Separate business inventory

[RLOPE]

Now that we've decided to file in the April timeframe, and we're set on seizing using all credit cards and making payments, a question has come to mind.

Long story short, 1.5 year ago my wife and I embarked on an endeavor to sell sandals online so that she continue to be a stay at home mom. Unfortunately of the 2000 pairs of sandals inventlry, only 250 sold. We did incorporate.

Question: Will the inventory be considered as an asset by the trustee? Or, would it be protected/exempt because they are under the corporation?

Thank you all -- your input is SOO appreciated.

[HHM]

It's an asset of the bankruptcy.

When it comes to incorporated businesses and personal BK, the bankruptcy trustee steps into your shoes relative to the business. So, for example, if your wife is 100% owner of Sandal Inc. and your wife files personal BK. Your wife's ownership interest in Sandal Inc. becomes an asset of the estate and the trustee can do anything your wife could do with Sandal Inc. So, if your wife has the right based on her ownership to liquidate the inventory, then so would the trustee. So even though your wife doesn't technically OWN the sandals-the inventory-(Sandal Inc does), your wife has "control" of the assets by virtue of the fact that she OWNS Sandal Inc.

Here is another rub; Tools of Trade exemption only applies to assets of the debtor. If, at time of filing the personal BK, the inventory is still owned by Sandal Inc., then the exemption DOES not apply and the inventory can be liquidated. However, if your wife was/is a sole proprietor, and assuming your state's tool of trade exemption covers inventory, then you may exempt it.

[RLOPE]

HHM, thank you very much for your response.

So if I understand you correctly, in essence, if I wanted to shelter the inventory from the BK I should do one of the following:

1) Convert Sandals Inc. from S Corp. to Sole Proprietor and protect under "tools of trade"
2) Dissolve Sandals Inc. and attempt to protect the inventory under personal exemptions. (My attorney explained that I have a wildcard of approximately $13K)


Is that a correct interpretation?

Thanks again.

[justbroke]

First, let me just say that this is where excellent asset protection and bankruptcy planning comes in handy.

1) Convert Sandals Inc. from S Corp. to Sole Proprietor and protect under "tools of trade"

Most "tools of the trade" exemptions are for a limited amount. Additionally, "inventory" is usually not a tool of the trade. (This will vary by State, so you have to find out for California.)

2) Dissolve Sandals Inc. and attempt to protect the inventory under personal exemptions. (My attorney explained that I have a wildcard of approximately $13K)

That could be a strategy. An asset protection attorney would be better at exactly what you would need to do. I'm assuming that you have OTHER things that you need to protect with your wildcard exemption. In California, if you don't have a homestead, then you have the unused homestead exemption which is over $20K.

I'm assuming that Sandals Inc doesn't have any liabilities and all that the only liabilities are personal liabilities. I don't know how you acquired the inventory and if it was with a major credit card, at least there's no PMSI lien attached to the inventory. If you actually have an inventory line of credit, this gets dicey with respect to liens.

The real question is... why not just liquidate? Or do you think that Sandals Inc's inventory is going to sell at retail values?

[RLOPE]

justbroke - thanks very much for your response. I will look into whether "tools of trade" includes inventory. The inventory in and of itself with import costs included is worth approximately $22.
In terms of you assuming I have OTHER things to protect w/ the wildcard exemption - - I don't think so: We do not own real estate, we only have 2 cars which have a combined 3K equity in them (note payoff is March 2013 for both), wedding bands and engagement ring (total value $6k), furniture (total value $3k), surfboard, child's crib, frig., stove, bed, dining room furniture, kid's playroom toys, 28" sony flatscreen, ipod, camcorder, sony vaio laptop, mac laptop, and GPS device. That's literally it.
You are correct, Sandals Inc. does NOT have any liabilities. Inventory was aquired with a loan from my 401k.
The market has shown that the retail values are not selling (plus we just do not have any money to market them), and we do intend on liquidating at a major discount, but who knows if they will sell...

[justbroke]

I think your key will be how you can restructure the business so that you can maximize your exemptions. I'm not suggesting it, just agreeing with HHM that a restructure may help. It just needs to be reviewed by a competent attorney who is good at asset protection and bankruptcies... with a business involved.

As for your exemptions, jewelry under System II is only exempt up to $1,350 so you need some of that homestead exemption for that. Additionally, under System II, other furnishings is limited to like $525 per item (don't quote me), so if you have $3K in furnishings, I wonder if any items exceeds the exemption allowance.

A good exercise for you may be to, if you haven't already done so, is create a spreadsheet with all your real and personal property and list the price you paid for it and the present value of it. Then you can add a column to list the amount that you can exempt and then a column with the "exposed" non-exempt value. At least you'll have this in one spot and can help your attorney later. I only suggest this so that you can get a good handle on just how much you can exempt and what is exposed. If you are successful with the reorg of the business, then how much exemption is left will be important.

On the other hand, if you are willing to lose "part" of the inventory or buy some of it from the Trustee, this could be a good strategy. Again, seek a great attorney who knows their stuff!

(Unlike what some other posters may write, I will not get into the whole 401(k) loan thing. I think you already learned something. Besides, this was done as a loan and not a distribution.)