My brother bought a dental business using bank loan but now business is very bad

[brdc]

Hi all, I hope I can get some suggestions to a situation my brother is facing. Here is the background: my brother and sister in-law lives in North Carolina. My sister in-law is a dentist. Two months ago they bought a dental practice from another dentist thinking they will do well but a lot of patients have defected, resulting in very large negative cash flow (-$20,000 per mon). They are working on a marketing plan to get new customers but won't last more than 6 months at this rate if the situation doesn't improve. The purchase price was $870,000 and $800,000 of that was borrowed from BoA. My brother has full-time IT job that pays $100K per year. They owned their primary residence w/ a mortgage ($300K mortgage, worth about $350K), plus investment home which is rented out (worth about $180K w/ mortgage of $50K left). They have $200K of cash in the bank, but most of that will be eaten up by the negative monthly CF by the time this is over. Then they have another $200K in retirement accounts and children education accounts.

Questions:

1) Given the loan amount and income level, Chap 7 is out of the question. Chap 13 is the way to go, correct? What I am not 100% certain is if the $800K BoA loan used to buy the practice is considered to be secured loan in order to fit the Chap 13 eligibility. The loan document mentioned the dental practice in a way that leads me to believe it is the collateral (because it said it can't be moved, sold or altered in any significant way without bank's permission), thus this is considered to be secured loan.

2) I believe from reading the site that under Chap 13 no forced liquidation, but a 5 years payment plan is setup to pay off creditors. But if the dental business can't make it, my sister in-law can't keep running it since it has a large negative CF. In that case does the bank just repossess the physical part of it (take away the x-rays, dental equipment, etc) and the 5 year payment plan pay the balance?

3) According to my readings, all of my brothers' assets like primary residence and even investment home will be kept and not liquidated, correct? Also his retirement accounts (IRA, 401k) are out of creditor's reach?

4) Does it make sense to talk to the bank NOW to say "listen we made a mistake, the business is bad and we are running out of operating cash fast. Can we work out a re-structuring of the loan?". Not sure if this is even possible, I am guessing no?

5) Can anyone recommend a reasonable and good BK attorney in the Raleigh/Cary area?

Thank you.

[DebtEnder]

Why do you think chapter 7 is out? In their case based on the 800k business loan and investment house mortgage they sound like a prime case for a non-consumer chapter 7. Means test not required. If their debt is over 50% business related then they qualify for chapter 7.

If they do decide to go with a 13 any thing the creditors would have gotten in a chapter 7 has to be paid into a chapter 13 plan. Ie that 200k in cash was the only asset if they filed now and exempted none of it then it would have to be at paid out into the chapter 13. In other words a min chapter 13 payment of around 3400. A BK does not strip liens on property so if the assets of the business are secured then yes the bank could take anything they have liens against if they are not otherwise paid.

Retirement accounts in most cases, if they have been funded at current levels for a period of time before BK, should be safe. As I said prior in this post in a chap13 any assets value that a creditor would get in a ch7 must be paid into a ch13.

I doubt a bank would adjust a loan, most banks don't give a flying &@(! about your problems until it starts costing them cash, ie you stop paying.

I have not looked at the exemptions for the area but the cash alone is going to be way over any amount they could protect. At the same time paying back the value of all those assets in a chapter 13 within a 5 year plan is just not going to be possible. That ~3500 payment I mentioned earlier.

[despritfreya]

If your brother is forced into a bk it may be a relatively complex filing.

Depending upon what exemptions are allowed, if he files a 7 he may lose the investment property and the rents that property generates as well as any non-exempt cash he has lying around. I agree that, based upon the info supplied, his income level will not be an issue as he will be deemed a non-consumer filing. However, in a Chapter 7 the Trustee will take whatever non-exempt assets there are.

Based upon the info you have supplied, your brother is not eligible for a Chapter 13 as he is over the debt limits regardless of whether or not B of A is secured or unsecured. The secured limit is $1,081,400.00 and the unsecured limit is $360,475.00.

The B of A loan is only secured if the lender took a security interest in the business assets AND filed a UCC1. If this happened, then, once you add in the mortgages on the two homes your brother’s debt exceeds the secured debt limit for a 13. If B of A did not perfect its security interest then your brother exceeds the unsecured debt limit for a 13.

Your brother needs to discuss these issues with a well qualified attorney. If he is forced into a bk and wants to protect his non-exempt assets he will probably be looking at a Chapter 11.

Des.

[brdc]

Thanks for the reply. I did not even know there was such a thing as non-consumer chapter 7. The dental business is setup as a PC (professional corporation), but the BoA loan was personally guaranteed by my brother and sister in-law. Does this mean it can still qualify for a non-consumer chapter 7 given that personal guarantee is there?

I just checked w/ my brother again and the value of all debt, including the 2 mortgages, is actually only $1,059,400, I got the primary residence mortgage amount wrong (too hight). I do not know of BoA filed a UCC1, guess have to find out.

Isn't chapter 11 primarily for corporations, not persons?

[brdc]

Ok I just found this on the website of an attorney, so that solves my question about personal guarantee:

"Personal Guarantees. Personal guarantees of business debts are not consumer. They remain business debts."

So if my brother is potentially eligible for BOTH chapter 7 or chapter 13, which one is more beneficial in his case, given the data provided? I would think 7, since there is no 5 years payment plan required. At this point losing his non-exempt assets like bank accounts (non-retirement) and investment home is secondary, as long as primary residence and retirement accounts are protected. And I think in both chapters 7 or 11 both are.

[justbroke]

A Chapter 7 is usually how you want to file but a Chapter 13 is a very specific tool. If you otherwise qualify for a Chapter 7, but you actually have assets that you want to protect, then a Chapter 13 (or Chapter 11 based on debt limits under 109(e)), may be the way to go.

After going through a Chapter 13 (almost a Chapter 11) myself and converting to Chapter 7... I prefer the Chapter 7. It's not available to everyone and you must consider the impact of doing a straight liquidation (Chapter 7) over a reorganization (Chapter 13/11).