)(2)(C). While the specifics of defending against this type of action for a client is discussed in the article “What is a Non-Dischargeability Action?” (also on this website), it is important to note that any non-dischargeability action must allege sufficient facts to state a claim under one or more sections of 11 U.S.C. §523, and that even if a presumption of fraud is alleged to be applicable under 11 U.S.C. §523(a)(2)(C), that such presumption may be rebutted.

            For example, many junior attorneys often ask the managing attorney of our firm if they should settle an action on behalf of a client with a creditor, merely because such creditor claimed that the “client made luxury purchases within the 90 day period prior to filing bankruptcy.” Typically, such allegations by a creditor are made without any specific facts alleged as to which purchases made were fraudulent prior to bankruptcy, when the fraudulent charges were made, where they were made, and why such purchases might be considered “luxury goods” under 11 U.S.C. §523(a)(2)(C)(i)(I) for purposes of the statutory presumption. Many creditors attempt to make blanket claims of fraud against the debtor which lack substantive merit, thinking that most bankruptcy debtors will never challenge the action, or will settle to avoid paying legal fees and costs to the debtor’s bankruptcy lawyer.

            Accordingly, it is a fair question to ask how a bankruptcy client can afford to pay his or her bankruptcy attorney to defend a meritless non-dischargeability action against the client in a cost-effective manner. The answer is often the statutory language provided in 11 U.S.C. §523(d), which allows for bankruptcy debtors to receive reimbursement for attorney fees and costs from the creditor that sued them, at least where the debtors can prove that such action was meritless (as it often is).

            The bankruptcy code states under 11 U.S.C. §523(d) that a bankruptcy debtor can recover attorney’s fees and costs from a creditor that sued such bankruptcy debtor unsuccessfully, if the court finds that the suit filed by the creditor was not “substantially justified,” unless “special circumstances” would make the award of such fees and costs unjust. 11 U.S.C. §523(d) (2012). Essentially, to obtain an award against a creditor for fees and costs in the non-dischargeability action, the bankruptcy debtor must not only win the case, but also convince the judge that the creditor’s original suit in bankruptcy court had no merit to begin with, and that the creditor can afford to pay the legal fees and costs if awarded. While this might seem like a difficult task in most situations, in reality, most non-dischargeability actions filed are objectively meritless and often insufficient to meet federal pleading requirements. As a result, it is often a good idea for a debtor’s bankruptcy attorney to file motions to dismiss meritless actions under Federal Rules of Civil Procedure 12(b)(6), rather than answer a meritless complaint, as a victory at the motion to dismiss stage will often mean that the court views such complaint as not “substantially justified,” and legal fees and costs will be much easier to obtain. Fed. R. Civ. Proc. 12(b)(6) (2012). In essence, it is much easier to argue that a creditor’s action is not “substantially justified” when the court itself has dismissed the action for failure to state a claim multiple times, as it will be difficult for a creditor to argue that its action “was substantially justified” under 11 U.S.C. §523(d) if the court already found the action to be “insufficient to state a claim for relief.” Additionally, it is the experience of Nova Law Group that most creditors’ attorneys have no idea how to litigate a motion to dismiss adequately, and as a result, often will settle such actions in a manner favorable to the bankruptcy debtor when confronted with skilled opposition from the debtor’s bankruptcy attorney.

            In conclusion, a client should always be sure that the bankruptcy attorney representing him or her is aware of the necessary steps to effectively defend against a non-dischargeability action, as well as the cost-saving provisions of 11 U.S.C. §523(d) for recovery of attorney’s fees and costs in such an action. This provision can not only serve as a very significant cost-savings to a bankruptcy client, but also can operate as a significant deterrent to any creditor contemplating an action in bankruptcy court against the debtor. If you would like to learn more about effective representation of bankruptcy debtors in non-dischargeability actions or would like to consult with a Nova Law Group attorney regarding your individual situation, feel free to contact a bankruptcy attorney of our office and we will be happy to assist you.