Bankruptcy Lawyer Bryan W. Stone answers the question: “What are the pros and cons of bankruptcy?”
For many people and businesses, deciding whether or not to file for bankruptcy protection is the pinnacle of their financial woes. Carefully weighing the pros and cons of this decision is something to which we have dedicated many a line of text on this blog.
That’s right—even though the act of filing for bankruptcy may feel like you are sacrificing plenty, filing is a privilege, not a right. This is something the chief judge for the U.S. Bankruptcy Court for the Northern District of Florida made abundantly clear in her ruling this month barring the former owner of TutoringZone, a college tutoring company, from filing for Chapter 7 protection.
We mostly discuss bad faith as it relates to bankruptcy when it comes to parties who have already successfully filed getting in trouble for misrepresenting their finances or trying to hide assets. Bankruptcy, and the clean financial slate its protection provides, depends heavily on a debtor’s good faith. In short, this means that the debtor did not borrow money he or she did not intend to pay back, and that their financial dissolution was the product of either honest but bad financial management, or circumstances beyond the debtor’s control.
So what did the Hintzes do to exclude themselves from bankruptcy protection? The main contention the judge had with Matthew Hintze’s actions was that he, as owner of the Gainesville, Florida-based TutoringZone, was not transparent with investors regarding his company’s financial status.
What transpired is this: Matthew Hintze and his business partner Ethan Fieldman founded TutoringZone back in 1997 with some $2.6 million from a group of investors. Cut to June of 2011, when Hintze bought out Fieldman for $835,000. Most, if not all, of these funds came from personal loans Hintze took out.
The very next day after being bought out, Fieldman opened a competing business called Study Edge. Before long, Study Edge had taken the market share of Gainsville’s college tutoring business. TutoringZone’s revenues crashed, and Hintze was unable to pay back the personal loans he’d taken out to buy out his partner and keep the company running.
A University of Florida professor who had loaned Hintze $275,000 to keep the company in operation over the summer bought TutoringZone’s intellectual property and course materials from him in August of 2012. After the sale, Hintze and his wife filed for bankruptcy, reporting $603,000 in assets and $2.7 million in debt to more than 50 creditors. The attempted filing included more than $1 million in personal loans from 12 different friends and family members.
Chapter 7 is not available to corporations like TutoringZone, but the Hintzes filed in their individual capacities. The type of bankruptcy they filed for wasn’t the issue.
So what was?
Shortly after the Hintzes filed for bankruptcy, the group of investors who had contributed to Hintze’s startup funds sued the couple to keep them from availing themselves of bankruptcy protection.
A Chapter 7 would have allowed the Hintzes to discharge, or cancel, their massive personal debts. Although their debts are classified as personal, the majority of them relate to the money the Hintzes borrowed to put back into their business. After going through the files and arguments presented from both parties, the bankruptcy judge declared that the Hintzes had used the company for their own benefit whilst misleading investors about TutoringZone’s financial success.
The judge’s decision will not be final until the paperwork is submitted. There is no word yet on how the Hintzes will go about handling their millions in debt without the option of bankruptcy relief, but the preliminary decision stands as a warning to other potential filers: don’t mislead your investors. Trying to classify debts as personal instead of business is not enough to keep it from haunting you for years to come.
If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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