What to Know Before Setting up a Limited Liability Corporation in Georgia
Limited Liability Corporations (LLCs) in Georgia contain similar characteristics of both corporations and partnerships. For taxation purposes, LLCs are treated as partnerships, with pass-through taxation to the individual.
The key benefit of an LLC is that you, the member, are protected from personal liability. But in order to enjoy this benefit, the member must keep personal assets and expenses completely separate from business assets and expenses. If there are commingling of funds by the member, then a creditor could potentially “pierce the corporate veil” to show the member is treating the LLC as an individual account, and thus go after the member’s assets.
Forming an LLC in Georgia requires several steps. First, you must file the Articles of Organization (AO) and pay the required fee to the Secretary of State. To register online, visit the Georgia Secretary of State’s website. The registered name must contain the words Limited Liability Corporation or the abbreviate LLC in order to provide notice to the public of the nature of the business entity. During the formation, another important aspect to consider is the management of the LLC. An LLC may be run by managers who are members; however, the AO can also call for the LLC to be run by a sole managing member.
The most helpful aspect of the LLC is that a member is not liable for any of the LLC’s liabilities, even though a member is always liable for his own personal torts. Therefore, while the LLC itself might be liable under agency principles, there is not vicarious liability to the individual. Thus, ALL owners are shielded from personal liability on non-tortious matters.
There is also more flexible management in an LLC than a partnership, in that all owners may exercise control unless the AO states otherwise. Also, there is less tax to pay in an LLC because of pass-through taxation, as opposed to the tax treatment of a C corporation. Business profits and losses in an LLC are taxed (like an S Corp.) at the individual’s income tax rate, which is more favorable.
If you have a partnership or a sole proprietorship and you want to protect your personal assets while having your business income taxed at an individual rates, an LLC could be the business formation for you. You can, but are not required to, get a separate tax identification number. This would be beneficial in ensuring that business and personal assets remain separate and further prevent a creditor from alleging commingling of funds, in an attempt to “pierce the corporate veil.”
Finally, since one of the primary goals of an LLC is to insulate the member against personal liability, is it crucial that when signing documents for the LLC, the member must indicate on the document that he/she is signing as a member. If the member does not sign as a member, then he/she is signing as an individual. Signing as an individual, even if done by accidental omission, will then trigger personal liability.
Why You Shouldn’t Move Out of Your House Right Away if Your Lender Wins a “Motion to Lift Stay”
Whether in a Chapter 7 or a Chapter 13 bankruptcy, a lender has the right to file a “Motion to Lift Stay,” to get at their collateral. This is typically only done by a lender when the debtor is not current, and if it is done when the debtor is current, then the debtor has a valid defense.
A lot of times when debtors get notice of hearing for the “Motion to Lift Stay,” they will ask me if they have to move out of their house on that day. The answer is no, and here is why.
Without filing a Motion to Lift Stay, a lender cannot assert its non-bankruptcy rights of foreclosure, because the debtor is protected by the Automatic Stay. Therefore, a lift stay order is not a foreclosure order. Rather, it is just an order allowing the lender to pursue its foreclosure rights through applicable state court methods.
In other words, once the lender is successful in its lift stay motion, it does not get to foreclose right away. Instead, the lender now has the same rights of foreclosure it had prior to the debtor filing bankruptcy. That means the lender must still follow the state law method of foreclosure, and it must start this process from scratch.
In Georgia, the lender must advertise for four weeks in the legal organ for the county of the property. It also must send certified notice to the debtor a month prior to the foreclosure sale. Doing the math, the lender cannot actually foreclose on the property until at least a month after the lift stay motion is granted.
Furthermore, lenders are not always chomping at the bit to foreclose. Often they do not want the property in their name for quite some time. Thus, they might go months after a lift stay motion without initiating a foreclosure sale, if at all. The lift stay motion might have been solely about drumming up attorney fees.
