Pending BK with Sole Prop

[azdebtor]

I hope that this thread is in the appropriate forum. My wife and I live in Phoenix, Arizona and are looking at BK due to the way the economy has hit our service business. My wife works full time at a good salary, but the business has taken quite a hit. I work alone using the intellectual property in my head, so I'm not worried about the trustee taking the business. I am aware, from all the reading I've done here on BKForum over the last few months that the TT will get my receivables and any assets he thinks he can sell. I plan to continue the business through BK, hopefully with some assets that will be abandoned back to me. If the business doesn't pick up, then I will be looking for a new job. Our son also lives with us and pays for the car he uses and car ins. Here is our situation:

• Income
  • Wife 6 mo. avg. net 2603
  • Bus. 6 mo. avg. net 1198
  • Son contributes 550
  • Total income/ mo. 4351

• Expenses
  • Mort pmt. 1385
  • Heloc pmt. 750
  • Utilities 593
  • Car pmts 1023
  • Hm/Car Ins 324
  • Other per. exp 1257
  • Total exp. 5332

• Assets
  • Personal cash 400
  • Business cash 300
  • IRA 14600
  • 401K 80000
  • Home (Zillow) 192000
  • Auto 1 (KBB) 19400
  • Auto 2 (KBB) 8200 Will be sold to our son
  • Work truck (KBB) 34000 Paid for by the business
  • Bus. receivables 56800 Good luck to the TT on these
  • Bus. assets 21000
  • Total assets 426700

• Debts
  • Credit cards 115768
  • Mortgage 176700
  • Heloc 113400
  • Auto 1 7500
  • Auto 2 4169 Will sell to son in private party sale
  • Work truck 22600
  • Sales tax 18000
  • Bus. unsecured 14500
  • Total debt 472637

Please feel free to analyze our situation and offer advice as to whether we should file BK, which chapter, when we should do it, and any preparations we should make. Our goal is to eliminate the debt so that we may get back to saving for our retirement - we are 50.

We want to keep the house (fixed at 5.75%) and auto 1. The work truck is debatable. As stated, auto 2 will be sold to our son at KBB private party pricing. Proceeds of the sale of auto 2 will be used to pay the house payment, utilities, food, etc. We know that the 401K and IRA are untouchable and that Sales tax can not be discharged. We will be receiving a homeowners insurance claim payment of over $5000 in the next few weeks for storm damage. It will take quite a while for us to make all the repairs to our house using several contractors. Due to the hail storm, we will be paying a $500 deductible on auto 1 and auto 2 for repairs as well.

Do we need to spend down the money from the sale of auto 2 and use the insurance money on the house before filing?

With the house worth $15000 more than the first mortgage, what is likely to happen with the Heloc?

Having $11000 equity in Auto 1, is it likely that the TT will just take the car rather than allow us to pay to keep it? If I let the work truck go back to Cap 1 leaving us with one car on filing day, can we double our exemption for a car and apply it to auto 1?

Am I correct in the understanding that I may continue to run my business as usual? The assets the TT will try to sell are items that I may, on any particular day, sell to a customer. Can I still sell them until the TT tells me otherwise? Am I able to collect any of the receivables that the TT is unable to collect? Once we decide when we will be filing, can I delay some billing until after filing so that I will have receivables that the TT can't take from me?


Thank you all in advance for any advice you can give us.

Azdebtor

[azdebtor]

Bump with a request to the mods to move this to the "Small Business and Investment Real Estate" forum to hopefully get some responses to it.

[despritfreya]

In response to:

1. Do we need to spend down the money from the sale of auto 2 and use the insurance money on the house before filing?

Yes. And you need to keep all receipts to prove what you did with the $$ in any Chapter you file.

2. With the house worth $15000 more than the first mortgage, what is likely to happen with the Heloc?

If you do not pay the loan as due the lender can get the stay lifted (or wait for the discharge) and then proceed to foreclose in any Chapter you file.

3. Having $11000 equity in Auto 1, is it likely that the TT will just take the car rather than allow us to pay to keep it? If I let the work truck go back to Cap 1 leaving us with one car on filing day, can we double our exemption for a car and apply it to auto 1?

You are allowed an exemption in a vehicle up to $5K. Your wife is allowed an exemption in a vehicle up to 5K. OR you are allowed a combined exemption in one vehicle, up to 10K. In a Chapter 7, if the vehicle has value over the exemption the trustee may or may not allow you to just cash him out without the need for a public sale. In a Chapter 13 you have to pay the non exempt value to your creditors ( priority taxes get 1st crack at this).

4. Am I correct in the understanding that I may continue to run my business as usual? The assets the TT will try to sell are items that I may, on any particular day, sell to a customer. Can I still sell them until the TT tells me otherwise? Am I able to collect any of the receivables that the TT is unable to collect? Once we decide when we will be filing, can I delay some billing until after filing so that I will have receivables that the TT can't take from me?

As you have indicated, on the day you file any and all receivables, inventory, non exempt equipment, fixtures, phone numbers, trade names, advertising, domain names, contracts, etc that were in existence on the filing date will belong to the Trustee, not you (but subject to your properly claimed tools of trade exemption). You cannot dispose of anything, including but not limited to the inventory or collect the receivables. Any $$ you do collect will need to be turned over. Failure to do this will result in the loss of your discharge. So, if you file a Chapter 7, NO you cannot run your business as ususal and you will need to segregate those assets that belong to the Trustee. Considering that you have $21K in business "assets" and almost $57K in receivables which may or may not be collectable and $18K in priority sales tax maybe you should be considering a Chapter 13

OR

Before filing, close the business, collect the receivables that you can, liquidate the inventory and PAY the sales tax.

