Questions about liquidating a single member LLC then filing personal Chapter 7

[ScaredGuy]

Hi guys, I've posted a few times on here and have gotten a lot of great help especially from justbroke and despritfreya and have some new questions today. Right now I run a single member LLC that has been close to financial insolvency a few times over the past couple of years. At this juncture, if the business becomes completely insolvent I plan to liquidate the LLC using a state-level liquidation process that was detailed to me by an attorney, then waiting to see what happens thereafter before deciding whether or not to file a personal Chapter 7 bankruptcy. However, I do have a few concerns about this potential outcome:

Question 1: A bankruptcy attorney told me that all of the creditors listed on a personal Chapter 7 bankruptcy would get my home address and full social security number. This seems like a huge security concern. I was originally planning on listing all of the LLC's customers with outstanding deposits as creditors in my personal bankruptcy, however if they are going to get my social security number I'm not so sure. Is it true that all creditors listed in a personal Chapter 7 will get the individual's social security number?

Question 2: Does it even make sense to list a customer who has less than $750 in outstanding deposits as a creditor in a personal bankruptcy, since that customer would have to try to pierce the corporate veil in small claims court which according to a corporate attorney I spoke to is exceedingly rare?

Question 3: I've been told by attorneys and folks on these forums to liquidate the LLC if it becomes insolvent. However, I've also been told that it is a good idea to keep the LLC entity active with the secretary of state for 5 years so that if any of the creditors or customers want to pursue litigation, they can sue the entity rather than me personally. Does it make sense to keep the LLC active for 5 years after liquidating for this reason?

I am doing everything possible to ensure that there is a clear legal separation between me and the LLC, and 99.9% of the customers have done business solely with the LLC (not me personally). Thus, I am hoping that by paying off most of the personally guaranteed business debts, after the LLC is liquidated I can avoid having to do a personal Chapter 7 bankruptcy.

Thank you to anyone for thoughts and advice on the questions above.

[despritfreya]

Question 1: A bankruptcy attorney told me that all of the creditors listed on a personal Chapter 7 bankruptcy would get my home address and full social security number.

While your address is available to the general public, your SS # is not. However, the 341 Notice mailed to creditors does contain the full SS#. Nothing you can do about it. If you get a PO Box and use that as your “mailing” address” (you must list your physical and mailing address on the Petition) I believe any notices sent to the creditors will show just the mailing address.

Question 2: Does it even make sense to list a customer who has less than $750 in outstanding deposits.

That is up to you, assuming you did not personally guarantee the obligation. I advise my clients to list all entity creditors regardless of amount owed. However, the ones that are not personally guaranteed are listed “for info only” with $0 owed.

Question 3: I've been told by attorneys and folks on these forums to liquidate the LLC if it becomes insolvent. However, I've also been told that it is a good idea to keep the LLC entity active with the secretary of state for 5 years so that if any of the creditors or customers want to pursue litigation, they can sue the entity rather than me personally. Does it make sense to keep the LLC active for 5 years after liquidating for this reason?

This might be state specific. In my state it makes no sense to “liquidate” (or shut down) a dead entity as a “dead” entity has no assets. Who cares if someone sues a dead entity. Good luck collecting. Who cares if it remains “active” or is administratively dissolved by the Corporation Commission (failure to pay the annual fee, file annual reports or keep a statutory agent will result in an administrative dissolution).

If there are assets that are free of UCC1 liens (you better check on that, especially if the entity took out any SBA loans or Merchant Cash Advance loans), then maybe liquidate and distribute to creditors on a pro rata basis. Pro rata seems more “fair” than paying personally guaranteed debt first - but I do understand the wish to clear those and I would not “yell” at someone for doing such.

Hope this helps.

Des.

[ScaredGuy]

Hi despritfreya thank you very much for your response. I do have one follow-up question based on the information you provided (I might be misconstruing what you said): are you saying that if there is a UCC1 lien on the LLC, a private liquidation is not possible? Currently we have 1 creditor that has a UCC1 lien on the LLC with the secretary of state. Does this mean if we do not pay this creditor off, we would be forced to do a formal Chapter 7 bankruptcy for the LLC rather than a state level liquidation where we handle the liquidation of the assets privately?