As a debtor, you have several options after the lift stay motion is granted. While you could move out right away, you could also wait to move until the foreclosure notice. Additionally, you could also ask your lender about renting the property or perhaps offer a “cash for keys” exchange to move out of the property early. The good news for the debtor is he/she is not reaffirming the mortgage, so the mortgage note is discharged regardless of when the lender ultimately forecloses. And if the bank takes it time to foreclose, the debtor can take advantage of this arrangement to continue to live in the property, perhaps even rent free. That is especially important because any place the debtor would likely move, he/she would instantly begin paying rent.
However, it is important to note that until the property is ultimately foreclosed upon, the debtor is still on title. Being on title, the debtor is liable for any injuries on the property, code violations and association dues. Therefore, the debtor should make sure to keep the property up to code, pay post petition filing date association dues and maintain insurance on the property until title switches hands. The last thing a debtor wants to do after filing bankruptcy, is to incur post petition debts relating to a property they are no longer living in. As those debts would be incurred after the filing date, they would not be discharged in the debtor’s bankruptcy case.
For an additional perspective on the pros and cons of “walking away” prior to a foreclosure sale, read this.
Who is the Bankruptcy Trustee?
When you file bankruptcy, a trustee is appointed by the Office of the United States Trustee to administer your case. Barring an unusual case of a conflict of interest between the debtor and the trustee or a request by creditors to remove the trustee, this person will remain your trustee throughout your case.
It is important to note that while the trustee has powers, it does not have legal authority to “force” a debtor to do anything. If there ever is a dispute between a debtor and the trustee that cannot be resolved, the two sides can always take the matter in front of the assigned judge, who will be the arbiter.
While many bankruptcy cases come and go without the debtor meeting his/her assigned judge, the debtor will always meet the trustee. The debtor must appear in front of the trustee for his/her meeting of creditors, also known as a debtor’s exam or 341 hearing. In that hearing the trustee will put the debtor under oath and ask him/her various questions relating to the filed petition.
The trustee’s role in a chapter 7 case is much different than in a chapter 13 case. In a chapter 7 case, the trustee is looking to determine if the debtor has non exempt assets, meaning the debtor has more assets than he/she is allowed to exempt in a chapter 7. In such an event, the trustee will liquidate the asset and pay and use the money to pay creditors who file a “proof of claim” with the court. The trustee will take a percentage commission for this liquidation, and it is possible that the debtor will also receive a sum of money from this sale. It is important to note however that the majority of chapter 7 debtors do not have any assets to liquidate, and are considered “no asset” cases.
In a chapter 13 case, the trustee does not liquidate assets. In fact, many debtors choose the chapter 13 alternative to chapter 7 so that none of the assets they want to keep are liquidated. In a chapter 13, the debtor pays the chapter 13 trustee a monthly payment for a period of 36 to 60 months, and the trustee in turn distributes the money among the debtor’s creditors who have filed a “proof of claim.” The trustee receives a commission not exceeding 10% for making the distributions.
Since chapter 13 involves a payment plan, whereas chapter 7 does not, there must be confirmation of the plan in a chapter 13. One of the trustee’s jobs is to make sure creditors are treated fairly and that the debtor contributes all of his/her disposable income into the plan, so the trustee will often object to confirmation. The two sides will then attempt to resolve any disagreements so that the trustee will allow the plan to be confirmed.
Although the trustee seems like an opponent of the debtor, in actuality the trustee is not for or against the debtor. The trustee is merely doing the job assigned under the bankruptcy code, and as long as the debtor is honest and thorough in describing his/her financial condition to the trustee, the actions the trustee takes in the case are often very predictable.
How Did I Arrange to Pass on my House? It’s in my Will! Wait, is it?
