Unethical Asset sale by Trustee???

[teew]

I have a retail store that is incorporated in Illinois as an "S Corp" that has a loan secured by a UCC filing and pledged assets (home) for which my wife and I both signed. The balance is $21,000 and is in the name of the company. The deed and mortgage on my home is held in "tenancy by the entirety", which I thought would protect the equity from any debt I entered by myself without my wife. The assets of the business are definitely less than what is owed on the loan but 2 attorneys have told me that the trustee can pull the company loan into the BK (because both me and my wife personally guaranteed) and that would open the door to all other creditors to the equity in my house. I am also told the trustee could close the business and sell the assets (even if less than the value of the secured debt & remaining lease term). If the trustee does this in effect he/she would cause me to default on the left over balance of the loan & the lease. Also I would lose the little income that I do have because I would no longer have a job. Only exemption I am told we could keep would be the $30,000 homestead exemption. Now if I add up the mortgage ($36,000), remaining business debt ($21,000) and my exemption ($30,000) it comes to $87,000. The value of the house realistically is about $90,000. This seems almost malicious to me because none of the other creditors would get a dime and in the process the trustee would shut down my business and sell my house. Does this sound right to anybody with knowledge about business assets?

[frogger]

This seems almost malicious to me because none of the other creditors would get a dime and in the process the trustee would shut down my business and sell my house. Does this sound right to anybody with knowledge about business assets?

Anytime you throw a corporation into the mix of personal bk, you potentially open up a big can of worms.

As to this being malicious, it's not. The corporation has no exemptions and is an asset that can and will be liquidated by the trustee if there is money there to pay the creditors. You could possibly buy back your corporate assets from the trustee if they have value and you can find the funds.

As to your personal property, etc. being tied up as security for the loans, that's normally the way it works. Most lenders will not loan to a small corporation without personal guarantees and enough assets to secure the loan, so if you default because of the corporate liquidation, that's just the way it is.

Not to be harsh here, but you are the one that tied up your personal assets with the corporation. At the time, it gave you a benefit, however now may be the time that it bites you on the ass.

It's not the trustees job to make sure that you have a job or that your corporation is protected. It is the trustees job to insure that the maximum amount of money that can legally be obtained for the creditors (and the trustee commission) is extracted from your estate.

Good luck.

[despritfreya]

If you don't want a 7 Trustee meddling in your business affairs don't file a Chapter 7. If you are already in a 7 and don't want the Trustee meddling in your business affairs seek to convert to a 13 or 11.

Des.

[tobee43]

i guess this is the new way to file with a S Corp. we filed two separate bk's. one for the S Corp and one personally. we did, however, list everyone that was a creditor on the S Corp petition on the personal as well.

i'm seeing here on the forum, many are just lumping them together, or am i misunderstanding something? which could be what the trouble is with my understanding.

besides the UCC filing doesn't actually secure the debt, it only acts as announcement which makes a matter of public record that a secured interest exists. from what i remember. we had UCC filings but our situation became very interesting when we had creditor, a local bank, filed an AP on a loan which was secured by inventory, and there was no more inventory to be had. therefore, no inventory, no more secured loan. that bank lost the AP.

it sounds as though the loan can be pulled in because it was personally guaranteed by you both. from what you state des's point is well taken to file either an 11 or 13.

des....? please what if they file 7 on both the S Corp and personally? one could be an asset and one not?

[despritfreya]

Tb,

While I cannot comment on your specific circumstances, in general one does not file a Chapter 7 for an entity (Inc., LLC, etc.) since an entity does not get a 7 discharge. For me, the only reason to file a corporate 7 is if the shareholder wants to attempt to purchase the assets of the entity from the bk estate and begin a new corporation/business without the threat of successor liability.

Now, can OP file a bk for the corporation (7 or 11)? As it stands now (assuming OP has already filed a personal Chapter 7), the answer is "no". OP no longer controls the stock of the entity and, therefore, has no ability to authorize the filing of a bk for the entity. If OP goes to a 13 or 11, OP regains control of the asset and can authorize the filing of a bk for it.

As to the UCC, such is what "perfects" a security interest as it relates to a bonafide purchaser for value (BFP). For bk purposes, a secured creditor is only secured up to the value of the estate's interest in the property (506(a)(1)). Basically if there is no value to the estate the creditor is not secured. This is why your creditor was not secured (at least from your above post). In your personal case the inventory, which, I presume, belonged to the entity, was not an asset of your bk estate therefore it had no value to your bk estate - the creditor was unsecured. In the corporate case, the inventory had already been dissapated and therefore was not an asset regardless of the UCC - since the inventory was gone the creditor was no longer secured by it. (Make sense?)

As it relates to corporate debt listed in a personal bk - we do this all the time. Many times the individual does not know if he/she personally guaranteed the debt. If one does not know, one errs on the side of caution and lists the debt. This does not mean the creditor cannot sue the corporation but. . . if the corporation is out of business or has no assets, who cares if it gets sued?

