S-Corp Ch7 + Personal Ch7+ Personal Guar... Keeping tools???

[DivorcedArt]

One question keeps me up at night...

I'm considering:

S-corp Ch7 and Personal Ch7 at the same time. I shouldn't have any personal assets outside exemptions. Car value is very low. House was sold on a short sale. No investments or anything of great value.

What I have of value is my tools because they can provide me with an income.

One more pertinent fact is that my $40,000 business line of credit has a personal guarantee. It's a SBA/Bank loan that is backed 50% by the SBA.

This is where it gets tricky for me to understand...

Under Wisconsin Bankruptcy Laws, exemptions include:

"Equipment, inventory, farm products, books, and tools of trade to $15,000 total."

If I could keep $15k worth of tools, I could provide a livable income. The tools are owned by the S-corp. Do I have right to keep $15k worth of tools, even with the personal guarantee???

Any insight would be helpful. Thanks!

[HHM]

Your are correct, this is more complicated.

First off, the S-Corp probably does not need to file BK. All a BK does for a corporation is liquidate it; however, with proper legal guidance, you can liquidate a business.

The rub, if the tools are owned by the S-Corp., to insulate yourself from fraud, you will need to buy them from the corporation. You do not have the right to just, "keep them."

[justasking]

Actually HHM, I am not sure that is 100% correct about the business tools.

He needs to check with his lawyer about business law for WI, but when you disolve a corporation, its assets become your personal assets.

He could then claim the business tools up to the $15k limit as allowed.

I don't believe he needs to "buy" them ... they are part of his assets as a subset of his corporate assets.

So long story short, consult your lawyer ... but you should be able to keep your tools.

[HHM]

Actually HHM, I am not sure that is 100% correct about the business tools.

He needs to check with his lawyer about business law for WI, but when you disolve a corporation, its assets become your personal assets.

He could then claim the business tools up to the $15k limit as allowed.

I don't believe he needs to "buy" them ... they are part of his assets as a subset of his corporate assets.

So long story short, consult your lawyer ... but you should be able to keep your tools.

If s-corp has creditors, not the case. When you dissolve a company, and if the company has creditors, they are entitled to get the value of the business assets. If the owners simply abscond with the assets, then the creditors can pursue the owners individually for the debt owed to the business.

[WanabeFree]

I believe that a S corp is just a legal form for tax purposes. Generally everything in a s corp flows back to its owner its just protected or insulated from the person who owns it but since almost every S corp is personally guaranteed by its owner there should be no difference in filing as a sole proprietor or S corp.

[frogger]

I believe that a S corp is just a legal form for tax purposes. Generally everything in a s corp flows back to its owner its just protected or insulated from the person who owns it but since almost every S corp is personally guaranteed by its owner there should be no difference in filing as a sole proprietor or S corp.

Wrong answer. Huge difference.......

The only thing that flows from the S-Corp is the profit/loss. HHM is correct.

All assets owned by the corp will be sold by the trustee. You can probably negotiate to buy them back at a very reasonable price.

[DivorcedArt]

Thanks everyone for the input!

I'm thinking about strategy. Here's the data:

1. Secured Bank LOC = $40,000
-backed by SBA, bank is reimbursed 50%

2. Unsecured Business Credit Cards = $52,000

3. Estimated value (guess) of all machinery if sold in ads. = $10-15K
-Biggest asset: $17k new in 2005, sells used now for $7500 through discussion board posts (new version has upgrades that make this one less desirable.)

The debt is crushing me, but I would like to continue the business (sans the debt).

I see two possibilities:

1. Chapter 11, if the debt can be negotiated down to $10-15k, which I wonder is even possible.

2. Chapter 7, and negotiate a purchase of the assets, which might be at a price considerably less than the $10-15k. (Is there a rule-of-thumb? 50%??)

One consideration is cash...

I might need to get creative in coming up with the purchase cash. Hmmm... I wonder if the bank would finance? Plus there are lawyer fees. I got one quote two years ago for $3,500 to handle both the personal and corporate Ch7. Which leads to the next question...

I've learned there is a big difference in Divorce Lawyers... How about BK? Is there a need to get someone who is a "specialist." Does the investment pay off?

Please feel free to comment on anything here. Thank you so much for the input. I'm just starting to get collection calls on the land-line. Thank goodness for cell phones!

[HHM]

Chapter 11 is probably a non-starter, the fees are prohibitive for the amount of debt; any real chapter 11 lawyer will charge you an upfront retainer of $15-$20K.

And yes, there is a HUGE difference between BK lawyers. $3,500 to handle both a business and personal chap 7 with biz assets that have value and an SBA loan is ridiculously low (and it was two years ago). My sense it, there is a serious limitation in the service that lawyer will provide.

In bankruptcy, what you need to be careful with is how the lawyers limit what they will do for you. There is a difference between a "basic" bankruptcy and a "full service" bankruptcy. In your case, you will need full service. Fees do vary by district, but a "reasonable" fee based on the little bit you mentioned and the goal to "keep the business operating" would probably be $6K and up.

[RuthCB]

So, say you have a small amount of business assets after dissolving the corporation and you choose not to file a business BK, but do file a personal BK. What should you do with those assets? As of now, my equipment is stored in my back bedroom. Should I notify the bank about those assets? If I do a balance sheet, my business will show no assets.
I have a LOC, but it is not personally guaranteed. I almost wish it was since I could get it discharged in my personal BK. My personal BK lawyer wants to list the LOC in the personal BK so I will be clear ( as the officer of the corp)

[blockhead]

Wrong answer. Huge difference.......

The only thing that flows from the S-Corp is the profit/loss. HHM is correct.

All assets owned by the corp will be sold by the trustee. You can probably negotiate to buy them back at a very reasonable price.

Having just gone through this with a c-corp ( same thing as an s-corp is just a corporate tax election - they're both still corporations and a separate entity ), the Bk estate owns the SHARES of the S-corp that you owned. The 40K debt you personally guaranteed is discharged in your own ch7 discharge but remains a debt of the corporation. If the trustee decided not to abandon the corp he'd have to administer it in such a way that the corp's creditors get paid out of any asset sales, or find someone to buy the shares outright.

[HHM]

So, say you have a small amount of business assets after dissolving the corporation and you choose not to file a business BK, but do file a personal BK. What should you do with those assets? As of now, my equipment is stored in my back bedroom. Should I notify the bank about those assets? If I do a balance sheet, my business will show no assets.
I have a LOC, but it is not personally guaranteed. I almost wish it was since I could get it discharged in my personal BK. My personal BK lawyer wants to list the LOC in the personal BK so I will be clear ( as the officer of the corp)

RuthCB, it really depends on the value of the assets. It sounds like your personal BK attorney has a handle on this issue. 9 times out of 10, the business entity (the corporation, LLC, etc) does not need to file BK. There is usually no point. But if the business has creditors, to prevent blow-back to the owners for dissolving the corporation, certain steps must be taken. If the business has assets, the assets MUST BE sold in some manner. In the normal "small business" situation, the owner will simply buy the assets for current market value. If you do not sell the assets, then you potentially create new problems. Now you have opened up yourself (the owner) to liability as the trustee in assets of the corporation. And since retaining the assets without selling them to yourself is a type of fraud, the debt would arguably be non-dischargeable in your personal BK (at least up to the value of the assets).