Personal Chapter 7 Bankruptcy vs. Debt repayment plan after small business closes?

[ScaredGuy]

Hi guys, I've posted a number of times on here and users despritfreya and justbroke have been awesome with their advice. I've been doing everything I can to try to sell my small business which is a single member LLC, but unfortunately the most promising buyers have backed out and the business is on the brink of financial insolvency. After consulting with many attorneys and these forums, the most likely course of action is that we will privately liquidate the business then potentially file a personal Chapter 7 bankruptcy.

However, if I can avoid personal bankruptcy I'd really like to avoid it. Right now the business has about $65,000 in personally guaranteed business debts.

On one hand it sounds good to wipe out that $65,000 in personally guaranteed business debt plus another $45,000 in personal debt with a Chapter 7 bankruptcy. On the other hand, if I do a Chapter 7 bankruptcy I will likely want to list all of the business customers who have outstanding prepaid deposits, and there are many due to some delayed products, which means all of them will get my social security number and a notification about my bankruptcy. Also, I do have some assets which could delay the Chapter 7 case by turning it into an "asset case" which concerns me if I happen to get an aggressive trustee.

Yet if I do *not* file a Chapter 7 bankruptcy, that leaves a crack in the door open for a business customer or creditor to come after me personally at some point down the road. The customers are probably less likely to sue, but there are a couple of creditors who the business borrowed from only in the name of the business where $45,000+ is still owed.

What I'm trying to figure out is: is wiping out $110,000 in debt worth all of the stress and potential online humiliation? Or should I simply liquidate the business then negotiate payment plans with business creditors who have a personal guarantee? Paying down $65,000 in personally guaranteed business debts would take me at least 2 to 3 years.

Thank you for any thoughts on this.

[despritfreya]

My opinion. . . you can try to settle and you may be successful with a few creditors. It only takes one to break the camel's back. Filing bk gives you finality.

As to your perception of "online humiliation" (whatever that is), with all due respect, please just get over it. Thousands of people file bk every day. I would imagine that 99.99% survived the ordeal.

Des.

[ScaredGuy]

despritfreya thank you for your thoughts on the matter, I believe you are correct. However, one factor in the potential Chapter 7 bankruptcy that I'm wrestling with is whether or not I should list all of the business customers in the bankruptcy. Unfortunately, several products that we offered were significantly delayed beyond what was anticipated, so there are something like 1,000 customers with prepaid deposits for products still forthcoming. 90% of these customers have less than $500 in prepaid deposits, only 30 or 40 customers have more than $1,000 in prepaid deposits. I've spoken to 5 different bankruptcy attorneys and they seem to have differing views on this: some say that since the customers did business with the LLC, it is unnecessary to list them in my personal Chapter 7 bankruptcy. Other attorneys say that to play it safe, I should list the customers as creditors in the bankruptcy. However, I am concerned that listing 1,000 customers in my personal Chapter 7 bankruptcy will complicate the case and possibly delay the discharge.

If I do *not* include the business customers in my personal Chapter 7 bankruptcy, could future lawsuits simply be dismissed by stating that those customers did business with the LLC and not me directly? This is indeed the case, the LLC has existed since 2012.

Thank you for any thoughts on this matter.

My opinion. . . you can try to settle and you may be successful with a few creditors. It only takes one to break the camel's back. Filing bk gives you finality.

As to your perception of "online humiliation" (whatever that is), with all due respect, please just get over it. Thousands of people file bk every day. I would imagine that 99.99% survived the ordeal.

Des.

[despritfreya]

1. For my clients I would suggest playing it safe by listing all for "info only". If the client took my suggestion, the cost of the bk would be adjusted to compensate for the additional time in drafting due to the number of potential creditors.

2. If your case ends up as a "no asset" case, omitted potential creditors would be subject to the discharge.

3. In an asset case, omitted potential creditors would not be subject to the Discharge and could go after you. Could you seek to dismiss a subsequently filed lawsuit arguing that the cause of action is against the entity? "Yes". Would you be successful? No way to know until it happens.

Des.

