To sell the house or not?

[tsato84]

Hi everyone,

My parents are filing for chapter 7 to completely dissolve a restaurant business and to dissolve personal debts of their own which they have accrued over the years to keep the business going. As a last ditch effort to try and find a buyer for the restaurant theyre currently trying to keep the restaurant going. However in order to keep the business' operational debts from increasing any further, theyre trying to liquidate the equity which remains in their only house. Therefore my questions are if it is a good idea to do this in the first place.

Also if we do sell the house and use the liquidated equity to keep the business going and file chapter 7 at a later date (less than a year) would my parents still be entitled to keep 100,000 dollars of the liquidated equity if there is any remaining in that account?

Thank you sooooooo much in advance and I really appreciate all the input that's available out there in this great resource of a community!

[despritfreya]

My parents are filing for chapter 7 to completely dissolve a restaurant business and to dissolve personal debts of their own which they have accrued. . . As a last ditch effort to try and find a buyer for the restaurant theyre currently trying to keep the restaurant going. . . In order to keep the business (alive for the moment). . .theyre trying to liquidate the equity which remains in their only house. . .

Having handled many clients with failing restaurants, I believe your parents are facing a losing battle. If the restaurant is in trouble financially they simply will not find a buyer. The only real asset is the liquor license, which, if California is similar to my State, is worth between $60 & $80K but, my guess is subject to a blanket security interest from the major lender. Funneling more money into the business in the hope of keeping it going until a buyer is found is, IMHO throwing good money after bad. Unless they have a ready, willing and able buyer in the wings they should stop the bleeding. If the assets of the business are not subject to some UCC lien then they should liquidate the assets, pay all unpaid payroll and sales taxes 1st and see what is left over. Before they take any distributions they need to talk to a bk attny as you don't want any corporate creditors alleging that they "raided the corporate coffers".

Also if we do sell the house and use the liquidated equity to keep the business going and file chapter 7 at a later date (less than a year) would my parents still be entitled to keep 100,000 dollars of the liquidated equity if there is any remaining in that account?

Is there such an exemption under California law? I doubt it. If they file a Chapter 7 having that kind of $$ in the bank those funds will belong to the Trustee.

Your parents really need to meet with a bk attny who handles small business and personal filings to discuss their options before they spend any more money on the business.

Des.

[tsato84]

Thanks Des!!!!!!

Right now we are planning to sell the house and as soon as the escrow closes we will hold off as long as we can to file for chapter 7 so that the new owners of the house can avoid a lien on the house.

The lawyers we have consulted with have recommended that we are entitled to a 100,000 homestead exemption from the liquidated equity up to 6months and that we should logically spend the money in things like basic necessities to live during this 6 months or more and then file for bankruptcy for both the business and my parents individually.

Are there any organizations for profit or non-profit who may help us find any potential buyers from our restaurant? We actually have a restaurant (which we plan to close since it is the major bleeder) and a small pub-like restaurant (which is breaking even currently) which we will continue in hopes of finding a buyer.

Thanks so much in advance and happy thanksgiving to Des and all!

[tcreegan]

Hi tsato,

Agree w/ des, you really need a CA BK attorney w/ small business experience....

entitled to a 100,000 homestead exemption from the liquidated equity up to 6months and that we should logically spend the money in things like basic necessities to live during this 6 months or more and then file for bankruptcy

CA system-1 BK exemptions allow a couple to exempt $100,000, and exempt proceeds for 6 months...if you declare a homestead.
...past 6 months it turns into a cash asset the BK trustee will go after.
What are the tax implications of selling before the BK?

How do you untangle the business from personal BK? ...the rules are a bit different.

There are a lot of in's and out's in your parents case, it would be easy to get something mixed up and end up costing $$ and time lost.

My first thought on the resturant is 'throwing good money after bad' Have any other similar resturants in the vicinity sold before closing their doors? Have you had anyone make an offer? Seem interested? I know in our town, at least a dozen resturants have closed, none sold as a going concern, all were bought after they went under.

organizations for profit or non-profit who may help us find any potential buyers ...there should be some trade publications w/ sale listings, and no shortage of online sites. And heck, why not use craigslist? Seems like everyone elso does....

