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5 ways CPAs can help their clients with bankruptcy

By Lyle Solomon, JD

July 7, 2022

The economic challenges caused by the global coronavirus outbreak have caused a rise in bankruptcy cases. Besides lawyers, CPAs are also handling an increasing number of bankruptcy cases. Although CPAs don’t run the legal part, they have an important role in advising clients — including those that find themselves heading toward insolvency or dealing with bankruptcy.
 
According to bankruptcy laws, insolvency is when the current liabilities of a person are more than their current assets. Whereas the IRS's definition of insolvency is when the total liabilities of an individual are greater than their total assets. Generally, a person is considered insolvent when they cannot pay off what they owe.
 
Below are a few considerations you can keep in mind to help your clients irrespective of whichever bankruptcy definition mentioned above applies in their case.

Reviewing assets and liabilities and preparing a statement of financial condition

Learn about your client’s financial condition through a review of their assets and liabilities. A review will be able to indicate if there’s an asset your client can sell or if your client has any capacity to borrow money. It can tell if there are any jointly-owned assets or assets held in partnership that need to be identified.
 
You’ll need to prepare a statement of a financial condition if the IRS or a bankruptcy court asks for it. Creditors might ask for a complete view, but you shouldn’t submit anything to them. They can access your client’s credit reports and may know more about your client’s finances than they’re letting on. Even if your client fails to mention anything in the statement, it may result in their loss of credibility and they’ll also be penalized.

Budgeting

There are many reasons that lead people to incur too much debt. Often those reasons are beyond the control of an individual, for example, medical expenses and illnesses that are not entirely covered by their insurance. Failed businesses and guaranteed loans are also primary reasons people get into debt. Some individuals lose their job, and because they cannot find another one quickly, they take out a loan to make ends meet. Some people get into debt for not managing their finances responsibly. These cases require assistance regarding readjustment of spending, getting a repayment plan that works for them and learning not to overspend.
 
Advise clients to form a budget, which is indispensable in these cases. The person managing the finances in the family needs to prepare a sensible budget and stick to it, and the budget must contain everything the family needs. In the case of past-due taxes, an individual needs to get into an installment agreement with the IRS. In this case, the individual must compare the spending guidelines of the IRS with the family’s needs.

Checking assets and trying to pay off debt

You can check your client’s assets to see if any can be liquidated to pay off high-interest debts. Credit card debts can be paid off with home equity loans. Retirement funds are also regarded as assets. Some can be spent, for example, an IRA, while some cannot be spent, like a 401(k). The client should look into whether they can make a withdrawal from any of these accounts or if they can borrow against them, or if those can be protected from the creditors.

The role of CPAs in developing a restructuring plan and negotiating debt settlements

Dealing with debt involves the following:
●            Reducing expenses.
●            Paying off debt.
●            Reducing principal payments and interest rates.
●            Negotiating with creditors to extend the repayment term or settle for an amount that is less than what                           is owed.
●            Getting a loan from one’s employer.
 
Dealing with debt is challenging, and your client needs to have a plan to deal with it effectively.
 
Your clients can use the debt settlement strategy to settle credit card debt, which can be done easily through negotiation with a collection agency. In many cases, these collection agencies receive a percentage of the amount they collect and are informed of the lowest amount they can accept. CPAs assist attorneys in debt settlement cases. As such, they have a high level of credibility and trust and are also knowledgeable regarding cash flow and debt repayments; thus, they can be effective regarding debt settlement.          

Discussing the different types of bankruptcy

Individuals can apply for three types of bankruptcy: Chapter 7, Chapter 11 and Chapter 13. As a CPA, you can advise on the development of an exit plan, on the financial aspects and the rules in general. People commonly file for Chapter 7 bankruptcy, and to qualify for it, one must be eligible in a means test. Those above a certain income level will not pass the means test and will have to apply for Chapter 13 bankruptcy instead. In a Chapter 13 bankruptcy, a debtor pays off their debt through installments within five years. It is not very common for individuals to file for Chapter 11 bankruptcy.

Be prepared to help

Because of the coronavirus pandemic, CPAs will find themselves involved in matters related to bankruptcy. They may have to work alongside legal counsel for the preparation of financial papers, and they might have to answer basic questions related to bankruptcy. CPAs should not get into the ambit of practicing law; however, they can help their clients.
 
Lyle Solomon, JD has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a principal attorney.