I have several questions about a bankruptcy involving 2 LLCs with 2 members declaring

[Tikitrey]

Do I Really need to bankrupt the LLC?

95k in unsecured debt. (all personal debt)
No Assets
Had a business I shut down a year ago and walked away from the lease with a Personal guarantee.
I do NOT have any business debt. The lease is written in my LLC name as well.
I expect the Landlord will come after me at some point once he rents out the space.

Question-I am already planning to file 7 for personal, do I need to file 7 for the business even though there's really no biz debt just the potential of the broken lease and personal guarantee?
Should I just dissolve the business or would the Landlord try and sue the LLC?

[jarrado]

As Mensa1 points out, once you borrow money and use the building as collateral, both the land and the building are encumbered.

I was thinking that this would be true, but better to be thorough than miss something.

Is your asset protection attorney also your BK attorney?

Is your Bk attorney an experienced BK attorney that knows the Trustee's well in your district?

Is your BK attorney aware that you are considering a property transfer just before filing BK?

At the moment we are trying to find another attorney that is both a asset protection attorney, bk attorney, has LLC experience and has been "around the block" so to speak.

As far as the last two questions: Yes every attorney we have consulted with knows the trustees in our district... even I know his name, although I know him by reputation only.

Next. Yes every attorney we have contacted said that, "due to our specific situation, while it would be a red flag, we should transfer the two lots behind our home and homestead them". Not to be confused with our business, as it is over 10 miles away and doesnt fall under homestead exemptions.

I only ask these questions because it is highly unusual that a BK attorney would suggest a real estate transfer on a property with equity just before filing. This is a huge red flag, given that there is equity in the property your parents are seeking to transfer.

The key thing here is that there is substantial equity in the property that the Trustee will be interested in pursuing for the benefit of creditors. The LLC's (each of them) are assets of your parents. The assets within each LLC would therefore belong to the BK estate. There is a real possibility that the Trustee will want to liquidate the asset to provide funds to pay off the creditors. After all, that is the Trustee's entire purpose in the BK: to find $$ to pay creditors.

This really makes no sense to me, as I know a certain, a long time friend of the parents, attorney-along with every other attorney we have talked to, except one-who stated that "LLC 2 should be able to avoid problems and continue normal operation". Our bank in question happens to be one of his client.

Now, I would like to know exactly what would make both LLCs my parents personal "assets", if you would?

[StartingOver08]

As Mensa1 points out, once you borrow money and use the building as collateral, both the land and the building are encumbered.

Is your asset protection attorney also your BK attorney?

Is your Bk attorney an experienced BK attorney that knows the Trustee's well in your district?

Is your BK attorney aware that you are considering a property transfer just before filing BK?

I only ask these questions because it is highly unusual that a BK attorney would suggest a real estate transfer on a property with equity just before filing. This is a huge red flag, given that there is equity in the property your parents are seeking to transfer.

The key thing here is that there is substantial equity in the property that the Trustee will be interested in pursuing for the benefit of creditors. The LLC's (each of them) are assets of your parents. The assets within each LLC would therefore belong to the BK estate. There is a real possibility that the Trustee will want to liquidate the asset to provide funds to pay off the creditors. After all, that is the Trustee's entire purpose in the BK: to find $$ to pay creditors.

[Mensa1]

Also, I just learned today.... that our land, which the building in question is built on, was paid for in cash. Their is no loan on this, but it is in the name of the LLC that is filing. What effect will this have, if any?

Normal course of action is, you have a piece of property that you paid cash for at purchase. Then later build a bldg on it, using borrowed funds, you then place a mtg on the lands, and the bldg becomes part of the land. So the net effect is that the property now has a mtg on it, regardless of if was ever free and clear. No real difference that it was once free and clear, it isn't now.

No real diff than is you paid off your mtg and now property is free and clear. You now take a new mtg on the property by borrower new funds, now you have a mtg on the property (again). Regardless of it once being paid off.

[jarrado]

I agreed that those WERE your main problems until you posted above about NOT being a shareholder. Uh-Oh, that means Ma and Pa are sole members of the LLC with the RE that is being transferred to them 1 week before filing?

