Business failing - BK an option?

[chrisld]

We opened a coffee shop 7 years ago. It was growing great but never profitable, but this year we seemed to have hit the wall. Business is down 12% from last year. Income is still short of expenses an average of $2000 per month. Unfortunately, we did not properly finance this business and ended up putting most of our expenses on personal credit cards. So we have $110,000 on personal cards and personal unsecured loans (eg. Discover personal loan.)

To make this more complicated, I have a second "side hustle". This one is actually profitable - it's part time but has a net income of about $40k per year. That money has been keeping the coffee shop afloat. That business has $45k in debt which is two credit cards and a line of credit.

So between the two businesses, plus one car loan we have $170,000 in debt. The monthly payments are almost $4k which we are current on, but without the coffee shop cash flow, we could never pay that. Outside of the businesses, I have a full-time job with an income of $85k. We have virtually no equity in our house, and I have about $58k in retirement savings (Roth and 401k).

I'd prefer to pay off the debt but the interest is killing us (over $20k in interest annually) and the monthly payments are not doable if the coffee shop closes.

So in this situation, are we looking at a Chapter 13, or a Chapter 7? Thanks for any advice.

[justbroke]

If you have less than $110K in personal credit, then you would be a non-consumer filer. I'm assuming you personally guaranteed all that debt or used those cards solely to fund the business. If that's the case, a non-consumer filing will allow you to skip the Means Testing and avoid a lot of other expense-related issues.

I filed a non-consumer Chapter 7 (converted from a Chapter 13). It was painless.

[chrisld]

Thanks. It is all personally guaranteed debt, and it was all used for the business. We have an appointment with an attorney later this week. I'm not really worried about the means test if necessary. We have a six person household so from my reading, we're still under the threshold.

I am kind of worried about my side hustle. I do need credit to purchase parts and other supplies. I don't know how that's going to work with bad credit.

[chrisld]

Ok, I talked to an attorney. This would be a personal bankruptcy, even though the money from credit cards was spent on the business, they are still personal cards. Nothing he told me was a surprise - except one big one. It was about "insider payments". He said the trustee will look through my gifts and payments for the last two years and reverse any over $600. Here are some he said could, and probably would be reversed:

My daughter's wedding (total of $5,000 in checks written to my daughter to pay for her wedding, plus $1200 to the dress place and $900 to the florist.)
I have an "informal" loan from my dad from 8 years ago. I have been working at repaying that and have paid my dad $8700 over the past two years.

If a trustee is really going to ask my family to pay this back, that would probably prevent me from declaring bankruptcy. Any experience or thoughts?

[bcohen]

I do not think the trustee will go after your daughter for the money spent on her wedding. Your daughter is not a creditor, and would have had no knowledge of your finances. Also, it is assumed that parents will spend money for their children's wedding, especially for a daughter's wedding. The "informal loan" to your father is of course a preferential payment, and the trustee will probably go after that.

However, regardless of what the trustee decides to do, or not do, you can always pay back any debt later after your bankruptcy. You can also attempt to negotiate with the trustee, and pay over time. Ultimately, if you are losing more than $2000 a month--plus the interest payments on your debt--trying to keep the coffee shop afloat, you need to close it, which presumably involves breaking a lease and other contracts. Hence, you need bankruptcy.

[chrisld]

Thanks. I looked up some other info online and they agreed that insider payments or preferential payments applies only to creditors, not paying for a wedding for my daughter.

We are working on selling the coffee shop, however the value of a business that is losing money is only the FF&E (furniture, fixtures, and equipment.) That's less than $20k (at best), but my lawyer said I had better document that it was sold for fair market value, if we go that route. Even if we don't sell, the building owner is very understanding. She said she would not enforce the lease if we go out of business, it's only to prevent us from moving.

[sadlybk100]

chrisld Have you filed yet? I am in a very similar situation as you (failed business but with a full time job) and would appreciate updates to your status. I'm not going to file until June of next year as advised by my attorney.

justbroke Really appreciate all your help on this forum. Such great advice. How far of a look back do the trustees perform for a ch 7 consumer debt bk vs a ch 7 non-consumer debt bk? Is it 6 months for both or are they different?

[justbroke]

justbroke Really appreciate all your help on this forum. Such great advice. How far of a look back do the trustees perform for a ch 7 consumer debt bk vs a ch 7 non-consumer debt bk? Is it 6 months for both or are they different?

(I'd say that "consumer" vs "non-consumer" is a misnomer of sorts as it really describes whether the debtor falls under the Means Testing or not.)

A Chapter 7 Trustee does a "lookback" for what are known as preferences and"fraudulent" transfers, and can "look" back 1 year and 2 years, respectively. It wouldn't matter whether it's consumer or non-consumer, as the bankruptcy is about the individual debtor and not a business.

A gift could be a fraudulent transfer if there was intent to hinder, delay or defraud a creditor. For example, paying for your daughter's wedding with a reasonable and modest amount of money would not be a fraudulent transfer. It could be questioned, though. Now think about just giving your daughter $50,000 as a wedding present. That would pique the Trustee's curiosity and they could claim that it was a constructively fraudulent transfer (e.g. you should have paid your creditors). If I paid for my daughter's wedding at $10,000 a year before filing, that would probably not raise any flags (questions, but not flags), because my income supports that as a modest amount.

In a case from Florida, the judge found that a $50K wedding gift was a fraudulent transfer because there was no value received. However, a case from new Mexico found that paying $10K for the wedding was not fraudulent because the parents were able to “listen and dance to the music, eat the food” and otherwise benefit from the wedding that was paid for (Montoya v. Campos (In re Tarin), 454 B.R. 179, 183–84).