One of the most common areas of estate planning that is overlooked seems to be the actual ownership interests in property. Oftentimes, a couple will arrange to have a will drafted or arrange to go online and draft one themselves, and in their minds, they need the simplest of arrangements. It is possible that they do only need a simple arrangement. However, simple needs to still include an examination of in whose name the assets and debts are titled. An examination of where the asset or debt is located is necessary. I come across many people that simply think that once the paperwork is prepared, the Will takes care of everything. The problem with this misconception is that although someone may have every intention to pass an asset to another person, they neglected to consider the actual ownership interest they may have in a certain piece of property, or where it may be located and the potential aggravation they are creating in not reviewing this aspect of their estate plan.
Title to Property Among Family: Older and Widowed Dad leaves all property to two sons equally. During his life, Dad gave to Older Son a 50% interest in the house Older Son now lives in with Older Son’s wife, so before death, Dad and Older Son owned the house as tenants in common (ie. No right of survivorship). Dad dies.
Dad neglected to consider: Evil Younger Son now has a quarter interest (via the half interest he inherited of the father’s half interest) in Older Son and Older Son’s (and family’s) house. Evil Younger Son now has the power to make life miserable for Older Son and his family.
Easily Preventable Problem: Dad could have reviewed the title to the house when preparing his will and arranged to own the house jointly with Older Son with rights of survivorship.
Title to Property and Federal Estate Tax Considerations: In considering the Federal Estate tax and exemption, there is a great deal of uncertainty with what may happen with the exemption amount and rule allowing a step up in basis for property. In considering the uncertainty, people are still arranging to set up Bypass Wills, or Credit Shelter Trusts for their families.[1] When a trust like this is set up, it is vital to review the title of assets. Oftentimes, a family could spend a decent amount to set up this type of arrangement only to discover later that the entire plan was defeated because all property was owned jointly between them, so that no property would go through probate and no property would then be passed into the Credit Shelter trust that was set up in the Will.
Title to Property Located Out of State: If you own real property in your personal name but you reside in another state, a separate probate process will need to take place for that out of state property. If you have property that you own outside of the state in which you reside, it is important to consider the cost of the sale or transfer of real estate during a probate process in the state where the real property is located. In some states, the transfer of property during the probate process is an expensive hassle, no matter how simple your estate. In Georgia, if a matter is uncontested, and there is a Will in place, the probate process can be a relatively smooth and inexpensive one. There are several easy solutions to avoid a separate probate process, but the main point is, the issue needs to be identified and addressed. Even if you do discover that you have no complications, it is worth the hour or two to find out.
Dara Berger is an estate planning and immigration attorney in Atlanta, who occasionally contributes to this blog. She can be reached at dara@dlb-legal.com.
Can you Discharge Income Taxes in Bankruptcy?
Many debtors filing bankruptcy think they cannot discharge income taxes in bankruptcy. However, that is not true. Income taxes can be discharged in bankruptcy. Of course, it is hardly that simple to discharge your tax debt. Discharging taxes depend on a variety of factors, and many debtors are not eligible to discharge their tax debt.
To understand how complicated it can be to determine if your tax debt is dischargeable, consider that debts come in three forms- secured (i.e. your mortgage), unsecured (i.e. your credit card bill), priority (i.e child support and alimony). Now consider that taxes can be classified as all three- even sometimes within the same debtor’s case.
A secured tax debt is one that the IRS has filed a lien against the debtor. That lien attaches to all of the debtor’s property, making it secured. A priority tax debt is one that the debtor will not be able to discharge in bankruptcy, but there is no lien. An unsecured tax debt is one the debtor should be able to discharge.
So what determines if an income tax debt is eligible for discharge? There are six rules for discharging income tax, and they apply equally to State and Federal income taxes. The tax is dischargeable if all of the following conditions exist:
- The most recent due date for filing the return is more than three years old. (Note: the three-year period is computed from the most recent date the tax return is due for the tax year. An extension to file the return delays the start time, so don’t just assume you know the due date. Your 2006 return was due no earlier than April 15, 2007. If an extension was filed, it could have been due as late as October 17, 2007 (depending on weekend dates)).
- A tax return has been filed or given by the taxpayer for the tax year in question at least more than two years preceding the filing date of the bankruptcy.
