How to avoid an "Asset" case in Chapter 7?

[ScaredGuy]

Hi guys, I currently run a struggling small business which is registered as an LLC. I am very concerned that at some point this year the business will become insolvent and creditors will start coming after it. Some attorneys have suggested that the LLC should "go dark" and that I file a personal Chapter 7 bankruptcy to remove myself from the personal guarantees and any personal liability. I do not own a home, but I do have some non-exempt investment accounts. From what I've researched, if a Chapter 7 trustee finds that a Chapter 7 case is an "asset case" then it could become significantly more complicated due to the trustee making a commission off of the sales of the assets.

Will assets from the closed business be counted as assets in my personal Chapter 7? For example: there are two vehicles registered in the name of the LLC paid for with business funds. One is worth about $20,000, the other about $8,000.

What is the best way to avoid a Chapter 7 case being an "asset case" in my circumstance? One thought I had was using the funds in these accounts to pay down/pay off the debts with several creditors at least 90 days before filing for personal Chapter 7 until my cash/assets are beneath exemption amounts. Since the business-related debts will then far exceed my personal debts, my understanding is that I will not have to pass the means test.

Thank you for any thoughts on this matter.

[justbroke]

There's no way to --- how do I say this -- properly avoid an asset case. I personally wouldn't try to avoid it anyhow. You're getting to substitute a little property for tens, hundreds, or even millions of dollars. Besides, intentionally attempting to or actually hiding property to defraud, delay, or frustrate creditors or the bankruptcy Trustee is considered fraud.

I agree with the attorney with which you consulted. You talked about the "quiet" shutdown versus a business bankruptcy, and despritfreya walked you through some different points of consideration. I still like the quiet way, but, as everything, it depends.

Unless the Chapter 7 Trustee tries to pierce the LLC and say it's just your alter ego, then the assets of the LLC are the assets of the LLC and not you personally. You may have a capitol account, which would be your asset. That's an entirely different conversation and is why you should find an attorney that can help you navigate your way through.

Even if the Trustee did try to get through the protections of the LLC, does it matter? Let the Trustee go liquidate the company (if s/he can pierce that "corporate" veil) and deal with it.

As for the means test, the test is against you personally. You would need to show where your "personal" debt is greater than your personal assets. The problem will be this... is a business guarantee personal debt? The reason to file the bankruptcy is to remove the personal liability... not the debt itself. Personally, I wouldn't worry. Again, if the Trustee wants to go deal with that LLC let them. (Remember, the Trustee sits in your shoes so can do anything that you could do with that LLC.) A smart Trustee would avoid an LLC that is a mess and has no assets. But I have seen unreasonable Chapter 7 Trustees.

My bottom line ... who cares if the Trustee wants to go liquidate the LLC. Let them do all the work. You're going to receive a personal discharge of the guarantees anyhow in your personal bankruptcy. I don't see an issue.

[despritfreya]

I really have nothing much to add to what JB stated.

The LLC is not filing bk. You are. The LLC's assets are not property of the bk estate. Your membership interest in the LLC is property of the bk estate. The Trustee steps into your shoes. If he/she wishes to sell LLC assets, the proceeds of the sale must be used to pay LLC debt. If there is anything left then the balance can flow into the Chapter 7.

There is a process whereby a Trustee can throw the LLC into a bk as well. Since he/she controls the membership interest, he/she could easily make a decision to bankrupt the company. This happens very rarely. There is also a way to consolidate debtors with non-debtors, but, again, this is rare and this process if kind of complicated.

If you truly want a fresh start then don't over-think it. Giving up a few assets is not a bad thing to get rid of buckets of debt.

Des.

[ScaredGuy]

justbroke despritfreya thank you both for the information. Let me ask you something else: information from an attorney online indicated that it might be a good idea to keep an LLC active for 5+ years after the business "goes dark" so that creditors can file litigation against the LLC. Is this necessary or a good idea? I would be listing the creditors on my personal Chapter 7 so they should not be able to come after me right?

After the advice from both of you and other information I've learned online, definitely leaning toward the business "going dark" rather than filing a business Chapter 7. According to what I've read, if a business files a Chapter 7 then the trustee will investigate all of its transactions and could litigate/cause other problems during the business bankruptcy.

I really have nothing much to add to what JB stated.

The LLC is not filing bk. You are. The LLC's assets are not property of the bk estate. Your membership interest in the LLC is property of the bk estate. The Trustee steps into your shoes. If he/she wishes to sell LLC assets, the proceeds of the sale must be used to pay LLC debt. If there is anything left then the balance can flow into the Chapter 7.

There is a process whereby a Trustee can throw the LLC into a bk as well. Since he/she controls the membership interest, he/she could easily make a decision to bankrupt the company. This happens very rarely. There is also a way to consolidate debtors with non-debtors, but, again, this is rare and this process if kind of complicated.

