Question about business loan with personal guarantee and Chapter 7 bankruptcy

[ScaredGuy]

Hi guys I'm in a really bad place right now and bankruptcy is looking likely. For over 10 years I’ve been running a small business (product based) that has low profit margins. To keep the business going I’ve been taking on debts - both business and personal. Now I find myself in a very deep hole. The business is currently $196,964.47 in debt and I personally am in $64,580.06 of debt.

One of the business loans is a PayPal LoanBuilder loan where I'm the personal guarantor and it lists basically all of my personal stuff as collateral, I've copied the security interest section of the contract below. From what I've read, collateral in secure debt does not go away when you file Chapter 7 bankruptcy. Does this mean PayPal/LoanBuilder would put liens against all of my personal accounts/property/assets/fixtures/general intangibles? So even if the Chapter 7 discharges the Personal Guarantee, they could keep coming after me for all of my stuff? Would exemption laws protect me? Thanks for any info.

From the contract:

Security Interest. In order to secure your full payment and performance of your obligations
under this Agreement, you grant to us a continuing security interest in and to all of your present
and future accounts, Receivables, chattel paper, deposit accounts, personal property, assets
and fixtures, general intangibles, instruments, equipment and inventory (as those terms are defined in Article 9 of the Uniform Commercial Code (“UCC”)), wherever located, and with
respect to these items, all proceeds now or hereafter owned or acquired by you (collectively,
the “Collateral”). Upon any Event of Default, we may exercise all remedies available to secured
parties under the UCC or any other applicable law. We have the right, but not the obligation, to
create, sign on your behalf and file all filings that we determine are reasonably necessary to
perfect our security interest in the Collateral, including without limitation, one or more UCC-1
financing statements. You agree that you will, from time to time, promptly execute and deliver
all instruments and documents (including any account control agreements), and take all further
action, that may be necessary or appropriate, or that we may reasonably request, to perfect
our security interest in the Collateral against you and all third parties or to enable us to exercise
and enforce our rights and remedies hereunder. For purposes of this Agreement, “Receivables”
refers to any and all cash received from your customers’ purchases of goods and/or services
from you and all payment rights arising from or occurring as a result of your customers’
purchases of goods and/or services from you, whether by checks, money orders, automated
clearing house network transactions, or “ACHs”, or any other type of electronic fund transfers
(collectively, “EFTs”), payment cards (including, without limitation, credit cards, charge cards,
debit cards, prepaid cards, benefit cards or similar cards), extensions of credit or any other
forms of payment now known or hereinafter developed.

[despritfreya]

Assuming the business is an entity (Inc. or LLC), you need to separate yourself from the entity. When you say that the loan "lists basically all of my personal stuff as collateral" do you really me "your" stuff or stuff belonging to the "entity"? Who is the borrower, you or the entity?

What you copied is a standard UCC-1 "blanket lien" and, in all likelihood only applies to the assets of the entity. "You" refers to the borrower, not the guarantor. Yes, upon default, the lender can assert its Article 9 rights to take possession of its collateral. Chapter 7 bankruptcy would not change this - nor would the entity file a Chapter 7 (without a darn good reason) since entities do not get discharges in Chapter 7.

And. . . if it turns out that you are the borrower and/or you actually did give a security interest in your household (personal) items, there is a way to deal with it in a Chapter 7. See 11 USC 522(f).

Des.

[ScaredGuy]

Thank you very much for your reply. You are correct that the business is a separate entity (LLC). However, I did sign onto this loan as a personal guarantor. I've read that if I file for personal bankruptcy, personal guarantees are discharged... so would the "collateral" only then apply to the LLC if I filed for personal bankruptcy? What if the LLC closes/goes bankrupt itself?

From what I've researched, it sounds like secured debts stick around even after bankruptcy because of their "collateral" that they can put liens on. In the collateral on this contract, it states "personal property" which led me to believe that they could essentially put liens on anything I own.

Assuming the business is an entity (Inc. or LLC), you need to separate yourself from the entity. When you say that the loan "lists basically all of my personal stuff as collateral" do you really me "your" stuff or stuff belonging to the "entity"? Who is the borrower, you or the entity?

What you copied is a standard UCC-1 "blanket lien" and, in all likelihood only applies to the assets of the entity. "You" refers to the borrower, not the guarantor. Yes, upon default, the lender can assert its Article 9 rights to take possession of its collateral. Chapter 7 bankruptcy would not change this - nor would the entity file a Chapter 7 (without a darn good reason) since entities do not get discharges in Chapter 7.

And. . . if it turns out that you are the borrower and/or you actually did give a security interest in your household (personal) items, there is a way to deal with it in a Chapter 7. See 11 USC 522(f).

Des.