In that Tarin case, the debtors spent over $10K on the wedding and the Trustee went after it as a fraudulent transfer. While these were edge cases, you can see where the line is drawn. As for chrisld I don't see that as a transfer where the Trustee would be concerned or attempt to claw back. However, had it been a $50K gift, and not to pay for a wedding, the Trustee would have firm ground to stand on to undue the transfer (claw it back).

(More on the wedding issue: In the Tarin case, the judge most quickly noted that it "is inconceivable that the wedding planner, cake maker, florist, band, piano player, limo driver or photographer would not be transferees in good faith for value." Fraudulent transfers usually hinge on the fact that nothing of value is exchanged. With the wedding itemization provided by the debtors, in the Tarin case, they were easily able to show value. The judge went further by saying that the debtors also received value by enjoying the wedding, eating food, and dancing to music. But the judge also thought about whether the parents had given the money directly to the daughter, rather than paying for the services directly.)

[chrisld]

We have not filed yet. If we do, it probably would not be until June or later.

[chrisld]

Here's a question - we have paid a $1750 deposit for a cabin rental in June. We'll pay the remaining $1750 when we go to the cabin. The vacation is a Christmas gift for our children. Is that something a trustee would have an issue with?

[justbroke]

Here's a question - we have paid a $1750 deposit for a cabin rental in June. We'll pay the remaining $1750 when we go to the cabin. The vacation is a Christmas gift for our children. Is that something a trustee would have an issue with?

That's more of what I call a "regular course of business" transaction. The Trustee couldn't claw it back because you received an in-kind exchange for value. Now, the Trustee could be upset that you enjoyed a "luxury" vacation on the eve of bankruptcy, but that's an entirely different story and battle. I don't know when you'll file, but the further away from that vacation the better.

But, I must go deeper into your question for a more qualified response. Since you haven't filed but have put down a sizeable deposit, my qualified answer would depend upon whether you filed before or after you took this vacation.

Filing before the vacation: You put a $1,750 deposit down, but file bankruptcy before going. You must list the deposit on your schedules (Schedule A/B line 22... Security deposits and prepayments). The Trustee would be VERY interested in clawing that back because it's easy money (cash or cash equivalents that don't need liquidation). While you won't personally have to pay the Trustee, the Trustee will definitely go after the business (or individual) where you made the deposit.

Filing before the vacation, but still taking the vacation while case is pending: you put a $1,750 deposit down and payoff the balance in May. You file June 1st, but then still take the trip in June. That would likely make the Trustee rather furious as the deposit should have still been on your Schedules, yet you spent it (by going). A modest road trip is not the issue (spending $300-400). Spending $3,500 on a "luxury" vacation at, near, after or around filing, is likely to make a Trustee take a look and decide whether or not the bankruptcy was filed in bad faith (for a Chapter 7). For a Chapter 13, it may not be as much of a problem because of the nature of Chapter 13s.

I define "luxury" in this case similar to the bankruptcy code which is around $750 for any single item. I would classify the cabin rental as a single item, and therefore a $3,500 cabin rental is a luxury.

[chrisld]

Yeah that vacation is going to be a problem. We have 11 kids and four grand kids (plus the sons/daughters-in-law, fiancees, etc.) It's two cabins with 20 or so people. It's a gift for us and the kids. It probably couldn't have come at a worse time, but it's already been planned for. The deposit has already been made, but I might want to find a way for the kids to pay for the rest.

[sadlybk100]

(I'd say that "consumer" vs "non-consumer" is a misnomer of sorts as it really describes whether the debtor falls under the Means Testing or not.)

A Chapter 7 Trustee does a "lookback" for what are known as preferences and"fraudulent" transfers, and can "look" back 1 year and 2 years, respectively. It wouldn't matter whether it's consumer or non-consumer, as the bankruptcy is about the individual debtor and not a business.

justbroke Thanks for the info! One follow-up questions since I believe you were in the same boat as I am.

I am a high income earner ($140k/year), but have unsecured debt of about $160k due to my failed business/side hustle.

If I file for ch 7, and the debt is classified as non-consumer, do you think I can get the debt discharged? Or does it depend on my net disposable income?

My second option would be to quit my job to go back to school for a MBA program. Do you think my debt will be discharged if I don't have income over the past 6 months? Would it look bad in the trustee's eyes when they review my petition and see my prior year's tax return that include my high income?

[justbroke]

justbroke Thanks for the info! One follow-up questions since I believe you were in the same boat as I am.

Yes, I was also a high-income earner.

If I file for ch 7, and the debt is classified as non-consumer, do you think I can get the debt discharged? Or does it depend on my net disposable income?

As a non-consumer, the means test doesn't matter since non-consumers do not complete the means test. However, the Trustee could poke around and try to claim "abuse" under what they call paragraph 707(a), or try to do a totality of circumstances or bad faith objection under 707(b)(3).

My second option would be to quit my job to go back to school for a MBA program. Do you think my debt will be discharged if I don't have income over the past 6 months? Would it look bad in the trustee's eyes when they review my petition and see my prior year's tax return that include my high income?

They may ask why your income decreased, but many people lose their jobs are stop working 2, 3 or more jobs to try to contain their debt. Personally, I would never want to bepnalize a person for going back to school.

I would say that you're overthinking this too much. Bankruptcy is very technical in nature. A non-consumer Chapter 7 does not complete the means test and only has to have not been filed in bad faith or have really strange circumstances that would not warrant a discharge. A high-income earner with a lot of non-consumer debt, who doesn't do the means test, will likely be more closely examined by the United States Trustee (UST). That would be what I expect for any high-earner filing Chapter 7.