If I have to file a personal Chapter 7 bankruptcy, I guess it makes the most sense to list every customer of the LLC with outstanding deposits for products yet delivered in my personal bankruptcy because otherwise it might leave the door open for someone to pursue litigation against me personally at a later date. While I think it's unlikely that customers would pursue litigation and they did business with the LLC (not me personally) so they would have to "pierce the corporate veil," if worst case scenario happens and I have to file Chapter 7, might as well list them just to err on these side of caution.

Thank you again for your thoughts on this.

While your address is available to the general public, your SS # is not. However, the 341 Notice mailed to creditors does contain the full SS#. Nothing you can do about it. If you get a PO Box and use that as your “mailing” address” (you must list your physical and mailing address on the Petition) I believe any notices sent to the creditors will show just the mailing address.



That is up to you, assuming you did not personally guarantee the obligation. I advise my clients to list all entity creditors regardless of amount owed. However, the ones that are not personally guaranteed are listed “for info only” with $0 owed.



This might be state specific. In my state it makes no sense to “liquidate” (or shut down) a dead entity as a “dead” entity has no assets. Who cares if someone sues a dead entity. Good luck collecting. Who cares if it remains “active” or is administratively dissolved by the Corporation Commission (failure to pay the annual fee, file annual reports or keep a statutory agent will result in an administrative dissolution).

If there are assets that are free of UCC1 liens (you better check on that, especially if the entity took out any SBA loans or Merchant Cash Advance loans), then maybe liquidate and distribute to creditors on a pro rata basis. Pro rata seems more “fair” than paying personally guaranteed debt first - but I do understand the wish to clear those and I would not “yell” at someone for doing such.

Hope this helps.

Des.

[despritfreya]

are you saying that if there is a UCC1 lien on the LLC, a private liquidation is not possible?

No. What I am saying is that the LLC should get the creditor’s permission to dispose of the creditor’s property and all proceeds go to that creditor. Anything else is technically improper. Now, do owners of entities do the proper thing? Probably not but they should. Do creditors get their britches in an uproar when they learn their property has been taken from them? Sometimes.

Currently we have 1 creditor that has a UCC1 lien on the LLC with the secretary of state. Does this mean if we do not pay this creditor off, we would be forced to do a formal Chapter 7 bankruptcy for the LLC rather than a state level liquidation where we handle the liquidation of the assets privately?

Again, I see little utility in filing a Chapter 7 for an entity. The entity could simply call the creditor and tell it to take control of its property or ask permission to sell the items. Again, the proceeds should go to the creditor.

Des.

[ScaredGuy]

Thank you despritfreya really appreciate this. I have one more question if you could please help me with this: my small business most likely showed a NET loss for 2023 according to the updated books. Before these books were updated it showed a NET profit and I was planning on depositing the maximum amount of funds allowed into my self-directed solo Roth 401(k) plan which would be $22,500 then also the maximum for 2023 into my separate Roth IRA account which would be $6,500 for a total of $29,000. If I make these contributions/deposits now despite the business most likely showing a NET loss on the 2023 tax return when we complete it later this year, would the funds still be protected since they are technically in retirement accounts that are normally exempt in Chapter 7 bankruptcies? Or could the bankruptcy trustee say that the contributions were made incorrectly due to a NET loss for the business, thus being able to get access to those funds?

In short: are funds deposited into retirement Roth IRA and 401(k) accounts completely protected in a personal Chapter 7 bankruptcy no matter what, or are there circumstances when they're not?

Appreciate any info on this.

No. What I am saying is that the LLC should get the creditor’s permission to dispose of the creditor’s property and all proceeds go to that creditor. Anything else is technically improper. Now, do owners of entities do the proper thing? Probably not but they should. Do creditors get their britches in an uproar when they learn their property has been taken from them? Sometimes.



Again, I see little utility in filing a Chapter 7 for an entity. The entity could simply call the creditor and tell it to take control of its property or ask permission to sell the items. Again, the proceeds should go to the creditor.

Des.

[despritfreya]

The question of net loss v. net profit is for your accountant. If there is a proper contribution it should be protected. HOWEVER, the ability of the trustee to set aside the contribution may be determined under state law. For example, in Arizona contributions to certain qualified retirement plans (including IRAs) made within 12o days before filing can be pulled back by a Trustee. See ARS 33-1126(B).

You need to ask your question to an attorney in your State. He/she will be familiar with what exemptions apply and what the local trustees will look at.

Des.