Thats my fault for not being clear. We are "shareholders", however we dont "own" the company in the sense that we are tied personally to the company, excluding my parents and their "personal guarantee" on the building loan.

Yes we are shareholders and managing partners/members, but our OA prevents us from getting any assets in the form of money based on shares, unless though salaries or bonuses. So once they are no longer employed by the LLC, those options for share dividends will no longer be viable. You'll have to overlook my carelessness in my wording, im tired from moving items, and a few pulled muscles, and this is a rather confusing situation. In any case, I will still ask our lawyer about that.

\No way in the world that this transfer will be left to stand and have the parents claim 200K of homestead exemption... that one week before was owned by an entity that they controlled. I will never believe that one even is you show the property records 6 months after discharge, and title is still vested to the parents.

I never said 200k (building loan is 200k and is to be filed on-building is worth 400K+land it sits on). the land is worth 20k-40k and it can be transferred now or at any time in the future Bk discharge permitting. I guess they could just wait and quick claim it after discharge? But our lawyer didnt see an issue with it. Under other circumstances... no, it would not be an option. But we are relying on our lawyer for this one. However if it would be the same either way and raise less flags, then I will ask about postponing the land transfer until after discharge. Im not sure if the property is currently titled to them already as members or if it in the LLC's name.... Im sure that has a great impact on the overall transfer... I'll find out.

Also, I just learned today.... that our land, which the building in question is built on, was paid for in cash. Their is no loan on this, but it is in the name of the LLC that is filing. What effect will this have, if any?

[Mensa1]

So, in short, our main problems are the credit card purchases(all of them being LLC building expenses) and the homestead land transfers. I will make sure to bring these up.

Thanks for all the input, it helped bring out a few important questions. If you have any more advice/concerns please drop a post thanks.

I agreed that those WERE your main problems until you posted above about NOT being a shareholder. Uh-Oh, that means Ma and Pa are sole members of the LLC with the RE that is being transferred to them 1 week before filing?

The T'ee will blow that transfer up BIG TIME. No way in the world that this transfer will be left to stand and have the parents claim 200K of homestead exemption... that one week before was owned by an entity that they controlled. I will never believe that one even is you show the property records 6 months after discharge, and title is still vested to the parents.

Good luck on it, but I think your are in for a rude awakening. hope not for your sake, but keep us posted.

[jarrado]

I'm not so sure that the Bk will look at this property transfer from LLC, immediately before filing, quite the same way you are looking at it. Yes, I get that LLC isn't filing but to the extent of your parents ownership in the LLC, which becomes part of the Bk estate. Also the fact that two sons involved in owning the balance of the company, minority interest, I might add.

Ok, our operating agreement is setup so that we dont own the LLC, we are "employees" that manage assets in the LLC's name and are allowed to invest (return investment is yearly/monthly in the form of bonuses or raises in salary) in the business-I have a limited grasp of this concept in our OA so im unsure as to the exact way it is setup. Also, in our operating agreement, when a "partner or managing member" leaves the LLC they do not receive any shares back from their initial-if any-investment. The OA was setup this way. Im not sure how this would effect it as a whole, but our lawyer will address these concerns.

Look-back more than a yr... You must be referring to when the purchases are made. I'm not so sure that is the relavent time frame. But I guess I can't grasp some of that w/o going back and re-reading the orig post and no time to do so now. Maybe later, but I don't think you are out of the woods here with your logic.

As far as credit cards go, we will do what is necessary to avoid issues in our BK, even if it means assuming the cards. Our lawyer is looking into this now.

Remember, when you have a small business involved in the BK the petition automatically gets more attention from the Trustee.

I am well aware, thats why we are working to minimizing red flags.

The lookback period for real estate transfers is up to TEN YEARS. I went through that myself in my own BK filing. When you have family members involved the lookback is one yr for insider transfers.

Just reviewing your initial post, the Trustee is going to give your parents extra scrutiny because the parties involve LLC's, asset transfers on the eve of BK (any transfer raises scrutiny), and family members. Make sure to lay out your plan with your BK attorney completely.

An asset protection/estate planning lawyer is the one that urged us to transfer the property, only because of the LLC's setup and our unique situation.