- If a tax claim has been assessed, then it has been at least more than 240 days between the last date of assessment and the filing of the bankruptcy.
- The tax is assessable, meaning the debtor is not a non-filer.
- The tax return was not fraudulent
- There was no willful tax evasion by the debtor
Therefore, a debtor should keep those conditions in mind before filing bankruptcy. For instance, the debtor might be able to discharge his/her taxes if he/she waits another 35 days to file the petition. It is thus recommended that if a debtor thinks his/her taxes might be dischargeable, that a tax account transcript is ordered from the IRS to verify filing dates, due dates and assessment dates.
It should further be noted that this blog is a very basic description of the rules associated with discharging income taxes and there are bound to be many complex questions that arise in a debtor’s case. Some questions that might need to be addressed by the debtor include, but are not limited to:
- Does an offer in compromise toll any of the time periods?
- What property is covered by an IRS lien?
- Will IRS self release a tax lien?
- How does the IRS setoff tax refunds when the debtor is in bankruptcy and has dischargeable taxes?
Debt Settlement Companies: Reasons to be Concerned
In April 2010, the General Accountability Office issued a 45 page report very critical of Debt Settlement companies, which can be found at www.gao.gov/cgi-bin/getrpt?GAO-10-593T. Common threads among the report are that these companies advertise in all forms of electronic media (TV, radio, internet) , touting their ability to aid the financially distressed. Also, an overwhelming majority (85%) of companies collected their fees BEFORE settling any of their clients debts (The FTC has proposed banning this practice).
Several companies practiced a policy of monies paid to them for as long as 4 months went only to pay the firm’s fees BEFORE any monies were used to pay the consumer’s bills.
Some companies claimed a 100% success rate for their programs. This was contradicted by FTC and state investigations typically showing that less than 10% of consumers are successfully completing these programs.
In the most egregious of cases, when consumers combined the fees they paid to these companies with the settled amounts of the debts, they actually paid MORE than total amount of the original debts.
Lessons Learned
Be very skeptical about responding to a debt settlement organization that contacts you directly (phone, mailing, email, etc.) or advertise as cited in the report
Check with your Better Business Bureau for any complaints, but bear in mind these organizations can be operating anywhere in the country and may not have a Georgia office. It is always a good idea before dealing with any of these companies to google them and find out what people’s experiences have been.
In the alternative, we would suggest you initiate contact with or a local not for profit organization that deals in debt settlement, such as CredAbility.
What is a Motion to Lift Stay?
Upon filing of a bankruptcy case, the automatic stay immediately kicks in. The importance of the stay instantly kicking in cannot be understated. Many debtors wind up filing the day before a foreclosure sale or a car repossession, so without the immediacy of the stay, they would lose their house or car.
While the stay gives the debtor a lot of relief at the filing of the bankruptcy case, the stay is not necessarily permanent. The stay can expire over time with respect to personal property, but the most common way the stay expires is upon a creditor filing and winning a “Motion to Lift Stay.”
A Motion to Lift Stay is filed by the creditor during the pendency of the bankruptcy case almost exclusively for the purpose of repossessing its collateral. In simple terms, a lift stay motion is almost always filed by a creditor to get back its car or its home. Without the stay being lifted, the stay remains in effect, and it is the stay that keeps the creditor from taking back its collateral from the debtor.
Note that the motion filed by the creditor is not technically asking for money. It is technically asking only for its collateral. It cannot ask the debtor for money, since that would be a violation of the bankruptcy code. This begs the question, what would cure the problem for the creditor? The answer is of course money.
The creditor should only bring the action if the debtor is behind in its payments. The creditor brings the motion arguing that its collateral is not being “adequately protected”; therefore, if the debtor is current in its payments, then the creditor has no room to argue that its interests are not being adequately protected. Remember, just because a debtor has filed bankruptcy does not mean it cannot retain its house or its car. As such, if the debtor has made and continues to make timely payments on these items, the creditor should not be bringing a lift stay motion and should not get an order granting that motion.