[ScaredGuy]

despritfreya thanks for this, one more question: if all of my assets are covered by bankruptcy exemptions, would it be considered an asset case? Or does an asset case only apply when you have assets that are not protected by bankruptcy exemptions?

1. For my clients I would suggest playing it safe by listing all for "info only". If the client took my suggestion, the cost of the bk would be adjusted to compensate for the additional time in drafting due to the number of potential creditors.

2. If your case ends up as a "no asset" case, omitted potential creditors would be subject to the discharge.

3. In an asset case, omitted potential creditors would not be subject to the Discharge and could go after you. Could you seek to dismiss a subsequently filed lawsuit arguing that the cause of action is against the entity? "Yes". Would you be successful? No way to know until it happens.

Des.

[despritfreya]

despritfreya if all of my assets are covered by bankruptcy exemptions, would it be considered an asset case? Or does an asset case only apply when you have assets that are not protected by bankruptcy exemptions?

In most, if not all, jurisdictions the initial notice sent to creditors in a Chapter 7 case states that the case is a "no asset case" and that the filing of a Proof of Claim is not required. The notice will also state that if the Trustee determines that there are assets another notice will be sent regarding the filing of a claim.

If all assets are exempt there would be nothing for the trustee to distribute to creditors. As a result the case will remain a no asset case and the second notice will not be sent to creditors.

Something I did not think of until now:

Google 11 USC 523(a)(3). Specifically review (a)(3)(B) of that section as it relates to a claim that could be found non-dischargeable under (a)(2), (a)(4) or (a)(6).

The problem you could face is that by not listing potential creditors who might assert some sort of fraud, misrepresentation, breach of fiduciary duty etc., even in a no asset case, the claim may not have been discharged. The safe road is to list everyone.

Des.

[ScaredGuy]

despritfreya Hi Des would really like to ask you a follow-up question: you have mentioned that it would be a good idea for me to list the LLC business creditors such as customers with prepaid deposits in my personal Chapter 7 bankruptcy as "info only" and with $0 owed. However, the attorney I am currently working with says that there's a box you can check next to each creditor to specify that it's a business debt and that we should specify the $ amount owed for those business creditors. Is it possibly just a different way of doing it, perhaps with different software?

One concern I have is that another attorney mentioned to me previously that by listing all of these business-only creditors who did business with the LLC in my personal bankruptcy it implies that I should be personally liable for those debts. These customers with prepaid deposits only did business with the LLC and not me personally - would including dollar amounts owed to them in my personal bankruptcy imply that I should be held responsible for those debts?

Really appreciate any information on this.

1. For my clients I would suggest playing it safe by listing all for "info only". If the client took my suggestion, the cost of the bk would be adjusted to compensate for the additional time in drafting due to the number of potential creditors.

2. If your case ends up as a "no asset" case, omitted potential creditors would be subject to the discharge.

3. In an asset case, omitted potential creditors would not be subject to the Discharge and could go after you. Could you seek to dismiss a subsequently filed lawsuit arguing that the cause of action is against the entity? "Yes". Would you be successful? No way to know until it happens.

Des.

[despritfreya]

. . . you have mentioned that it would be a good idea for me to list the LLC business creditors such as customers with prepaid deposits in my personal Chapter 7 bankruptcy as "info only" and with $0 owed. However, the attorney I am currently working with says that there's a box you can check next to each creditor to specify that it's a business debt and that we should specify the $ amount owed for those business creditors. . . One concern I have is that another attorney mentioned to me previously that by listing all of these business-only creditors who did business with the LLC in my personal bankruptcy it implies that I should be personally liable for those debts. These customers with prepaid deposits only did business with the LLC and not me personally - would including dollar amounts owed to them in my personal bankruptcy imply that I should be held responsible for those debts?

And this is why advice differs and you have to go with what you feel comfortable with.

Yes, you can do what attorney 1 suggests but if you do, please make sure you check the box that states the claim is "disputed".

Yes, as attorney 2 suggests, by listing the creditor with an amount owed, even if marked "disputed" you could be "admitting" that it is a personal debt as well as a corporate debt.

This is why I like the idea of "for info only". No admission one way or the other. Another idea (run it by a local attorney) is not to list them on Schedule F at all, but to make sure they are on the official Master Mailing Matrix so that they get notice of the bankruptcy.