Des.

[tobee43]

des thanks for that information and clarification.

so, from what i understand one can convert then to an 11 or 13 to maintain some sense of control of any existing assets, if any.

with respect to our AP:

Des:
As to the UCC, such is what "perfects" a security interest as it relates to a bonafide purchaser for value (BFP). For bk purposes, a secured creditor is only secured up to the value of the estate's interest in the property (506(a)(1)). Basically if there is no value to the estate the creditor is not secured. This is why your creditor was not secured (at least from your above post). In your personal case the inventory, which, I presume, belonged to the entity, was not an asset of your bk estate therefore it had no value to your bk estate - the creditor was unsecured. In the corporate case, the inventory had already been dissapated and therefore was not an asset regardless of the UCC - since the inventory was gone the creditor was no longer secured by it. (Make sense?)

absolute sense!

an excellent point:

if the corporation is out of business or has no assets, who cares if it gets sued?

[despritfreya]

so, from what i understand one can convert then to an 11 or 13 to maintain some sense of control of any existing assets, if any.

There is no longer an "absolute" right to convert but, for the vast majority, yes.

Des.

[tobee43]

There is no longer an "absolute" right to convert but, for the vast majority, yes.

Des.

thank you des!!!

[teew]

des thank you for the reply and to the others for taking the time to reply. I have not filed yet, the scenario I listed above is thru discussion with the attorney I have chosen if I do go thru with the BK. He did tell me that if things go in an ugly direction he would try to go the route of chapter 13 but I don't think I would qualify due to a low income. The corp loan docs that were guaranteed by my wife and I was done by an unscrupulous loan officer that had us sign paperwork for a HELOC at the same time i was restructuring a corp loan, what we signed jointly we believed to be a HELOC doc's. The loan officer (VP) left the bank within a week of this and it seemed like it would be a nightmare to prove so I did not peruse.

There was a citation to discover assets scheduled for yesterday morning that I was told by three different attorneys not to go to because we would be filing and that would freeze (by means of stay) all efforts to collect. This all happens so fast and my heart told me to go to the hearing but even my accountant told me to listen to the attorneys. I really wanted to go to court and ask the judge for time to consult with counsel and more time to get doc's in order but I was scared because I was told if I go once in court the judge could compel me to do as he pleases.

I do still have the option to go back to court when the date is set to "show cause". I believe that if I do go back in and deal with this one creditor that only a very small amount of exposure exists. The creditor is coming after me for a judgement for a CC in the amount of $13,000 (mostly fees) and the only real exposure after exemptions are taken is $2000-$3000, assuming the judge allows the exemptions which would be:

1. Auto - $2500
2. Wild card - $4000

Under this scenario I believe the "tenancy by the entirety" would protect my home and the equity. I am just very uncomfortable not understanding what the judge can or will do. Can he say "no" to state exemptions or could the creditors attorney spin things and take advantage of my ignorance or is the judge fair and impartial? Finally yesterday was the motion to discover assets and as stated I did not show, if I do decide to go back to court when they file a motion to "show cause" will the Judge treat me differently? Please understand my actions to this point have mostly been dictated by fear and ignorance of the legal procedures.

[SunshineGal]

Hi Teew,

First, I'm not familiar with IL law regarding TBE, however, FL is one of the states that offers full TBE protection so I am very familiar with the concept. The way I see it you have two big problems with the loan secured by your house. First and foremost is the fact you pledged the home as collateral making it a secured loan. Second, and this would apply regardless of the pledge against the house, is that TBE ONLY applies in the event of an individual creditor. Meaning that a creditor cannot go after marital assets unless BOTH Husband and Wife have signed the agreement and you did. Think of it like a mortgage where on spouse qualified but both had to sign the note.

Good luck and keep us posted.
SG

[teew]

I am not contesting the loan my wife and I signed, that loan is in the name of my corp and is being paid and is current. I have no problem continuing to pay it and honoring the terms. The CC that got a judgement against me personally was only in my name, wife was not on the card. And BTW, thank you for taking the time to reply!

[tobee43]

I am not contesting the loan my wife and I signed, that loan is in the name of my corp and is being paid and is current. I have no problem continuing to pay it and honoring the terms. The CC that got a judgement against me personally was only in my name, wife was not on the card. And BTW, thank you for taking the time to reply!

yes, please do keep us posted! i know it seems most likely overwheming at this point. but, you will sort it all out.

[teew]

Hope so, thanks tobee!

[tobee43]

Hope so, thanks tobee!

it will. most all of us have been through the mill going bk is no picnic and it's like a chess game and one just wants to be certain they are making the right moves.

just keep asking questions!! we have such a wonderful wealth of knowledge and support on this forum!!!