So how can the debtor fight a lift stay? The debtor can fight it in several ways. The debtor could get current on its payments, which would deny the creditor its adequate protection argument. The debtor could also fight the creditors standing to bring the motion. This often happens in mortgages, where the creditor bringing the motion might not have proof that it has received the deed or note via an assignment. The debtor could also settle with the creditor. The creditor might agree to not lift the stay in consideration for the debtor getting current in a set number of days.
If the stay is lifted, then the creditor is free to pursue its collateral according to state law methods. In other words, the creditor can go after its collateral in the same methods it could have done prior to the debtor filing bankruptcy once the stay has been lifted. That is why a debtor who intends to continue to use the collateral in its bankruptcy estate cannot afford to ignore a lift stay motion.
What is the Automatic Stay in Bankruptcy?
I have seen my fair share of debtors who file bankruptcy without needing immediate relief. They might be current on all their bills and have not even received a single phone call from a creditor, but are overwhelmed by their debt load and do not see any way out besides bankruptcy. In that situation, their filing date is arbitrary and could possibly have waited for month.
However, often debtors have an immediacy to their situation. They might be facing a foreclosure or a garnishment. Perhaps they have been served and the answer is past due and in default.
The good news is no matter which fact pattern the debtor is facing prior to the filing, the second the debtor files, he/she enjoys the protection of the “automatic stay.” The protections of the automatic stay are laid out in 11 USC 362. They prevent creditors from taking the following actions:
- Starting or continuing a garnishment
- Starting or continuing a foreclosure
- Starting or continuing a lawsuit against the debtor
- Calling the debtor
- Sending bills to the debtor
- Repossessing a vehicle
Basically any act to collect money short of a domestic support obligation is going to cease at the filing. This does not mean the debtor does not have to pay to continue to use any of its collateralized items. Rather, it just means until such time as the stay expires- which can happen through the expiration of time or through a creditor action called a “motion to lift stay” – the debtor is protected by the automatic stay.
The automatic stay works differently in chapter 7 versus chapter 13. For instance, the debtor in a chapter 7 proceeding has to file a reaffirmation agreement within 45 days of its court appearance to retain its vehicle or else the stay expires automatically at that point, whereas in a chapter 13 the debtor would pay off the car as part of its plan and the creditor would actually have to file a “motion to lift stay” to repossess the car. (Note: the technicalities of possibly keeping a car without signing a reaffirmation and whether a debtor would pay off a car in a 13 directly to the creditor or through the trustee will vary according to district).
Additionally, in a chapter 7 the automatic stay operates differently as to personal property versus real property. As mentioned above, the stay will expire automatically as to personal property (usually the debtor’s car) if the debtor does not file the reaffirmation agreement the debtor listed in its statement of intention within the allotted time. However, as to real property, (the debtor’s house) the stay remains in effect until the earliest of the trustee abandoning the property, the case being discharged, the case being closed or the case being dismissed. Therefore, real property stays often last until the end of the case in a chapter 7 or 13 unless the creditor files a “motion to lift stay.”
Finally, it is important to note that the debtor loses automatic protection stay if he/she becomes what it known as a “serial filer.” If this is the debtor’s second filing within a calendar year, the debtor only gets automatic stay protection for 30 days and must file a “motion to extend stay,” to keep it in force longer. If this is the debtor’s third filing within a calendar year, the debtor gets no stay and must file a “motion to extend stay,” to get any stay protection. Without a valid excuse for the repeat filings, the debtor’s motion might not be granted.
Important Dates to consider when filing bankruptcy
Filing bankruptcy is painful enough for most debtors. The last thing you want to do on top of that is to make a mistake in your filing that leads to even more heartache, especially the kind of mistake that can be easily avoided. That is why after you make the decision to file the case, you have to make another important decision- when to file the case.
While there are certain things not to do before filing your case, even if you have done some of these things, they can often be corrected by picking the correct filing date.
