S-Corp in a Chapter 7 (Service Biz)

[jonance]

Hi,

I do website design freelance and have an s-corp. I build websites and charge monthly for programming, maintenance, etc. I made $20 last year on it. I have stopped all activity and payments as of last month (not enough time with my regular job, and to decrease income), and plan to file Chapter 7 non-consumer to get rid of investment properties. How would my websites, etc be handled in a chapter 7?

Without me and my knowledge, i assume the business is worthless. I programmed the websites and only i know how to do the day to day things due to my intimate knowledge. Would a trustee most likely have no interest in them? Should i take the two websites offline?

[DeadManCrawling]

Trustee will not be interested in this. Can almost guarantee it. Well, unless, of course, one of the sites you started and maintain is www.google.com

If that is the case, expect to pay back all of your debts, buy us all a drink and take a vacation for the rest of your life.

Good luck,

-dmc

[jonance]

Sorry i mistyped, I made $20k on it last year....oops. Does that change it. The fact still remains, without my knowledge and skills, it is a pointless venture. In other words, if they tried to sell the business, and i didn't instruct someone for months on how to set up, program, operate and maintain the websites....it would be worthless.

[DeadManCrawling]

No problem, even with 20k. Without you it is worthless.

I work in the entertainment field. I am a performer. I have an S-Corp. Legally, it belongs to the BK estate as of today, since we filed this morning. In reality, it is worthless to the trustee, since all the Corp owns is a computer and a couple other small things.

Without me, it would produce zero income and be useless.

Sounds like your situation almost exactly. I don't think you have any concerns here. Just list the corp value as zero. Include any computers in it, but not software, since that is essentially worthless. Amazing how much we can pay for the tools to do the job, and they are really worth nothing. Use garage sale prices. A 6 month old computer is worth perhaps 50 bucks.

You shouldn't have any issues. I will report back on my case as it proceeds, in case you wish to follow it. There are a couple errors on the petition, and I am going to email to see if we need to correct them. Attorney didn't state that I have my own corp and am an officer. This will be obvious to the trustee since I included my corp tax returns, so it shouldn't be a real issue.

Also, I based all of my means test figures and incomes on the GROSS, instead of net. Some folks get into trouble when they try to claim the net income and the company expenses. This can be a real mess, since you are sort of playing with the figures to get your desired result.

Sounds like you are fine.

-dmc

[jonance]

Thanks for the info. Yeah, it is tricky. I have investment properties, so i'm exempt from the means test. Trying to get I & J in order now.

So with my web design, it is basically a residual monthly fee i was charging. That is my only worry. However, if they "sold" it and someone else took over, without my knowledge, they would not have a clue how to fix the problems, take care of the customers, etc. I have no employees but myself....plus they would never be able to attain new business b/c they wouldn't have any idea on how to set up new sites, etc. Of course i certainly wouldn't be cooperative either.

One question though. I had to stop the business and cut out the residuals....so does anyone think i should take the website offline? Also, i have about 40 domain names/websites...only one of which was profitable. Will i need to list all of those as assets? Or can i just list the S-corp? I don't have any self sustaining websites that could be sold...all require my brainpower for them to make any money. I wasnt' sure how "tech savvy" trustees are about websites, domains, etc. We're talking about a freelance secondary job here...not millions of dollars...but i wanted to be sure.

[StartingOver08]

You have an interesting question. I think that DMC is right about the process, but I got curious as to the sale of domain names by Trustee's from your post above. I found out some interesting info: yes, some Trustee's sell domain names just like they sell other assets. See this short blog here by a MA attorney: http://tech-bankruptcy.blogspot.com/...me-online.html

I also found an article written on how to value assets in the cyber world for bankruptcy here: http://jolt.law.harvard.edu/articles...vJLTech315.pdf

Not knowing the details of your situation, it sounds like you are safe. But it seems the Trustee's (as a group) recognize the value of domain names and websites. Possibly they recognize there is no value if you are not there to oversee your business too!

[DeadManCrawling]

Indeed, they look at the value of domain names. If you owned, say money.com or some potentially high-value name with resale value the trustee would be interested.

If your site(s) are only worth the income you make, and that income is due to your efforts, not a spectacular .com name, then you should still be fine. Ask your attorney, for sure, but I doubt it is an issue.

[DeadManCrawling]

One other thought. You refer to this as a "monthly residual income". I would rethink this phrase, depending on any contracts you do or do not have with your clients.

the trustee is entitled to recover all "accounts receivable". I am fortunate in this regard. All of my clients operate without contract. If I work for them that month, they pay me.

Make sure, as much as possible, that you have NO accounts receivable on filing day. That includes ongoing, or residual payments. One way to do this is to make sure you are paid up from them. Another method would be to use a slightly different accounting method for one month. No need to even inform the clients. Simply bill them for a 2 month term instead of a 1 month.

It's a gray area that most people need not worry about, but for us who make an income on our own or on the side, can be very important in terms of bk.

[jonance]

Yeah, none of the domains are mind-blowing, and yes, they only reason they make money is due to my efforts. I would have to intensively train any would be buyer to do what I do, even if they were a computer programmer.

Also, I don't have contracts with my clients. As with you, if they pay me, I work for them...I have significantly cut back my work though, to deal with this, and also to lower my income as it is a 2nd job. After BK I can reestablish contact with them and hopefully pick their business back up.

[frogger]

Make sure, as much as possible, that you have NO accounts receivable on filing day. That includes ongoing, or residual payments. One way to do this is to make sure you are paid up from them. Another method would be to use a slightly different accounting method for one month. No need to even inform the clients. Simply bill them for a 2 month term instead of a 1 month.

It's a gray area that most people need not worry about, but for us who make an income on our own or on the side, can be very important in terms of bk.

Would you elaborate on this more? Especially the change in accounting methods.

Thanks.

[DeadManCrawling]

In our case, I informed my regular clients, if they asked, that we were working on some tax and retirement planning and billed them one month early. Then I used that money to pay down company expenses and take care of living expenses. None of my clients had any issue with it. Most didn't even ask what we were up to.

By doing so, we were able to claim NO receivables, since no one owed us money. The following month, December, will be business as usual.

So, when we filed Friday we had already been paid for November and December, but it was in the bank, exempted, or spent on useful things. Our main accounts had very close to zero balances, but we had been paid for 2 months.

I thought this would work best for someone who receives non-contract income, but income that is regular or expected to be regular.

Since we just filed, I cannot say yet how the trustee will view this, but my attorney thought it would be fine.

[frogger]

Thanks. That wouldn't work for me, but hopefully it all will be good for you.