Customer preorders in a business bankruptcy?

[ScaredGuy]

We run a small business in a difficult industry that has been hit with a plethora of issues and delays in the past few years. As of writing this we have upward of $70,000 in customer preorders still outstanding. Right now we are fighting to keep the company solvent, but we're most worried about taking care of these customers who have been patiently waiting for their preorder products. If the company runs out of money and can no longer continue to operate, should we file a Chapter 7 for the LLC to make it transparent to the customers that the business is no longer operational? I've been told that we could let the LLC "go dark" by not filing for any kind of bankruptcy and simply stating that the company is closing down. It seems like officially declaring bankruptcy would be the better choice due to the large amount of customer preorders.

In the event that the LLC is preparing to file for Chapter 7 bankruptcy, would we list all of our preorder customers as creditors, or only those with substantial amounts of preorders still outstanding? Or would it be unnecessary to list the preorder customers as creditors?

I am very concerned about taking care of these customers, and if it's looking like the business will become insolvent, we plan on trying to refund as many of them as possible. If this ends up happening, I also plan on filing a personal Chapter 7 to remove my personal guarantee from some of the business debts.

Thank you to anyone who can share thoughts/wisdom on dealing with customer preorders in a business Chapter 7 bankruptcy.

[justbroke]

As despritfreya wrote earlier, there is usually no reason to file a Chapter 7 for a corporation (or LLC), because there is never a discharge in such a filing. I would think, as I've had several LLCs, that the only way I'd file a Chapter 7 for the LLC is only to have a Trustee liquidate the assets. That's because it's probably easier for the Trustee to liquidate things when they are significant (in quantity or value).

To make an LLC non-operational, you should file a dissolution with the Secretary of State in the state(s) in which the LLC operates. Or, you can mark the business as closed in the Annual Report. That is the type of notice that indicates that a company is no longer operating. A Chapter 7 doesn't close a business until the case is closed (because the Trustee can operate the business for the benefit of the bankruptcy estate). There's an exception for certain types of business which continue to operate despite the close of the Chapter 7.

But even with a Chapter 7 "closing" an LLC, it's the Secretary of State that has the official record. (In practice, the Chapter 7 "closing" here is nothing more than a "ceasing of operations.") Nothing I know will cause the Secretary of State to officially close an LLC outside a.) a notice of dissolution (voluntary dissolution), or b.) involuntary dissolution due to non-filing of annual report (an administrative dissolution). My gut is that if you filed a Chapter 7 on the LLC, the LLC would still be "officially" active in the State (or States) because it's the Secretary of State's record that matters. Until there's a failure of that LLC to file an annual report, it will continue to be "active" based on the State's records.

Just my $0.02.

In any regard, all of the customers that made a deposit, or made a pre-order payment, are creditors. Remember a creditor is just someone that has a claim against you and, certainly, a pre-order deposit is such a claim.

[ScaredGuy]

Thank you for this. One attorney I visited said it would be good to do a bankruptcy for the LLC to basically announce to all of the customers with preorders/deposits that the business is "done" but it sounds like there might be other ways to go about it. Another concern I have is that as a sole member LLC that some of these preorder customers might try to come after me personally when the business closes. The attorney said I could list some of these preorder customers as creditors on my personal bankruptcy to avoid that.

Basically in the social media age, I am most concerned about 500 angry customers rather than a few large banks.

Another option I thought of was taking out another business loan essentially to fulfill or refund as many of these customers as possible before closing the business to minimize damage. According to the attorney if I waited 90+ days to file after refunding these customers, I could avoid the "preferential treatment of creditors" issue.

As despritfreya wrote earlier, there is usually no reason to file a Chapter 7 for a corporation (or LLC), because there is never a discharge in such a filing. I would think, as I've had several LLCs, that the only way I'd file a Chapter 7 for the LLC is only to have a Trustee liquidate the assets. That's because it's probably easier for the Trustee to liquidate things when they are significant (in quantity or value).

To make an LLC non-operational, you should file a dissolution with the Secretary of State in the state(s) in which the LLC operates. Or, you can mark the business as closed in the Annual Report. That is the type of notice that indicates that a company is no longer operating. A Chapter 7 doesn't close a business until the case is closed (because the Trustee can operate the business for the benefit of the bankruptcy estate). There's an exception for certain types of business which continue to operate despite the close of the Chapter 7.

But even with a Chapter 7 "closing" an LLC, it's the Secretary of State that has the official record. (In practice, the Chapter 7 "closing" here is nothing more than a "ceasing of operations.") Nothing I know will cause the Secretary of State to officially close an LLC outside a.) a notice of dissolution (voluntary dissolution), or b.) involuntary dissolution due to non-filing of annual report (an administrative dissolution). My gut is that if you filed a Chapter 7 on the LLC, the LLC would still be "officially" active in the State (or States) because it's the Secretary of State's record that matters. Until there's a failure of that LLC to file an annual report, it will continue to be "active" based on the State's records.

Just my $0.02.