[justbroke]

Des wrote that "'You' refers to the borrower, not the guarantor." It's not your personal assets since you signed as a Managing Member of the LLC. Des wrote that "personal property" relates only to the borrower. You are not the borrower because the loan was taken out by the LLC.

I assume that you are closing the LLC?

As an aside, I'm so glad to read that it is an LLC. Many small business owners operate their business as their alter ego -- the person themself (e.g., Justbroke d/b/a Broken Dreams).

[despritfreya]

. . . would the "collateral" only then apply to the LLC if I filed for personal bankruptcy? What if the LLC closes/goes bankrupt itself?

1. If the entity ceases to operate and defaults in its payment to the secured lender, the lender has the right to take possession of its property (collateral). You contact the lender and arrange to have the property surrendered. You DO NOT dispose of the collateral as the collateral does not belong to you or the entity. If the lender does not want its property, then get something in writing that authorizes you to dispose of the property in whatever fashion you choose without turning over any money (if sold) to the lender.

2. The entity is not filing Chapter 7. As stated above, there would be no reason (with very few exceptions) for the entity to file bankruptcy unless it wanted to attempt to reorganize under Chapter 11. In most instances, one simply lets the entity die a slow death. Make sure all taxing authorities know the entity is no longer operating. Talk to your accounting professional in this regard.

Des.

[ScaredGuy]

Thank you, Des, you have been very helpful. I do have a few more questions and any input is sincerely appreciated:

1. We have two vehicles that are registered in the name of the business, have the business name (no personal names) on the titles and have been paid for using business funds. These vehicles are also used as our personal vehicles. Yesterday a bankruptcy attorney told me that if I file a personal Chapter 7, the vehicles should be safe since they only have the business name on them and were paid for using business funds. I am worried that the secured business debtor would come after the vehicles as collateral. Would it be possible to keep the vehicles by transferring them into my personal name *after* my debts are discharged in a personal Chapter 7, then dissolve the LLC/business? Would it be considered a fraudulent transfer if I transferred one of these vehicles into my personal name before filing Chapter 7?

2. Our business has many customers with paid preorders/advance deposits. If we want to close down the business, ideally we would like to try and refund as many of the customers as possible first. The bankruptcy attorney told me to do this at least 90+ days before filing for personal chapter 7 so we avoid being seen as giving preferential treatment to certain creditors. Does this sound accurate?

3. When you say let the entity (LLC) "die a slow death" do you mean that we shouldn't immediately dissolve it? Basically let the LLC linger until the next renewal date with the Secretary of State, then simply don't renew it on the due date?


Thanks again for your input, I'm probably gonna speak to another bankruptcy attorney soon.

1. If the entity ceases to operate and defaults in its payment to the secured lender, the lender has the right to take possession of its property (collateral). You contact the lender and arrange to have the property surrendered. You DO NOT dispose of the collateral as the collateral does not belong to you or the entity. If the lender does not want its property, then get something in writing that authorizes you to dispose of the property in whatever fashion you choose without turning over any money (if sold) to the lender.

2. The entity is not filing Chapter 7. As stated above, there would be no reason (with very few exceptions) for the entity to file bankruptcy unless it wanted to attempt to reorganize under Chapter 11. In most instances, one simply lets the entity die a slow death. Make sure all taxing authorities know the entity is no longer operating. Talk to your accounting professional in this regard.

Des.

[despritfreya]

1. We have two vehicles that are registered in the name of the business, have the business name (no personal names) on the titles and have been paid for using business funds. . . Yesterday a bankruptcy attorney told me that if I file a personal Chapter 7, the vehicles should be safe since they only have the business name on them and were paid for using business funds. I am worried that the secured business debtor would come after the vehicles as collateral. Would it be possible to keep the vehicles by transferring them into my personal name *after* my debts are discharged in a personal Chapter 7, then dissolve the LLC/business? Would it be considered a fraudulent transfer if I transferred one of these vehicles into my personal name before filing Chapter 7?

You do nothing with the vehicles. Putting them in your name (at any time) is a fraudulent transfer out of the entity unless you pay the entity fair value for the purchase of the vehicles and then use those funds to pay entity debt. Assuming you are in a title holding state - meaning that liens against vehicles can only be perfected by a lien on the title, it is unlikely that the vehicles are part of the UCC1 - Were the vehicles included in the list? Do they have liens on their titles? Does the entity even have possession of the titles?

I agree with the attny that your Trustee will leave the vehicles alone since, if he takes control of the entity and sells entity assets, he has to use those funds to pay entity debt before he can pay a dime to your personal creditors. His job is to maximize the recovery to your creditors, not those of an entity that has not filed bk.