Hope you have a good Thanksgiving!

Tom in Colo

[tsato84]

Thanks for your thorough response Tom.

I just had a two hour discussion with my dad about where to go from now and here's the plan that we came up with. First and foremost we are going to liquidate the equity in the house by selling it to a private party that already gave us a generous offer on the house and if the escrow fails for some reason we already have a realtor on our side who's ready to quickly sell the house. (Just to give you the numbers the liquidated equity will be about 300,000 dollars and the secured and unsecured debts amount to about 550,000 dollars.) Secondly we're planning to close down Sushi of Naples and stop operating the business so that our debt's stop exacerbating for the time being. And thirdly to avoid a lien on the house which will be no longer rightfully ours shortly and a repossession of the house by trustees/creditors we will file for chapter 7 bankruptcy as a business as well as individuals (mother and father) 6 months after the escrow closes.

With this plan in mind we came across a few questions that I was hoping that you could answer for us again.

1). Is it correct to just ignore creditors who harass my parents and sue them for their outstanding invoices during the 6 month period since these debts will be dissolved when chapter 7 is filed?

2). If we use the liquidated equity in the house to start to pay secured creditors and if we manage to save 100,000 dollars of this liquidated equity can we use this towards our homestead exemption?

2). Can my parents start to liquidate things like equipment at fair market value during the 6 months between the restaurant closing and filing for bankruptcy and use that money to start to repay vendors and bills? Can't this be seen as good faith or should it just be left to the trustee/creditors to sort things like this out? And also what about things that could spoil like produce, can we just give it away to other restaurateurs and neighbors since it's going to spoil if its not eaten?

3). Can my parents file for unemployment via EDD and collect unemployment insurance during the 6 month period before filing for bankruptcy?

4). For a somewhat complicated case like ours I was wondering if you could give us a quote for full service representation and if we'd be needing BPP services as well.

Thanks so much in advance and happy thanksgiving everyone!

[tsato84]

for 4). I'm just fishing around for typical costs that we can expect and not expecting your personal representation of course.

[despritfreya]

In response to:

“We are going to liquidate the equity in the house by selling it to a private party. . .the. . . equity will be about 300,000 dollars and the secured and unsecured debts amount to about 550,000 dollars.”

What do you mean that the “secured and unsecured debt” is $550k? Are your folks going to clear $300k after all liens, encumbrances, closing costs and commissions are paid? If so, that is a lot of $$ to blow through in 6 months. That alone will raise eyebrows. My guess is your folks will be living off of those funds for a very long time before they even think about doing a bk. And, by living off of the funds, I do not mean using those funds to pay corporate/LLC debt, unless they personally guaranteed the debt.

“To avoid a lien on the house which will be no longer rightfully ours shortly and a repossession of the house by trustees/creditors we will file for chapter 7 bankruptcy as a business as well as individuals (mother and father) 6 months after the escrow closes.”

Why do you think the sale of your parents house will be subject to questioning by their creditors? If the sale is arms length and the sales price for the home is not below market (appraisal helps) then there is no issue with the sale and the buyers are not at risk. On the other hand, if you are selling the home below what the market would give then the sale will be questioned as a fraudulent conveyance at least for the next two to four years.

“Is it correct to just ignore creditors who harass my parents and sue them for their outstanding invoices during the 6 month period since these debts will be dissolved when chapter 7 is filed?”

Your parents can ignore creditors. There is no law that says they have to talk to a creditor. Secured creditors have the right to the return of their property. Further any creditor has the right to file a suit in an effort to obtain a judgment and then execute on that judgment. Whether a creditor will do this is not known. Some do, some don’t and even with those that do, the filing of the suit could take months and months.

“If we use the liquidated equity in the house to start to pay secured creditors and if we manage to save 100,000 dollars of this liquidated equity can we use this towards our homestead exemption?”

I can’t answer a question regarding California exemptions, however, Tom indicated that the funds are only protected for 6 months and must be used on necessities. After 6 months the protection goes away.

