Sole prop to LLC

[HHM]

What if a combo of secured and unsecured debt, and the real property has equity in it with the secured debt, but then the entity also owed unsecured debt in addition, and the net total of equity is still less negative number, so zero share value. Can/will the T'ee strip the RE out of the LLC, or liquidate it to pay a portion of the unsecured creditors, after the secured is fully paid?

So the question is, how is the secured and unsecured debt handled inside of an entity when the net equity is zero, net share value zero?

Unsecured debt does not matter. If no entity or person has a perfected security interest in the assets (directly), then the trustee can do what ever he wants with it. So, in the above scenario, if there is actually equity above and beyond the claims of the secured creditor, the trustee may liquidate to get at that equity.

[BKDefender]

Without the consent of the creditor, you cannot 'assign' debt and take away responsibility of the person whom originally owed the debt.

As for winding down operations of an LLC, I can tell you that in Nevada, all secured AND unsecured creditors of the LLC must be paid before any excess proceeds can be disbursed unless it is the LLC itself filing bankruptcy (it CAN file, it just can't get a discharge, so it uses the BK court to liquidate & distribute then it would get dissolved.) The value of the LLC is the value that remains after the LLC pays all of its debts, secured & unsecured.

Because a lot of laws in Nevada are a bit similar to those in California, California may be similar in it's dissolution process.

Nevada's dissolution process is detailed in NRS 86.505, 86.531, & 86.541 available in http://www.leg.state.nv.us/NRS/NRS-086.html .

You could create an LLC, enter into an asset purchase agreement with the LLC such that the purchase price is the amount of the liability you owe for business operations, thus the LLC would assume your personal liability (with the consent of the creditor) and in exchange the LLC would get all of the receivables and assets in addition to the liabilities. The purchase price would be the liabilities it assumes.
But before you do it, you'd need to get an accountant to do a valuation of the assets and liabilities to come up with a dollar amount that the company (presently a sole proprietorship) is worth so it can be 'sold' to the LLC for assumption of liabilities. It must include a net-present-value determination of the receivables and liabilities.

Again, this is how I would structure something like this in Nevada - I have no idea if this would work in California.

--William

[GWBcasualty]

Without the consent of the creditor, you cannot 'assign' debt and take away responsibility of the person whom originally owed the debt.

You could create an LLC, enter into an asset purchase agreement with the LLC such that the purchase price is the amount of the liability you owe for business operations, thus the LLC would assume your personal liability (with the consent of the creditor) and in exchange the LLC would get all of the receivables and assets in addition to the liabilities. The purchase price would be the liabilities it assumes.

--William

But the LLC (or the Corp.) can pick which assets and/or liabilities to take over, right?

[HHM]

Not quite sure what you are asking?

[GWBcasualty]

Not quite sure what you are asking?

Assuming that I am forming a LLC or a Corp. - This corp would take over the assets and liabilities of my sole prop... I would then exempt the value of my interest on the Corp.

I guess the question is: "Would the new LLC or Corp be obligated to assume ALL the liabilities or just some of them?"

Again I am exploring ways to continue a relationship with some vendors, without actually reaffirming the debt.

Thanks

[frogger]

Again I am exploring ways to continue a relationship with some vendors, without actually reaffirming the debt.

Thanks

If you have a good relationship with the vendors now, you should not have a problem with them in the future. The one key factor to that is to make sure that they are paid.

Perhaps you need to make sure these vendors are paid, and then have them put you on a c.o.d. basis until after you file bk. By doing that, you should be able to preserve your relationship with them, and you can not be accused of making a preferential payment to them, because you're paying cash on delivery.

As to setting up a new corporation at this time, I would not, unless there was going to be a substantial amount of time between the setting up of the corp and the filing for bk. Setting up a new corporation could give the "appearance" of you trying to hide something.

[GWBcasualty]

If you have a good relationship with the vendors now, you should not have a problem with them in the future. The one key factor to that is to make sure that they are paid.

Perhaps you need to make sure these vendors are paid, and then have them put you on a c.o.d. basis until after you file bk. By doing that, you should be able to preserve your relationship with them, and you can not be accused of making a preferential payment to them, because you're paying cash on delivery.

As to setting up a new corporation at this time, I would not, unless there was going to be a substantial amount of time between the setting up of the corp and the filing for bk. Setting up a new corporation could give the "appearance" of you trying to hide something.

I finally decided against it. Although it would have some benefits and I don't have anything to hide, I just think it would raise too many red flags and may get my petition under extra-scrutiny and... who needs that, really!

[frogger]

Smart decision.