Death. Disease. Bad coffee. Bankruptcy. Certain things strike dread in the hearts of most people. So it is often with a sense of dread that Charlotteans caught in a web of debt trudge through the doors at Dave Badger’s South End law firm, ready to throw their hands up. And they are not alone. More than 43,000 North Carolinians filed for bankruptcy in 2005, according to the American Bankruptcy Institute.What they don’t realize as they face what may seem to be their darkest hour is that bankruptcy can be a new beginning.
Although declaring bankruptcy can be painful, most people welcome the chance to tidy up their financial messes and begin anew. But a recently enacted bankruptcy reform law has complicated what used to be a relatively straightforward process. Meant to discourage fraud, the complex reforms are most certainly sending headache remedy sales through the roof.
David and Goliath
Lu Najjar of Charlotte was running a thriving advertising and marketing agency overseeing more than 30 employees when a car accident sidelined him in 1997.
“I had about a quarter of a million dollars in debt and was facing an 80 percent decrease in income,” Najjar says. “I tried on my own to work out the debt with vendors and creditors, but I just couldn’t make it work. That’s when I went to Dave.”
Badger’s loft office is a little different than what you may expect. There are no dark offices with imposing mahogany desks. Rather, the loft was designed to let in as much natural light as possible. The atmosphere is casual, and the first one to greet you may just be Target (pronounced Tar-zhay), the quite vocal resident cat.
“I had a Zen wall made for this office, but it turned out to be too big for the intended space,” Badger says with a chuckle. “So we turned it upside down and made it into a bookcase.”
The hardest part of the whole bankruptcy process for most people is just walking through the firm’s door, Badger says, and he wants to help clients relax.
“I’ve worked with a lot of lawyers,” Najjar explains. “Many law firms are more like factories than offices. But Dave is a rare find. He is very hands-on and takes a personal interest in his clients.”
Badger has been an attorney for more than three decades. Unlike many bankruptcy lawyers, he started with trial work in criminal cases, civil litigation, medical malpractice suits and the like. He gravitated toward bankruptcy work and has handled bankruptcies almost exclusively for the past 20 years. His trial experience gives him a big advantage over bankruptcy lawyers who have never tried a case.
“When someone on the other side threatens to take some kind of action meant to intimidate us,” Badger says with a smirk, “my reaction tends to be, ‘Oh, please, it breaks the monotony.’”
Badger attracts a lot of small business people through local and statewide seminars he conducts. He cautions people against letting their fingers do the walking when it’s time to choose a bankruptcy lawyer. Bankruptcies can be extremely complicated and lawyers who are intimidated by big corporations may roll over too easily under pressure.
“Everybody thinks they can do bankruptcies,” Badger says. “But unless you’re just looking at a handful of credit card balances and a hospital bill, I highly recommend you find someone with experience whom you can trust.”
Making Sense of It All
As word spread that bankruptcy would soon become more difficult if not impossible, people scrambled to file prior to Oct. 17, 2005, the date the new bankruptcy reform law took effect. Bankruptcy filings shot up 31.6 percent to 2.04 million in 2005, according to Lundquist Consulting Inc., an industry group that tracks bankruptcy statistics.
It’s no secret to anyone who knows Badger that he has a well-defined opinion of the reform law. He thinks it’s “the most miserable piece of legislation he’s seen in 34 years of practice.”
Meant to make it more difficult for people to abuse bankruptcy laws by attempting to relieve debts they can afford to pay off, the reform law, in Badger’s opinion, simply makes bankruptcy laws largely inoperable.
“I understand making the guidelines for Chapter 7 bankruptcy, which relieves most debt, more stringent,” Badger says. “But why monkey around with Chapter 13 bankruptcy, which requires people to make payments to their creditors over the course of three to five years? Filing bankruptcy used to be a 200-yard dash. Now it’s a 220-yard high hurdle race.”
Badger tells clients coming to him for advice about their limping businesses that they basically have two choices. They can “shoot it and bury it” with a Chapter 7 filing or they can try to resuscitate it with a Chapter 11 filing. Individuals can also file a Chapter 7 bankruptcy, but it’s a lot harder to qualify for Chapter 7 relief under the new bankruptcy code than it used to be.
Under the new law, consumers with more than approximately $100 left each month after expenses are exempt from filing Chapter 7 bankruptcy. The income used to calculate this figure now includes virtually everything earned over the previous six months from everyone in a filer’s household, including your teenage daughter who’s working the counter at the local fast food restaurant. It even figures in recent windfalls, such as lottery winnings or an inheritance.
“They call this figure ‘current monthly income,’ Badger says. “But in reality it’s not current, it’s not monthly and it’s not income. Many people don’t even have a job by the time they come to me.”
