Somewhat Complicated S-Corp/Property LLCs/Land Issues

[daedalus]

Been lurking here for the last several weeks just trying to learn as much as possible about our impending bankruptcy. First, I must thank you all for the valuable information that you share - it certainly helps me sleep better at night.

Regarding our case, spouse and I own a consulting company organized as an S-Corp. It was just started Feb. 2008. Income is sporadic at best, but not profitable. We would like to file Ch. 7 asap due to insurmountable personal debt.

We also own 2 rental properties held in separate LLCs without personal guarantees. Income generated by rents is somewhat greater than the mortgages.

Finally, I purchased some land with a partner a couple of years ago (better times, of course!) and we created another LLC for this purpose. Sold my interest and was completely paid out over several months with the last payment made November 2008. Problem here is that buyout agreement stated that upon final payment, I would have no further interest in LLC and would be removed from mortgage. Bank agreed to this originally, but has not happened. Still showing on LLC and responsible for 50% of mortgage.

Questions are...

What would happen with S-Corp if we file personal Ch. 7? Required to dissolve company?

When should this happen? No personal guarantee on office space (sublease). Should we move out of office before filing?

Regarding the properties, the LLC is the debtor on the mortages, no personal guarantee, non-recourse loans? We need to keep these properties as they are the only current source of any steady income? What may happen to them in this process?

The land is a real question mark for me? I guess I have to list it even though I shouldn't still be on the LLC. Worth significantly more than mortage & would not want trustee to force sale. Should I just remove myself from LLC even though I am still personally liable for 50% of mortgage?

Thanks in advance for all your help!

[StartingOver08]

Your S-corp's are assets to you personally.

Questions are...

What would happen with S-Corp if we file personal Ch. 7? Required to dissolve company? The S-Corp is considered an asset of yours so any funds in the corp acct belong to the Trustee as of the filing date. Also any A/R belong to the Trustee. If you have debt that the S-Corp is responsible for, list the debt in your personal Ch 7 (put the S-Corp name in the alias section under your personal name). It is usually wise to close the S-Corp, but not required. If you elect to keep it open, then S-Corp debt will need to be paid by the S-Corp.

When should this happen? No personal guarantee on office space (sublease). Should we move out of office before filing? Do you need this rental amount in your schedules to offset your income to allow you to file a Ch 7? If you do, then don't move out until after your filing date. The lease is an 'executory contract'. I would take the chance and list it in the schedules even though there is no personal guarantee. Ask your attorney about this aspect though.

Regarding the properties, the LLC is the debtor on the mortages, no personal guarantee, non-recourse loans? We need to keep these properties as they are the only current source of any steady income? What may happen to them in this process?Are you sure there is no personal guarantee and they are non-recourse loans for the LLC? Once again, most LLC's are considered assets of the 'partners'. Don't know how many people are involved in your LLC. But you need to bring your corp papers to the BK attorney to find out what is considered an asset of yours, if any. There is a risk here - but I don't know the scope (I'm not an attorney).

The land is a real question mark for me? I guess I have to list it even though I shouldn't still be on the LLC. Worth significantly more than mortage & would not want trustee to force sale. Should I just remove myself from LLC even though I am still personally liable for 50% of mortgage?Don't remove yourself yet from this LLC, this will create big problems in your BK. The Trustee will consider this a fraudulent transfer (even though the intent is not there). Talk with your attorney - several BK attorney's - to find out what to do here.

Thanks in advance for all your help!

I know my answer did not help you much. We do not get as much protection from the S-Corps and LLC's as we are led to believe by many attorney's when creating them. Please interview several BK attorney's for your impending BK. Make sure they have experience with the small business aspect. Many do not and many just try to get you to file additional BK's (not normally necessary when filing a personal Ch 7).

Stay away from the BK mills - you need someone with lots of experience that will anticipate the Trustee's objections so you can properly prepare.

[daedalus]

Thanks for the info! The LLCs for the two rental properties are single member - me only. I'm quite worried about this process, and pretty distrustful of attorneys in general. Although I know we'll need one, due to the expense, I can't afford to make a mistake in making this choice. I don't have any attorney referrals. Is there a list of questions I can reference when interviewing them?

How did you or anyone else go about finding your attorney?

[StartingOver08]

I did several things to find an attorney as I too had an active S-corp and needed someone with BK experience. I asked a real estate attorney that I know well and he referred someone. Ultimately I did not use that attorney because I wanted one that knew the Trustee's well in my district. I also DID NOT want an attorney that was a Trustee too as IMHO I think it is a conflict of interest in borderline cases. I see it all the time on this board where people select Trustee's and they get thrown into a Ch 13 just because the attorney is too conservative or has conflicting interests.

So I found my attorney by google - checked out the attorney and his track record. Interviewed a few and chose a really good attorney - not the least expensive and not the most expensive. I have been extremely happy with the result. My attorney's office was a one man shop with a full time paralegal, and full time administrative help. Not so large that I got lost, not so small that the administrative work did not get done. Of course our contact was primarily e-mail except for the initial interview and the 341 (in person).

As to your single member LLC's - I fear that they may be considered assets of the BK estate if you file a personal Ch 7. That does not mean you can not keep them - it is a good start to the questions you will need to ask in your attorney consults.

Write down all of your questions. Take the means test yourself. Have your figures ready. Ask the attorney if he will attend the 341 (meeting of creditors) or if he will send a jr attorney. If he does not personally attend, I would not hire him! JMO. There are two most important aspects of the BK - filing the paperwork correctly and attending the 341. It is amazing to me how many attorney's don't even file the paperwork correctly (as evidenced by the threads on this board). So you really want to make sure you get an experienced attorney - but not a BK mill.

I work with attorney's regularly (I am a Realtor) - and a good attorney is worth his weight in gold. However, the good attorney's are few and far between - especially in the BK field. That is where your interviewing skills will come in handy.

[BigJohn]

"Finally, I purchased some land with a partner a couple of years ago (better times, of course!) and we created another LLC for this purpose. Sold my interest and was completely paid out over several months with the last payment made November 2008. Problem here is that buyout agreement stated that upon final payment, I would have no further interest in LLC and would be removed from mortgage. Bank agreed to this originally, but has not happened. Still showing on LLC and responsible for 50% of mortgage."


Was this buyout agreement also included in the mortgage?

[daedalus]

Not sure if I completely understand the question, but we decided to part ways well after the deal was done. Buyout was payout for my interest. Called banker prior to initiating buyout to get verbal approval for removal of personal guarantee of mortgage. He said it was fine, but would be done after the buyout was complete.

I have spoken to a couple of attorneys since this was posted and I was told that the trustee will most likely look very hard at this property as there is some significant equity there, but the remaining partner will have to contest any action by trustee to protect her interest.

Also, concerning the mortgage, if I just list it as a debt under personal bk, this should take care of my personal guarantee, no?

[fltoo]

Are you saying that the lender said you could be removed from the mortgage?
Whom did you make these buyout payments to, bank or your partner?

Unless you had some special arrangement with the bank, half the mortgage being paid by one party does not relieve that person from the rest of the debt.

Just reread that. Bank promised to remove the personal guarantee but you would still be responsible for the loan?? Still don't think I am understanding this.

[daedalus]

Yes, the lender said this. Since then, however, the market has changed and they are requesting additional financials from the remaining partner. Of course, I have no control over how quickly these are provided. So this has not yet been done. We each had to personally guarantee 50% of the mortgage on the property.

My former partner in this business bought me out, so payments were made directly to me.

[fltoo]

OK, I had that ALL screwed up.

Back to the question. Does the original mortgage and note address this buyout?