Des.

[ScaredGuy]

despritfreya thank you and just to clarify: if we list the LLC customers with prepaid deposits as "for info only" with $0 owed in my personal Chapter 7 bankruptcy on the Schedule F, that would prevent them from suing me personally based on their prepaid deposits with the LLC? Would only including them in the mailing matrix (and not on Schedule F) still provide this protection? I really want to fully close this chapter on my life and move on without any lingering loose ends.

Part of me wonders though if including the LLC customers in my personal bankruptcy is a mistake. 95% of them have $200 or less in prepaid deposits, there are around 300 customers with $500 or more in prepaid deposits and around 60 to 70 individuals with $1,000 or more in prepaid deposits. Only 5 customers have more than $5,000 in prepaid deposits. Many of them aren't even aware that I'm the single managing member of the LLC. However, if I don't list these LLC customers with prepaid deposits in my personal Chapter 7 bankruptcy, it would leave the door open for disgruntled customers to sue me personally. One corporate attorney told me that I could respond to those hypothetical lawsuits against me personally stating "these individuals did business with the LLC and not me personally" and it would most likely suffice/get the case dismissed. Experts like you Des and other attorneys have advised me though that to play it safe it would be wisest to include them in my bankruptcy, but it makes me nervous because they would all get letters in the mail with my social security number stating that I'm going bankrupt, and that might make the attention fall more on me rather than just the business.

This is a really tough decision. Most of the customers who have substantial amounts in prepaid deposits would likely just be sad to see the business go since it has existed for decades. It is a reputable business that started having financial issues in 2020. The business has produced and delivered tens of thousands of orders to its customers over the multiple decades that it has operated.

There are a handful of customers who have caused flareups on social media, and those are the customers that are likely to be the most litigious. I worry that when they get the letter in the mail regarding my personal bankruptcy, it will start a fire on social media. Would that lead to something more serious like litigation? Maybe not, but it's still a concern.

It basically all boils down to: is making 1,000+ customers aware of my personal bankruptcy (and social security number) worth avoiding the risk of them suing me personally over their prepaid deposits with the LLC? Right now, I'm leaning slightly toward yes, it is worth listing them to fully shut the door on this chapter of my life.

And this is why advice differs and you have to go with what you feel comfortable with.

Yes, you can do what attorney 1 suggests but if you do, please make sure you check the box that states the claim is "disputed".

Yes, as attorney 2 suggests, by listing the creditor with an amount owed, even if marked "disputed" you could be "admitting" that it is a personal debt as well as a corporate debt.

This is why I like the idea of "for info only". No admission one way or the other. Another idea (run it by a local attorney) is not to list them on Schedule F at all, but to make sure they are on the official Master Mailing Matrix so that they get notice of the bankruptcy.

Des.

[despritfreya]

My apologies for taking this long to respond. We were swamped at the office filing cases as the higher debt limits for Subchapter V and Chapter 13 were set to sunset on the 21st. I hate filing skeletal cases and then having to scramble to get everything else filed timely.

The key to successfully discharging a potential claim is “notification”. So long as the claimant has actual notice of the bankruptcy filing, the duty to act shifts to the claimant. Making sure the potential claimant is on the mailing list (with a correct address) is the key to "actual" notice.

As to social media - something I think is really stupid - bankruptcy is public record. If someone wants to run your name and thereafter ruin it, the bankruptcy may pop up anyway. If you are that worried about social media, filing bankruptcy may not be what you want to do. You have to weigh the costs and benefits. If you have no intention to go back to running a business (can’t remember if you mentioned yes or no), who cares what the Internet states. More than half of what is out there is BS anyway. This is just my opinion.

Yes, if a claimant who is not aware of the bankruptcy files suit against you (with or without naming the entity), you could seek a Rule 12(b) Motion to dismiss you from the suit for failure to state a claim upon which relief can be granted. You would have to make sure this is done because if you fail to assert an “affirmative defense”, you waive it.

Remember, listing the customers is your decision. There is no rule for or against it if the contract is between the customer and the entity since the entity is not filing bankruptcy.

Des.