I know that the above posts are quite lengthy, but ALL the info is relevant. Our entire situation is laid out (except details that would identify the parties in question, of course

So, in short, our main problems are the credit card purchases(all of them being LLC building expenses) and the homestead land transfers. I will make sure to bring these up.

Thanks for all the input, it helped bring out a few important questions. If you have any more advice/concerns please drop a post thanks.

[StartingOver08]

Remember, when you have a small business involved in the BK the petition automatically gets more attention from the Trustee.

The lookback period for real estate transfers is up to TEN YEARS. I went through that myself in my own BK filing. When you have family members involved the lookback is one yr for insider transfers.

Just reviewing your initial post, the Trustee is going to give your parents extra scrutiny because the parties involve LLC's, asset transfers on the eve of BK (any transfer raises scrutiny), and family members. Make sure to lay out your plan with your BK attorney completely.

I ended up fine with my Ch 7 discharge, but I can tell you everything was documented (a la frogger style ) and I still had to go to two 341's.

[Mensa1]

the trasfer would be taking place immediatly prior to filing, but the LLC holding the assets is not filing, so there is no issue. They just want to homestead it now, in case that LLC doesnt in fact have to fold, more time between transfers is better after all. But the land to be homesteaded could be quick claimed before or after filing, but, since it takes 3 months to get "discharged" they would rather do it now, since it is right around our house.



Unless they can look-back more than a year, that isnt an issue either. Also we plan on paying those off, so its moot anyway. And even if it did fold out that way, we would just not file on those cards and continue to pay them off.... its the building note that is the problem.. not the credit cards.

I'm not so sure that the Bk will look at this property transfer from LLC, immediately before filing, quite the same way you are looking at it. Yes, I get that LLC isn't filing but to the extent of your parents ownership in the LLC, which becomes part of the Bk estate. Also the fact that two sons involved in owning the balance of the company, minority interest, I might add.

Look-back more than a yr... You must be referring to when the purchases are made. I'm not so sure that is the relavent time frame. But I guess I can't grasp some of that w/o going back and re-reading the orig post and no time to do so now. Maybe later, but I don't think you are out of the woods here with your logic.

[jarrado]

You mentioned something about transferring property from one of the LLC's which will become homestead exemptions for ma and pa. When was/is the transfer to take place? When do you anticipate the filing of the Bk?

the trasfer would be taking place immediatly prior to filing, but the LLC holding the assets is not filing, so there is no issue. They just want to homestead it now, in case that LLC doesnt in fact have to fold, more time between transfers is better after all. But the land to be homesteaded could be quick claimed before or after filing, but, since it takes 3 months to get "discharged" they would rather do it now, since it is right around our house.

Next, the personal credit cards used buy ma and pa to purchase goods for LLC also effectively fall into the close family member transfer (possibly). The fact that 46 cents out of every dollar that they transfered benefited their two sons, is close enough. (we aren't playing hoseshoes or hand grenades here, bk is another area where close enough works if the T'ee says it works). What you could find yourself in the position of is the LLC that received the benefit of those transfers could possibly owe the T'ee an equivilent amount of offset. Either pay in cash or they start liquidating to equal the cash.

Unless they can look-back more than a year, that isnt an issue either. Also we plan on paying those off, so its moot anyway. And even if it did fold out that way, we would just not file on those cards and continue to pay them off.... its the building note that is the problem.. not the credit cards.

[Mensa1]

Here are your two areas for the forrest fire to start, IMO. (and I just skimmed over the above chapters quickly and didn't follow everything).

You mentioned something about transferring property from one of the LLC's which will become homestead exemptions for ma and pa. When was/is the transfer to take place? When do you anticipate the filing of the Bk?

It appears to me that any transfer here due to closely held company assets would fall within the 12 month, not the 3 month look-back period. So Trustee could invalidate the transfer back the LLC and attempt to liquidate from there. Now if they did, what do that do to the price of tea in China; would it generate cash equivilent to Trustee?

Next, the personal credit cards used buy ma and pa to purchase goods for LLC also effectively fall into the close family member transfer (possibly). The fact that 46 cents out of every dollar that they transfered benefited their two sons, is close enough. (we aren't playing hoseshoes or hand grenades here, bk is another area where close enough works if the T'ee says it works). What you could find yourself in the position of is the LLC that received the benefit of those transfers could possibly owe the T'ee an equivilent amount of offset. Either pay in cash or they start liquidating to equal the cash.