2. Our business has many customers with paid preorders/advance deposits. If we want to close down the business, ideally we would like to try and refund as many of the customers as possible first. The bankruptcy attorney told me to do this at least 90+ days before filing for personal chapter 7 so we avoid being seen as giving preferential treatment to certain creditors. Does this sound accurate?

I don’t disagree with the attorney however, please go back to the attny to clarify who makes the payments, you or the entity. Also ask him/her if such payments by you can be recovered as a fraudulent conveyance under Section 548 if you are not personally responsible for the return of the deposits given to the entity.

3. When you say let the entity (LLC) "die a slow death" do you mean that we shouldn't immediately dissolve it? Basically let the LLC linger until the next renewal date with the Secretary of State, then simply don't renew it on the due date?

This you have to discuss with your CPA and/or attny). In my state there is no reason to officially dissolve a corporation. In other states, fees are charged until such time as there is an official dissolution. Regardless, once you file bk, you cannot do anything with the entity until the Chapter 7 Trustee closes his/her file. Your membership interest is an “asset” that must be disclosed on Schedule A/B. On the day you file bk your membership interest transfers to the Trustee and, unless there is an allowed exemption for the interest, you no longer control the entity. Control is returned to you if and when the Trustee abandons the asset.

Please follow up with your attorney as he/she is on the correct path.

Des.

[ScaredGuy]

Thanks Des, I spoke to another attorney yesterday... he had a different opinion than the other attorney. He thinks that we should also declare bankruptcy for the LLC to basically tell everyone that the business is done. I was also thinking along these lines originally because the business has so many outstanding customer preorders, if we simply stated that the business is "closing" then the customers would likely not take it well (although they won't take it well either way). However, he said that if the LLC declares bankruptcy we would definitely lose the vehicles.

The vehicles currently have loans on them that are being paid off - 1 vehicle will be paid off this August 1st of 2023, the other vehicle will be paid off March 1st of 2024. Based on what you're saying we'll continue making payments without paying them off or transferring them into another name. Will the vehicles still having existing loans on them affect how the trustee handles them? The entity is not in possession of the vehicle titles - the loan company currently has the titles.

Also regarding the secured debt: unfortunately, I signed onto the contract as "owner" and not "managing member" of the LLC. The attorney I visited yesterday thinks this will make it easier for them to come after me personally. The "Borrower" in the contract is listed as the LLC, but I signed on behalf of the business as "owner." Does this make it more likely that they could come after me personally for the security interest/collateral?

Thank you again for all of the information.

You do nothing with the vehicles. Putting them in your name (at any time) is a fraudulent transfer out of the entity unless you pay the entity fair value for the purchase of the vehicles and then use those funds to pay entity debt. Assuming you are in a title holding state - meaning that liens against vehicles can only be perfected by a lien on the title, it is unlikely that the vehicles are part of the UCC1 - Were the vehicles included in the list? Do they have liens on their titles? Does the entity even have possession of the titles?

I agree with the attny that your Trustee will leave the vehicles alone since, if he takes control of the entity and sells entity assets, he has to use those funds to pay entity debt before he can pay a dime to your personal creditors. His job is to maximize the recovery to your creditors, not those of an entity that has not filed bk.



I don’t disagree with the attorney however, please go back to the attny to clarify who makes the payments, you or the entity. Also ask him/her if such payments by you can be recovered as a fraudulent conveyance under Section 548 if you are not personally responsible for the return of the deposits given to the entity.



This you have to discuss with your CPA and/or attny). In my state there is no reason to officially dissolve a corporation. In other states, fees are charged until such time as there is an official dissolution. Regardless, once you file bk, you cannot do anything with the entity until the Chapter 7 Trustee closes his/her file. Your membership interest is an “asset” that must be disclosed on Schedule A/B. On the day you file bk your membership interest transfers to the Trustee and, unless there is an allowed exemption for the interest, you no longer control the entity. Control is returned to you if and when the Trustee abandons the asset.

Please follow up with your attorney as he/she is on the correct path.

Des.

[justbroke]

Also regarding the secured debt: unfortunately, I signed onto the contract as "owner" and not "managing member" of the LLC. The attorney I visited yesterday thinks this will make it easier for them to come after me personally. The "Borrower" in the contract is listed as the LLC, but I signed on behalf of the business as "owner." Does this make it more likely that they could come after me personally for the security interest/collateral?

despritfreya what do you think about this issue? It would certainly make the strategy more complex if a creditor seeks to pierce the protections of the LLC.

[despritfreya]

despritfreya what do you think about this issue? It would certainly make the strategy more complex if a creditor seeks to pierce the protections of the LLC.

I really don't know. I think it goes to the intent of the parties. "Owner" is not the same as signing "individually", but it is also not the same as signing as "managing member". There may be Oregon case law on this issue (assuming the contract is to be interpreted under Oregon law). I just don't know.

Des.