Generally speaking, the debtor should avoid filing if he/she has:
- Charged on a credit card or received a cash advance in the last 90 days
- Paid off an unsecured debt exceeding $600 in the last 90 days
- Paid off a debt to a family member in the past year
- Given a sizeable gift to someone in the past year
- Transferred an asset for less than equivalent value in the previous two years (or even longer, if your state law anti-fraud statute reach back is longer)
- Just purchased a vehicle
The debtor might also wish to avoid filing in certain other circumstances, depending on the facts of the case. Some scenarios the debtor might not want to file in include:
- About to receive an inheritance.
- About to receive a tax refund
- Received a sizeable bonus in the previous six months which inflates the debtor’s income on the “means test”.
- In the middle of working out a home loan modification
While filing after having done some of those things might not affect the debtor’s case in certain circumstances, it is important to alert your attorney to these issues before filing. Even though it might not be possible to avoid filing before letting the timeline run on one of these issues (for example, you might need to file to stop a foreclosure while knowing full well this exposes you to having a debt repayment to a relative rescinded), it is critical to run the facts by your attorney so you can be given all your options.
Often times the debtor will think he/she “needs to file,” well before it is actually necessitated. In those circumstances, waiting to file can often lead to a smoother bankruptcy case for the debtor.
What Happens at Your 341 Meeting of Creditors?
No matter which chapter of bankruptcy you file, you will have to attend a debtor’s exam with your assigned trustee (also known as your 341 Meeting of Creditors). This is a requirement of the bankruptcy code and will be under oath.
This meeting will usually take place about 4-6 weeks after you case is filed. You will not meet with your Judge and usually do not need to bring much, if any, paper work. At least a week prior to the meeting you should have given your trustee the required tax returns. A picture ID and proof of social security number is required at the meeting.
While a Chapter 13 examination is slightly more complicated and time consuming than a Chapter 7 exam, neither one lasts too long. An exam typically takes between 5-10 minutes, with some ranging even shorter or longer. It is also an opportunity for creditors to question the debtor, although in the typical case, creditors do not appear.
Some of the trustees questions are routine and given to all debtors, while others are specific as to your case. Among the typical questions debtors can expect to hear are:
- Did you read and sign your petition and schedules before signing them, and did you attorney review it with you? Are they true and correct?
- Is all of the information still true and correct or are there changes?
- Do you understand that while you are under Chapter 13 you cannot incur any new debt or buy or sell any property without permission of the Court?
- Do you have any claims against anyone or the right to sue anyone? Do you understand that while you are in bankruptcy, you must tell your attorney about any claims that you have against third parties, even if they arise after your case was filed?
- What caused you to file this case?
- Do you owe any taxes to the IRS or the State Department of Revenue?
- Do you participate in a 401(k) or other retirement program? If so, do you currently contribute to this program? Do you have any loans against the funds?
- Do you pay or receive child support? If you pay, is the creditor’s name, mailing, address, and phone number listed in your schedules? Have you made all of your support/alimony payments that have come due since this case was filed?
- Do you have any student loans? If so, what is their status (deferment, default, etc.)?
- Does anybody owe you money?
- Do you have any credit cards, either with you or at home?
- Are you expecting or entitled to an inheritance?
Questions that are specific to your case will focus on things like the following (note this list is hardly all inclusive):
- How did you arrive at the value of your house?
- Describe the value received for any transfers of property in the previous two years.
- How much money was garnished or setoff from your bank account in the 90 days previous to filing?
- Describe the nature of a particular asset you own that you cannot exempt
- Give the details of you any gift you gave in the past year exceeding $200.
At the conclusion of the meeting the trustee will give you a list of things that need to be corrected prior to confirmation if it is a chapter 13. If you are in a chapter 7, the trustee might ask you to supplement additional information or conclude the meeting.
No matter which chapter you are in, there will be additional things you must do after the hearing. Filing a financial management certificate, filing reaffirmation agreements and/or lien avoidance motions, or redeeming a car are just the bare minimum of things that might still need to be done.