Chapter 11 proceedings for a mom-and-pop business are the same as they are for US Airways: extremely expensive and cumbersome.
“When I tell clients what the retainer is for a Chapter 11, it’s usually enough to change their minds,” Badger claims.
This leaves small business owners with few options. Fortunately, a competent bankruptcy lawyer can sometimes steer clients around bankruptcy altogether.
“Dave was able to work out a repayment plan for me that made sense,” Najjar says. “Once we worked out the details, he started contacting my creditors and making the arrangements. His style and methodology are such that no one refused the offers he made. I was able to avoid filing bankruptcy with his logical solutions.”
Individuals and unincorporated businesses can opt to file a Chapter 13 bankruptcy, where they agree to a modified repayment plan and can retain most of their property. This sounds like a good solution for all concerned, however filing for Chapter 13 bankruptcy requires jumping through more hoops than a circus poodle.
Before they can file for Chapter 13 relief, consumers must undergo government-approved consumer credit counseling. The assumption is that this step benefits the consumer by helping them explore options. Badger disagrees.
“Too many times these operations charge exorbitant fees or try to convince the consumer that he doesn’t qualify for bankruptcy and should sign up for a consolidation loan or some other program meant to benefit the counseling service instead,” Badger cautions. “People should be very leery of high fees and sketchy debt-management plans.”
According to Bankrate.com, the Federal Trade Commission and the Internal Revenue Service are investigating a large percentage of these supposedly not-for-profit consumer credit counselors. High fees and close ties to for-profit organizations are red flags that a company is not on the up-and-up.
After filing bankruptcy, consumers must complete a government-approved financial management course.
“Talk about too little, too late,” Badger says. “Maybe the government should look at putting this education in our high schools instead.”
Knowledge is Power
Clients working through a bankruptcy are often surprised to hear they can get credit, finance a car and even buy a house right after the bankruptcy is discharged. Higher interest rates are a price they have to pay, but Badger says they shouldn’t let past history cause them to fall prey to greedy business practices.
“People who’ve filed bankruptcy are particularly vulnerable to being taken advantage of by creditors who insist they only qualify for the very highest interest rates,” Badger says. “They assume they have to do whatever the person on the other side of the desk says. That’s just not true. Almost any deal is negotiable.”
And lest you assume filers’ mailboxes are emptier after a bankruptcy, Badger points out that credit card companies aggressively pursue his clients. Read the fine print, he says, and be aware of what you’re agreeing to before you sign on for credit. With some cards, one late payment can mean a skyrocketing interest rate. High late fees and over-limit charges also fill creditor’s pockets.
“It’s like a drug dealer hanging around a rehab center,” Badger says. “Creditors will try very hard to lure you back into debt. People need to be ready for that.”
Although bankruptcy is still a viable option that sometimes can’t be avoided, it’s something no one aspires to, and the new, more complicated tax code offers greater incentive to try to avoid it.
For many clients coming through Badger’s door, the qualities that provided the impetus to start a business are the very same ones that come before the financial fall.
“Entrepreneurs are innately optimistic,” Badger says. “They have to have that spirit to go into business for themselves. But that optimism often prevents them from preparing for the worst.”
One of the biggest mistakes Badger sees clients make is signing personal guarantees for business purchases. If a bank sees a loan applicant as risky, it may ask him to guarantee the loan with personal assets. Badger has seen people lose their houses when businesses go bad.
Once again, remember that everything is negotiable, Badger says. If you have to agree to a personal guarantee, stipulate that it doesn’t include your house. If the bank insists that a non-involved spouse has to sign the personal guarantee too, refuse those terms. If it’s a good deal for the bank, chances are you can negotiate a deal that minimizes personal risk.
Pay your taxes. If your business takes a turn for the worst, you can negotiate a repayment plan with a vendor. The IRS, however, is not so flexible.
“Business start-ups need to talk to their accountants or corporate attorneys, be open to preventative advice and heed that advice,” Badger says. “If your attorney isn’t talking to you about ways to protect yourself, get a new attorney.”
About seven years after Najjar recovered with Badger’s support, misfortune struck again. He lost a couple of big clients and then a complicated mix-up between two creditors made bankruptcy inevitable.
“The good news is that Dave helped me stay in business,” Najjar says. “And he didn’t burn my creditors in the process, either. He helped me make choices where no one got burned.”
Najjar has referred more than 10 people caught in a financial tangle to Badger over the years. All but one was able to recover without declaring bankruptcy.
“When I mention Dave’s name to others, I get one of two reactions, depending on who I’m talking to,” Najjar says. “People react with either a mixture of fear and respect or just plain respect.”