Des.

[azdebtor]

Thank you Des, for your terrific and thorough answers! I knew I could count on this forum for some in-depth help.

On the Heloc question, because the house value is higher than the first mortgage, does this cause part of the second to be secured? Is a Ch 13 better for this reason - like the ability to cram-down? Or are we stuck having to continue paying on the Heloc balance to ensure no foreclosure regardless of Chapter?

As far as my business goes, are you suggesting a Ch 13 due to the fact that the receivables and assets are higher than the amount of taxes due? I do agree that I should try to raise enough cash to pay off the taxes, which should then make this BK process easier. Are you suggesting a CH 13 would allow me to continue day to day operation after filing. If not, can I begin a new business entity (under a new business name?) after filing either Chapter? In other words, I need to know if I will still be in business or if I have to go get a job. Also, what will happen to the receivables the TT can't collect and how long will a TT try to collect on them?

Additionally, I just stopped paying my credit cards this month. How long can I take to do any of the things you suggested before the CCs can cause us real problems? I've read 6 months, but I have also read that some CC will sue sooner, with the timing of some suits depending on the balance owed. We have Amex at 6K, Citi at 21K, BofA at 43K, Chase at 23K, Discover at 12K, USAA at 16K.

Thanks again to all for any and all answers.

Azdebtor

[despritfreya]

In response to:

On the Heloc question, because the house value is higher than the first mortgage, does this cause part of the second to be secured?

No.

Is a Ch 13 better for this reason - like the ability to cram-down?

No.

Or are we stuck having to continue paying on the Heloc balance to ensure no foreclosure regardless of Chapter?

Yes. The Bankruptcy Code does not permit you to modify the rights of a lender who is solely secured by a security interest in your principal residence. As a result, an “undersecured” (as opposed to a totally “unsecured”) lien holder cannot be “crammed down”.

As far as my business goes, are you suggesting a Ch 13 due to the fact that the receivables and assets are higher than the amount of taxes due?

No. I am only suggesting a 13 if you want to continue to operate and do not want the 7 Trustee to control the assets that are in existence on the day you file.

Are you suggesting a CH 13 would allow me to continue day to day operation after filing.

Yes. In a 13 you are the “debtor in possession” and control all of your assets subject to the terms and conditions of the Chapter 13 Plan.

Can I begin a new business entity (under a new business name?) after filing either Chapter?

In a Chapter 13 there is no need to do this. In a Chapter 7 the answer is “yes” BUT you cannot take the assets from business #1 and use them in business #2. This includes the phone number as that has “blue sky” value.

What will happen to the receivables the TT can't collect and how long will a TT try to collect on them?

The Trustee (or his/her attny) will meet with you independent of the 341 to discuss the viability of collections. I have had cases where my client pursued collections of aged accounts and cut a deal to split the amount collected thus compensating him/her for his/her efforts. This all depends upon the Trustee. Some are easier to deal with than others.

Additionally, I just stopped paying my credit cards this month. How long can I take before the CCs can cause us real problems?

Months and months. Don’t put another thought into this because, by the time a creditor sues you and gets a judgment you will be ready to file. My only suggestion is that you DO NOT bank at any institution to which you also owe money.

Des.

[msm859]

In response to:
[I]As you have indicated, on the day you file any and all receivables, inventory, non exempt equipment, fixtures, phone numbers, trade names, advertising, domain names, contracts, etc that were in existence on the filing date will belong to the Trustee, not you (but subject to your properly claimed tools of trade exemption). You cannot dispose of anything, including but not limited to the inventory or collect the receivables. Any $$ you do collect will need to be turned over. Failure to do this will result in the loss of your discharge. So, if you file a Chapter 7, NO you cannot run your business as ususal and you will need to segregate those assets that belong to the Trustee. Considering that you have $21K in business "assets" and almost $57K in receivables which may or may not be collectable and $18K in priority sales tax maybe you should be considering a Chapter 13
Des.

Not sure if this is entirely true. I filed on September 30, 2010. I am still running my business - as usual. First week my attorney called me and said he had been contacted by the Trustee about the "value" of the business. It is a personal service business and I told him without me it was zero. The Trustee had apparently thrown out the number $5,000 (they keep 25% of the first $5k they collect). My attorney said we might have to file a Motion to Abandon, but I told him for now to hold off and see what the Trustee does. Have not heard anything since. Personally I think it is the Trustee who should abandon it to be smart since there is no upside and limited exposure for a downside. I have 1 employee and continue to collect/earn money and pay bills.

[despritfreya]

Not sure if this is entirely true. . . I am still running my business - as usual. First week my attorney called me and said he had been contacted by the Trustee about the "value" of the business. It is a personal service business and I told him without me it was zero. The Trustee had apparently thrown out the number $5,000 (they keep 25% of the first $5k they collect). My attorney said we might have to file a Motion to Abandon, but I told him for now to hold off and see what the Trustee does. Have not heard anything since. Personally I think it is the Trustee who should abandon it to be smart since there is no upside and limited exposure for a downside. I have 1 employee and continue to collect/earn money and pay bills.

Since you were/are a personal service business without inventory or, it appears, receivables your Trustee is attempting to sell the business to you since he knows he can't sell anything on the open market. He is attempting to extort $$ from you and you are correct in not falling for it. In your situation my advice would be not to do anything and wait for the Trustee to walk away. However. . .

OP's situation is completely different as he has inventory of over 20K and receivables of over 57K. As a result, his Trustee is unlikely going to walk away.

You have mixed the proverbial apple with an orange but you should proceed down the path you have chosen in your case as it will most likely work.

Best regards.

Des.