In any regard, all of the customers that made a deposit, or made a pre-order payment, are creditors. Remember a creditor is just someone that has a claim against you and, certainly, a pre-order deposit is such a claim.

[despritfreya]

We did recently file a Chapter 7 for an entity who had taken customer deposits. Projects were in various states of completion. We filed the Chapter 7 as the entity had assets that could be liquidated for the benefit of creditors. In an orderly liquidation, a Chapter 7 trustee could pay back a percentage of those deposits. Consumer deposits, up to a certain dollar amount, are given priority treatment - even ahead of taxes. See 11 USC 507(a)(7). But for the assets that could be liquidated, I don't think we would have considered the Chapter 7.

If OP wants to continue to operate the LLC, he/she may want to consider a Subchapter V Chapter 11 for the entity.

Regardless, once a decision is made about the entity, OP may, at some point, need to file bankruptcy. Only time will tell.

Des.

[ScaredGuy]

Hi Des, really appreciate your reply. The LLC does have a couple of vehicles in the company name as well as maybe $10,000 to $20,000 in inventory, so not much for assets. A big concern of mine are the 500+ customers who have outstanding deposits for projects not yet completed. I am worried that if the business simply "closes" or "goes dark" and does *not* file for Chapter 7 bankruptcy, the customers with outstanding deposits might think we're simply running off with their money which we would never do. Filing a Chapter 7 for the entity would send a clear message to these customers that unfortunately the business is no longer solvent and cannot financially fulfill the projects or refund all of the deposits.

So I guess my concern is more based in perception than law.

An idea I've considered is taking on another business loan or working capital line to use basically to refund as many customers as possible. One of the bankruptcy attorneys I visited recently said "in bankruptcy it's better to deal with a few banks than hundreds of angry customers." As a single member LLC, I'd also be concerned about them trying to come after me personally by "piercing the corporate veil."

We did recently file a Chapter 7 for an entity who had taken customer deposits. Projects were in various states of completion. We filed the Chapter 7 as the entity had assets that could be liquidated for the benefit of creditors. In an orderly liquidation, a Chapter 7 trustee could pay back a percentage of those deposits. Consumer deposits, up to a certain dollar amount, are given priority treatment - even ahead of taxes. See 11 USC 507(a)(7). But for the assets that could be liquidated, I don't think we would have considered the Chapter 7.

If OP wants to continue to operate the LLC, he/she may want to consider a Subchapter V Chapter 11 for the entity.

Regardless, once a decision is made about the entity, OP may, at some point, need to file bankruptcy. Only time will tell.

Des.

[justbroke]

As a single member LLC, I'd also be concerned about them trying to come after me personally by "piercing the corporate veil."

That is the single problem I've always been concerned with when operating as a single-member LLC. Fortunately for me I am no longer in a single-member LLC. The problem with such an entity is when it becomes just an "alter ego" of yourself. We keep very good records and are sure not to commingle funds in any way. If I "loan" money to the LLC it's a loan. If we require another capital contribution, then it's just another contribution that goes into our books on our capital (member) accounts. If any member takes a draw, we all take a draw. Makes it easier!

I think I would rather have 1 angry creditor than 100. But, I also wouldn't want it to be for nothing if that single-creditor finds any indication that I never intended to pay back a loan.

It's an interesting strategy! I think that's what you need right now is the strategy of how to unwind this thing... or to continue operating as Des suggests as a possibility (Small Business Chapter 11).

[ScaredGuy]

Sincerely appreciate the replies from justbroke and despritfreya and hope I can ask a little more: 1 attorney told me that it's "unlikely" that any of the customers with deposits/preorders would come after me personally if the business closes.... another attorney said that I should list all customers with significant amounts in deposits/preorders as creditors on my personal Chapter 7 as a "precautionary measure" to stop them from coming after me post-bankruptcy. For context, we have upward of 1,000 customers with deposits/preorders, probably around 100 customers with $1,000+ in deposits and 10-20 customers with over $3,000 in deposits/preorders. Do you think it would be a good idea to list these customers as creditors on my personal Chapter 7? The attorneys said it would add a *lot* in attorneys fees.

If we decide to do a Chapter 7 for the LLC, would we also have to list those same customers as creditors in the LLC Chapter 7?

The most valuable assets that the LLC has are 2 vehicles which could probably be sold by the trustee for around $20,000 to $25,000. We have a small amount of inventory in a specialized industry that the trustee would likely have trouble selling. It sounds like filing a Chapter 7 for the LLC would be more time consuming and expensive, so if we don't have to file for the business that would be ideal.

That is the single problem I've always been concerned with when operating as a single-member LLC. Fortunately for me I am no longer in a single-member LLC. The problem with such an entity is when it becomes just an "alter ego" of yourself. We keep very good records and are sure not to commingle funds in any way. If I "loan" money to the LLC it's a loan. If we require another capital contribution, then it's just another contribution that goes into our books on our capital (member) accounts. If any member takes a draw, we all take a draw. Makes it easier!