If you truly want a fresh start then don't over-think it. Giving up a few assets is not a bad thing to get rid of buckets of debt.

Des.

[justbroke]

I have recently shutdown an LLC and I don't keep it active. I immediately filed with the Secretary of State dissolving the LLC, and filed a "final" tax return with the IRS (indicating that the company is shuttered). That won't stop a lawsuit, so I see no reason to keep doing annual reports for a shuttered business. The only thing that you're doing, by keeping it active, is keeping the "registered agent's" contact information up to date. You won't have a physical address any longer, if you were brick and mortar, so I don't see how to actually keep the filing accurate anyhow. To drive my point home further, Florida's Secretary of State specifically says that if your business is closed, you don't need to file a report and you should dissolve or withdraw. (If you don't file, you get administratively dissolved.)

But, alas, that's me. I don't know if you have some special case that rates keeping a business open on paper when it's essentially closed and shuttered. I would make sure I have an excellent attorney that can help navigate both the person and business issues and has useful experience in that area.

[ScaredGuy]

despritfreya I spoke with another attorney who said that filing Chapter 7 for the LLC would be cheaper overall than simply closing it. He says this is because there are over 1,000 creditors and that selling the LLC assets pro rata in a "going dark" scenario in an equal way to all of those creditors would be more expensive than simply letting a trustee come in and liquidate everything in a business Chapter 7. What are your thoughts on this?

I really have nothing much to add to what JB stated.

The LLC is not filing bk. You are. The LLC's assets are not property of the bk estate. Your membership interest in the LLC is property of the bk estate. The Trustee steps into your shoes. If he/she wishes to sell LLC assets, the proceeds of the sale must be used to pay LLC debt. If there is anything left then the balance can flow into the Chapter 7.

There is a process whereby a Trustee can throw the LLC into a bk as well. Since he/she controls the membership interest, he/she could easily make a decision to bankrupt the company. This happens very rarely. There is also a way to consolidate debtors with non-debtors, but, again, this is rare and this process if kind of complicated.

If you truly want a fresh start then don't over-think it. Giving up a few assets is not a bad thing to get rid of buckets of debt.

Des.

[despritfreya]

I spoke with another attorney who said that filing Chapter 7 for the LLC would be cheaper overall than simply closing it. He says this is because there are over 1,000 creditors and that selling the LLC assets pro rata in a "going dark" scenario in an equal way to all of those creditors would be more expensive than simply letting a trustee come in and liquidate everything in a business Chapter 7. What are your thoughts on this?

That is a legitimate issue. Cost could be high with that many creditors. The cost would be paid by the Chapter 7 estate out of the sale of the assets and before anything goes to creditors.

My concern: You and/or your family becoming a target of the Trustee. Many folks use the entity bank account as their own little piggy bank, paying personal expenses out of it. A trustee in a bk can seek to recover such amounts as fraudulent conveyances. So, unless the books are squeaky clean, you need to go through them to see what your (and your family) exposure is. Now, such exposure will "end", if and when you (and/or your family) files your own bk.

Des.

[ScaredGuy]

despritfreya hoping you can help me here. I read online that if a business simply "goes dark" without filing for bankruptcy, there is no legal obligation to liquidate the assets. Does this mean it would be possible to transfer the business vehicles into personal names, then just file a personal Chapter 7 while the LLC remains dark? Or would the trustee in my personal case possibly take over the LLC thus making the transfer of the vehicles an issue?

That is a legitimate issue. Cost could be high with that many creditors. The cost would be paid by the Chapter 7 estate out of the sale of the assets and before anything goes to creditors.

My concern: You and/or your family becoming a target of the Trustee. Many folks use the entity bank account as their own little piggy bank, paying personal expenses out of it. A trustee in a bk can seek to recover such amounts as fraudulent conveyances. So, unless the books are squeaky clean, you need to go through them to see what your (and your family) exposure is. Now, such exposure will "end", if and when you (and/or your family) files your own bk.

Des.

[despritfreya]

despritfreya hoping you can help me here. I read online that if a business simply "goes dark" without filing for bankruptcy, there is no legal obligation to liquidate the assets. Does this mean it would be possible to transfer the business vehicles into personal names, then just file a personal Chapter 7 while the LLC remains dark? Or would the trustee in my personal case possibly take over the LLC thus making the transfer of the vehicles an issue?

IMHO, in such a scenario it is not your Trustee you need to worry about. It is the creditors of the entity who could go after the vehicle as it was fraudulently conveyed. Entity assets are used to pay entity debt - not "line the pocket" of the owner of the entity.

Des.

[justbroke]

... read online that if a business simply "goes dark" without filing for bankruptcy, there is no legal obligation to liquidate the assets. Does this mean it would be possible to transfer the business vehicles into personal names ...

Absolutely horrible idea. Yes, some people may get away with it, but any savvy creditor may come looking to collect.

Ah, the Internet strikes again.