Now, could the T'ee do all that.? I don't know, but I am just throwing the potential arguments on the proverbial wall to see if the stick. You decide.

[jarrado]

They'd have to pay it back because it's probably thousands of dollars and if they use credit, the creditor is more than likely to file a complaint as to the dischargeability of the debt.

Ok so they can use credit to pay for it. They fully intend on paying it back if it comes to it. They dont want to file BK, but they dont have another option. so... "what can you do right?"

I never thought you personally would face scrutiny, only the LLC if the Trustee can wiggle through it. Since you say that an asset protection attorney help setup the structure, then I will certainly yield to that expert advice. Many people who come on to the Forum have LLCs created without the help of attorneys who specialize in protecting the members and assets. Not to say that's wrong, but if you have more than just one member (single-member LLC), the protection is more important to isolate members.

Ok. I misunderstood then. We more had them look over it and they told us what to change/alter, rinse/repeat. Bottom line, we went back to the same attorney and asked him and he advised us to transfer vehicles, quick claim some property and homestead, sell some property to pay certain debts and then file BK and liquidate LLC 1, but keep LLC 2 open for a year before liquidating it aswell or keep it and start over.

I probably got confused because the member's case (1 and 2) is complex. I'm just sure it will be poked at a little, and maybe they quickly go away without any fanfare.

If you could actually talk it out in person you would understand right away, its really hard to convey thoughts exactly on a forum.

Ultimately though, what I came here for was for other opinions and some insight. Theres a few things we need to look at now, we will be talking to our attorney again later this week. After this is over I'll post up what went down, as it is a rather special case.

Also, the bank has yet to even talk with us. I dont understand them at all. Its annoying that we have to go through this, its down right maddening that they wont even talk to us though. As a bank I expected more. Oh well. I'll check back on a regular basis to see whats going on.

fin~ for now....

[justbroke]

I have one major concern, if they have to borrow money to pay for the BK, they will still owe that amount, correct? Or can it be included in the BK filing?

They'd have to pay it back because it's probably thousands of dollars and if they use credit, the creditor is more than likely to file a complaint as to the dischargeability of the debt.

I never thought you personally would face scrutiny, only the LLC if the Trustee can wiggle through it. Since you say that an asset protection attorney help setup the structure, then I will certainly yield to that expert advice. Many people who come on to the Forum have LLCs created without the help of attorneys who specialize in protecting the members and assets. Not to say that's wrong, but if you have more than just one member (single-member LLC), the protection is more important to isolate members.

I probably got confused because the member's case (1 and 2) is complex. I'm just sure it will be poked at a little, and maybe they quickly go away without any fanfare.

[jarrado]

The nice part about the non-consumer, it saves you from any of the inquiry under 11 USC 707(b) which includes the means test, abuse, bad faith, and totality of circumstances objections. (At least in Florida, it's found that a non-consumer Chapter 7 can't be dismissed on anything under 707(b).) However, for cause, they can dismiss but the threshhold is substantial abuse and much harder to prove.

well considering that they are only filing because of the building, thats why they did the non-con. MS is a little different I believe, but our lawyer said it will be fine and there isnt anything to ground a fraud/abuse situation.

Most of this is predicated on actually liquidating (selling) property... that's the big concern. I'm just worried, for you, that the Trustee will get their hands on assets through Member 1 and Member 2.

Im not sure what you mean. LLC 2 only pays rent to LLC 1(LLC 1 has absolutely no assets-equipment wise or other) LLC 1 was setup to protect LLC 2 the parent company. LLC 1 is going to dissolve, as member 1 and 2 the only members.

Also myself and member 4 are not in any way tied personally to either LLC, but we did "buy in" to LLC 2-not LLC 1 that owes debt-as partners over a year ago (unless that somehow puts us in a binding contract, even though we never signed anything, and member 4 is under 21, im not sure that he could be held liable for debts). Our shares are les than 50% combine, until we assume control after BK. If assuming control would cause a problem, we can always dissolve LLC 2 and pay back our shares plus loans we have given the business?