I think I would rather have 1 angry creditor than 100. But, I also wouldn't want it to be for nothing if that single-creditor finds any indication that I never intended to pay back a loan.

It's an interesting strategy! I think that's what you need right now is the strategy of how to unwind this thing... or to continue operating as Des suggests as a possibility (Small Business Chapter 11).

[despritfreya]

1 attorney told me that it's "unlikely" that any of the customers with deposits/preorders would come after me personally if the business closes.... another attorney said that I should list all customers with significant amounts in deposits/preorders as creditors on my personal Chapter 7 as a "precautionary measure" to stop them from coming after me post-bankruptcy.

I cannot give you a definitive answer as the answer turns on the aggressiveness of customers and whether or not the local news media will have a field day. In the situation I alluded to, I tend to doubt my advice will be to list all customers with outstanding deposits in the personal case. Why? Because the business Chapter 7 went smoothly with no problems. The owners of the company fully cooperated with the Trustee. I spoke to several customers and walked them through the filing of a priority claim. Assets were sold and payments were made. Granted, the customers with deposits only got back a small percentage, but so far, none are “complaining” or threatening to go after the owners. Now, if there had been a different outcome, when the owners come back to file their personal case, my thought process might be different and recommend listing all customers “for info only”, with $0.00 owed. Listing an actual debt with an amount owed is an admission of personal liability.

We have upward of 1,000 customers with deposits/preorders, probably around 100 customers with $1,000+ in deposits and 10-20 customers with over $3,000 in deposits/preorders. Do you think it would be a good idea to list these customers as creditors on my personal Chapter 7? The attorneys said it would add a *lot* in attorneys fees.

See above. As to cost, I would agree that a Chapter 7 that is much more involved will demand a higher fixed fee. But, I want to note that if the business files and then you file (and list the customers), importing the creditor list from one case to the other is easy.

If we decide to do a Chapter 7 for the LLC, would we also have to list those same customers as creditors in the LLC Chapter 7?

The customers ARE creditors of the LLC and all get listed.

The most valuable assets that the LLC has are 2 vehicles which could probably be sold by the trustee for around $20,000 to $25,000. We have a small amount of inventory in a specialized industry that the trustee would likely have trouble selling. It sounds like filing a Chapter 7 for the LLC would be more time consuming and expensive, so if we don't have to file for the business that would be ideal.

Tough call. Are there liens on the vehicles? If not, what about self liquidating? We did this for a company when the owner passed away. The family sold all assets. Proceeds were given to us and we then worked a distribution to all creditors on a pro rata basis. Everyone got something. No one was paid in full. Upon payment, each creditor released the entity (and the spouse of the owner) from liability. No need for a bankruptcy. I do note that consumers were not involved in this situation - all creditors were "institutional".

Des.

[ScaredGuy]

despritfreya thank you *so* much for the information! One thing in particular that you mentioned is key: "Listing an actual debt with an amount owed is an admission of personal liability." Indeed, I am not personally liable for these delays on products tied to customer deposits so that would be a huge mistake. Today I visited 2 more attorneys and it sounds like the way to go would be to file a Chapter 7 for the business, list all of the customers with deposits/preorders as creditors in the business Chapter 7 and do not list them in the personal Chapter 7. One attorney in particular thinks it's very unlikely that any of the customers would attempt to "pierce the corporate veil" for outstanding amounts under $5,000 which 99.8% of them are. Some of these customers can get kind of aggressive, so we're going to try to refund a lot of them before filing Chapter 7 (giving at least 90 days to avoid "preferential treatment of creditors").

Of course, our top priority is making the business survive and thrive, but I feel better now being more prepared for worst case scenario. Thanks again.

I cannot give you a definitive answer as the answer turns on the aggressiveness of customers and whether or not the local news media will have a field day. In the situation I alluded to, I tend to doubt my advice will be to list all customers with outstanding deposits in the personal case. Why? Because the business Chapter 7 went smoothly with no problems. The owners of the company fully cooperated with the Trustee. I spoke to several customers and walked them through the filing of a priority claim. Assets were sold and payments were made. Granted, the customers with deposits only got back a small percentage, but so far, none are “complaining” or threatening to go after the owners. Now, if there had been a different outcome, when the owners come back to file their personal case, my thought process might be different and recommend listing all customers “for info only”, with $0.00 owed. Listing an actual debt with an amount owed is an admission of personal liability.



See above. As to cost, I would agree that a Chapter 7 that is much more involved will demand a higher fixed fee. But, I want to note that if the business files and then you file (and list the customers), importing the creditor list from one case to the other is easy.



The customers ARE creditors of the LLC and all get listed.



Tough call. Are there liens on the vehicles? If not, what about self liquidating? We did this for a company when the owner passed away. The family sold all assets. Proceeds were given to us and we then worked a distribution to all creditors on a pro rata basis. Everyone got something. No one was paid in full. Upon payment, each creditor released the entity (and the spouse of the owner) from liability. No need for a bankruptcy. I do note that consumers were not involved in this situation - all creditors were "institutional".

Des.