“Can my parents start to liquidate things like equipment at fair market value during the 6 months between the restaurant closing and filing for bankruptcy and use that money to start to repay vendors and bills?”

If the business is a corporation or LLC and the funds are used to solely pay corporate/LLC debt then the answer is “yes”. If the business is a sole proprietorship then the answer is “no” as it relates to an unsecured creditor unless your parents wait 90 days from the time they paid the creditor. However, even if they do pay the unsecured debt in the sole proprietor situation and do not wait 90 days, it is not their problem. The Trustee will recover the money as a “preference” from the recipient of the payment, not your parents. Secured creditors get their property back regardless of the business formation.

“And also what about things that could spoil like produce, can we just give it away to other restaurateurs and neighbors since it's going to spoil if its not eaten?”

I do not see a problem with this. Consider donating it to a food bank.

“Can my parents file for unemployment via EDD and collect unemployment insurance during the 6 month period before filing for bankruptcy?”

I don’t know.

“For a somewhat complicated case like ours I was wondering if you could give us a quote for full service representation and if we'd be needing BPP services as well.”

I do not know what “BPP” means and I am not in California so I do not know what a fee would be. I can tell you that the fee my firm would charge for your parents' case would be about $4,000.00 for a Chapter 7. If they were not eligible for a Chapter 7 or otherwise needed a Chapter 11 or 13 (depends upon how much debt they have) we bill on an hourly rate but the retainer would be $4,000.00 plus the filing fee. The first thing I would be doing with your folks is discussing what they can and cannot do with the sale proceeds from the home and how long they need to wait to file bk.

Des.

[tcreegan]

Hi tsato,

Forget about a BPP (BK petition preparer), your attorney will take care of the paperwork. BPP"s don't do anything you can't do yourself and they are not liable if it gets screwed up.

1) To ignore or not to ignore, that is the question.....you can ignore them, like des said, it takes months before they start legal action. I prefer the polite, ambiguous, response. Tell them that things are in a pinch now, you are trying to work out a solution and can tell them more later. Just don't agree to pay or confirm the debt.

2) There is a problem if the $$ is used to pay on items that will be exempt in the BK. Can't move non-exempt to exempt. We need some clarification on the house situation:

liquidated equity will be about 300,000 dollars and the secured and unsecured debts amount to about 550,000 dollars ....does the house secure any business debt or is it all personal? I think there would be problems taking $$ from business Bk to/from personal BK

Usually it is the BK trustee who takes liquidated equity and pays creditors, if you sell early and want to do the trustees job...you might want to follow the rules the trustee would use so they don't have to pull the $$ back and redistribute.

And thirdly to avoid a lien on the house which will be no longer rightfully ours shortly and a repossession of the house by trustees/creditors we will file for chapter 7 bankruptcy as a business as well as individuals (mother and father) 6 months after the escrow closes. ....??? If you are going to sell the house, you have to satisfy the lien from the sale proceeds. If the house is no longer yours, the trustee isn't going to repossess it, they will go after the sale proceeds. Watch the 6 months, sale proceeds are only exempt for 6 months, go over you hand it over....

All in all, pretty complicated mess, definitely something you need a BK attorney to handle. Shop around and find an attorney you are confident in and comfortable with....major stumbling blocks mentioned around here center on communication, organization/work ethic, competetence, and what is included in the retainer. With the numbers you are talking about, skimping on an attorney might be penny-wise, pound-foolish...

Hope you had a good Thanksgiving!

Tom in Colo

[frogger]

All in all, pretty complicated mess, definitely something you need a BK attorney to handle. Shop around and find an attorney you are confident in and comfortable with....major stumbling blocks mentioned around here center on communication, organization/work ethic, competetence, and what is included in the retainer. With the numbers you are talking about, skimping on an attorney might be penny-wise, pound-foolish...

That's the best advice that you're going to get. You need to get a good, experienced bk attorney that has personal and business experience. You don't want to get into a situation of having the trustee reverse their actions and decisions, which can happen if things are not done right.