I hear ya, loud and clear on this end! I had invested in real estate and that took me down. Well, tenant issues and then using credit cards to stay afloat. If only I had let the investment properties go earlier.

Its the building for us.... in our business its normal to have long lulls or no business and then several months that equal most of our gross. We just didnt see it coming and after 6 months we began to plan an exit strategy.

No issues, just "holes". While the organization of the LLCs seems okay, I'm just thinking that the smart panel Trustee is going to want to poke holes at it and see if they can... "penetrate the veil of corporation"... as they say in the business. It's just a strange organization where LLC 1 owns this, but uses equipment/property that's owned by LLC 2. If an attorney set that up and was an asset protection attorney, then I'm sure they know a lot more than I do!

Well about that, I must have not typed it exactly right or you mis-understood or something. Anyway, LLC 1 ONLY owns and takes care of the building, nothing else. It was setup that way with the help of an attorney that has done "asset protection" and " estate planning". Its probly ok.

Also, we set up our LLC's to be non-effected by "pierce the veil" practices.... we call them "shady dealings" here. I dont know all the specifics and I wouldnt go and write them here. Im sure you understand.

And our trustees in MS are all rather ..... I would say very practical. Or maybe cheap/lazy is a better word lol.

Again, my only concern is that the debtor-members are likely to face scrutiny. You are not going to face it as you're not a filing debtor. Or, the Trustee just says... "too complex for me" and abandons the assets and goes away.

I dont know why we would face scrutiny.... all we did really was buy in to the business to try and help our parents, we were employees before and filed w-2's. Just in case, myself and member 4 do not have to file BK as we are not personal guarantees on any loans. My parents have been in business for 20 years and we setup these LLCs to limit our risk and liability as mush as possible. Nothing wrong with that.... unless the uncle sam says so lol. Although you did bring up some things that I will have to pass on.

Ah, about the "selling" of assets. LLC 2 doesnt have to sell anything and LLC 1 doesnt have any assets to sell. LLC 2 was going to sell the property of its own volition to be able to pay my parents salaries, so in turn they could pay there bills, or their credit cards. thats what i meant, sorry for any confusion. Its very confusing for me too. I dont know everything about our situation, so im just exploring all avenues of information to help my parents as much as I can.

I have one major concern, if they have to borrow money to pay for the BK, they will still owe that amount, correct? Or can it be included in the BK filing?

[justbroke]

I dont think they will ahve a problem though since there filing a non-consumer and its almost all business debt(the loan) as far as cars and such, them being personal they fall under exemption and wont be considered.

The nice part about the non-consumer, it saves you from any of the inquiry under 11 USC 707(b) which includes the means test, abuse, bad faith, and totality of circumstances objections. (At least in Florida, it's found that a non-consumer Chapter 7 can't be dismissed on anything under 707(b).) However, for cause, they can dismiss but the threshhold is substantial abuse and much harder to prove.

I mean, they only owe like 200k on a building thats worth twice the loan amount. They haven't misappropriated any money.

Most of this is predicated on actually liquidating (selling) property... that's the big concern. I'm just worried, for you, that the Trustee will get their hands on assets through Member 1 and Member 2.

If it werent for this economy we would be fine, we've been in business for more than 10 years and have used credit cards to pay bills, but we've paid them off.

I hear ya, loud and clear on this end! I had invested in real estate and that took me down. Well, tenant issues and then using credit cards to stay afloat. If only I had let the investment properties go earlier.

If you see a major issue please tell me exactly so I can pass it on to the lawyers. Thx.

No issues, just "holes". While the organization of the LLCs seems okay, I'm just thinking that the smart panel Trustee is going to want to poke holes at it and see if they can... "penetrate the veil of corporation"... as they say in the business. It's just a strange organization where LLC 1 owns this, but uses equipment/property that's owned by LLC 2. If an attorney set that up and was an asset protection attorney, then I'm sure they know a lot more than I do!

Again, my only concern is that the debtor-members are likely to face scrutiny. You are not going to face it as you're not a filing debtor. Or, the Trustee just says... "too complex for me" and abandons the assets and goes away.