BUSINESS
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Tri-State Defender
November 29 - December 5, 2012
MONEY MATTERS
‘Fiscal cliff’ and market changes bear watching In February, Federal Reserve Board Chairman Ben Bernanke coined the phrase “fiscal cliff” to warn Congress about the potentially harmful combination of nearly $600 billion in federal tax increases and spending cuts that are scheduled to take effect on Jan. 1, 2013, unless lawmakers address the deficit, taxes, and government spending. Economists and government officials have expressed concern that failing to prevent such severe fiscal tightening at the start of the year could cause a recession. The Congressional Budget Office projected that if no action is taken, U.S. gross domestic product (GDP) growth could fall 0.5 percent (yearover-year) by the fourth quarter of 2013, and unemployment could rise to 9.1 percent. As the national election loomed, politicians largely
avoided controversial decisions related to taxes, governm e n t spending, and the nat i o n a l debt. Legislative Charles Sims Jr., CFP deadlines may now prompt the president and Congress to address a number of important financial issues possibly before the end of 2012.
A bigger tax burden Many of the tax cuts enacted in 2001 and 2003 – including rates on regular income, capital gains, dividends, and estates – are scheduled to expire on Dec. 31, 2012, and revert to their previously higher
levels. The 2 percent payroll tax reduction for workers, enacted as a temporary stimulus, is also set to expire at the end of the year. The expiring tax provisions could cause the federal tax bill of the average middle-income household (earning $50,000 annually) to rise by about $1,750, and higher-earning families could owe thousands more in total federal taxes. Federal budget cuts The Budget Control Act of 2011 mandated $1.2 trillion in deficit reduction spread over nine years (2013-21), divided evenly between defense and non-defense programs. About $109 billion in automatic budget cuts are scheduled to go into effect on Jan. 1, 2013 ($54.7 billion a year from U.S. defense spending). Pay for military service members and Social Security and Medicare
benefits are exempt. The blunt cuts were meant to be indiscriminate and painful for both political parties in order to motivate lawmakers to replace them with a more targeted deficit-reduction package. To date, there has been much discussion but little agreement on how to accomplish such a feat. Debt disputes The national debt is also projected to reach its legal limit (the “debt ceiling”) sometime around the end of 2012. Congress must pass legislation to raise the limit, which initiated heated negotiations in the summer of 2011. Standard & Poor’s was the first ratings agency to downgrade the U.S. credit rating after a debt-ceiling standoff that threatened the U.S. Treasury’s ability to make payments to debt holders.
ON OUR WAY TO WEALTHY
Bankruptcy: Chapter 11
Reorganization Our month-long focus on bankruptcies concludes with a focus on the Chapter 11 version. The key word is reorganization. Under Chapter 11, the debtor – commonly referred to as the debtor in possession (DIP) – retains control of the business and the assets. Individuals with high levels of debt also may file under Chapter 11.
Automatic stay The automatic stay is in effect on all bankruptcies. Upon the filing of a petition for relief in the bankruptcy courts, the automatic stay prevents any creditor from proceeding to collect a debt. Chapter 11 vs. Chapter 7 Remember, under the Chapter 7 bankruptcy, the individual is liquidating assets in an effort to satisfy debt. However under Chapter 11, the business owner or individuals wish to reorganize in order to maintain their assets and avoid liquidation. Many companies that file Chapter 11 bounce back and become profitable again. The court looks carefully at the plan and if approved expects the DIP to adhere to the plan. If the DIP deviates from the plan or a
plan is unaccepta b l e , Chapter 7 liquidation could be on the horizon.
Chapter 11 vs. Chapter Carlee McCullough 13 Chapter 11 and Chapter 13 are similar in many ways. While there is a plan under both chapters, the court approves the plan under Chapter 13. Creditors vote to approve or reject the reorganization plan under Chapter 11 and may even submit their own plan for consideration. Once the plan is approved, the DIP has a fiduciary duty toward its creditors and must submit monthly financial operating reports with the bankruptcy court. Eligibility A sole proprietorship, partnership or corporation may file Chapter 11. The DIP must complete certified credit counseling and pay the appropriate filing fees, which tends to be higher than other chapters.
Small business bankruptcy Under a Chapter 11, there are typically no limits to the amounts of debt allowed. In cases where the DIP has noncontingent liquidated secured and unsecured debts of $2,343,300 or less (as of 2012), the DIP may qualify under the “Small Business Bankruptcy” (SBB) Chapter 11, which tends to move faster than the standard Chapter 11. Under a SBB, the court will not appoint a creditors’ committee as in a traditional Chapter 11. The petition must include: a balance sheet, statement of operations, and a copy of the company’s most recent tax return. Unfortunately, real estate companies do not qualify for the Small Business Bankruptcy Chapter 11, but can file under the standard Chapter 11. Individuals with high debt If an individual has more than $360,475 in unsecured debt (which includes judgments, credit cards, personal loans, medical bills, etc) and/or more than $1,081,400 in secured debt (which includes mortgages, car loans, boats, and any other collateralized loans), the individual may not qualify to file a Chapter 13 Bankruptcy and will be forced to file under a Chapter 11. Payroll taxes A DIP, unfortunately, will have a multitude of debts, which may include unpaid
payroll taxes. By law, employers are required to withhold payroll taxes from employees’ earnings. The IRS considers payroll tax violations a serious issue and may resort to seizure of business assets, penalties, interest and fines. While taxes generally are not discharged under Chapter 11 Reorganization, they are paid over a period of time with interest but without penalties. Denials by the court Under certain circumstances, the court may deny a discharge if the DIP is found
Moody’s Investors Service, which changed its outlook on U.S. government debt to “negative” last year after Congress and the White House finally agreed to an increase in the debt ceiling, has warned that it could lower the U.S. AAA credit rating next year if lawmakers fail to craft a longterm debt-reduction plan.
Deadline-driven decisions? It’s possible that Congress may temporarily extend the current tax provisions and/or delay planned spending cuts until more comprehensive legislation can be enacted. Even so, the resulting uncertainty may make it difficult for individuals and businesses to move forward on major purchases or investments. Leaving critical issues unresolved for too long could also weaken the U.S. economy, especially if political gridlock to have concealed property, destroyed or falsified records or committed fraud. In addition to providing the court reasons to deny discharge, these actions may also be considered criminal. The court may also deny confirmation of the plan. After a hearing, if the court believes the proposed plan is not feasible, not in the best interest of the creditors, not proposed in good faith or out of line with required amounts under the law, then the court may deny confirmation.
continues well into next year. As an investor and taxpayer, you may want to monitor how the U.S. political situation and fiscal decisions unfold in the coming months. Maintaining a steady course could help you weather market changes. Keep in mind that it is important to make investment decisions based on your time horizon, risk tolerance, long-term goals, and personal circumstances.
(Charles Sims Jr. is President/ CEO of The Sims Financial Group. Contact him at 901-682-2410 or visit www. SimsFinancialGroup.com. The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.)
Completing the plan Chapter 11 Reorganization requires payment over a certain period of time. The amount of income and debt will determine the amount of the fixed monthly payments for an agreed upon time. At the end of the term and completion of the plan, the remaining debts to those creditors will be discharged. (Contact Carlee McCullough, Esq., at 5308 Cottonwood Road, Suite 1A, Memphis, TN 38118, or email her at jstce4all@aol.com.)