Sole proprietorship and Chapter 7

[LCBDesigns]

In 2006 I opened a small (brick and mortar) Boutique and website that sells crafts, redesigned fleamarket finds and vintage items. (NOt High end antiques). It is a Sole Proprietorship. I have struggled since the beginning and when the economy plumeted things went from bad to worse. I closed my boutique at the end of this summer, sold off alot of inventory at clearance prices and moved into a small space at a local antique mall. I have also kept my website open. I am left with about $20,000 in unsecured debt including back rent. I have been considering bankruptcy and met with a BK lawyer 2 days ago. He suggested chapter 7 would be in my best interest since I don't have much income.
Here is my dilema. My "business" is really not much more than a hobby right now but it is my passion and creative outlet. I would like to keep my space at the antique mall and keep my website open.
I am concerned about the liquidation aspect of a chapter 7. I am horrified at the thought of the trustee taking all of my inventory, which retail value totals about $13,000 as of today. Is there anyway I would be able to keep some of it and keep operating? My inventory consists of crafts, redesigned second hand finds(you know like shabby chic?) and vintage items. I am not selling Ipods, Computers or any type of Hot Commodity. If I were I wouldn't be in this situation! My items appeal to a very small niche market. Would a trustee even consider these items valuable enough to seize?
Do I have to close completely and reopen under a new name and if so when? I will lose my space at the antique mall and have no place to go. Do I have to wait to reopen until after the debts have been discharged?
I am not sure how to handle this.

[Mensa1]

Exemptions are determined by the state you live in. So it depends on what you can exempt in the way of assets.

A business as a sole proprietor is not distinguished from personal assets in a Ch 7. Your inventory is personal prop so the liquidated value (wholesale single purchase value) would be used by the TT. Unlikely that your website has any value from the TT standpoint. There are websites that will place a value on your site, which are usually quite low, so you might consider one of those for documentation of the site value.

You can always agree to buy the non-exempted inventory from the TT. Say its non-exempted liquidation value is 3K, most TT's would rather sell you the inventory than attempt to liquidate it themselves. They will usually allow non-interest terms in the forms of payment over 1 or 1.5 yrs... so you might be paying 200 mo to the TT for inventory while the rest of your debt goes away. You need to have a good accounting of inventory on the date you file; pictures or other documentation, as best you can to illustrate the property.

Surprised your Atty didn't go over the above in your meeting.

[LCBDesigns]

MOre questions.

So if the TT did want to take my inventory and sell it how would they go about it? Would I have to bring it somewhere or would they come to take it? How do they sell it off? Auction? Where?
Also, I am married but I am only filing for BK. Could my creditors then turn around and sue my husband? His name is not on the lease nor any of my debts that I am including in the BK. This is a big concern for him if I decide to move forward.

[BKDefender]

LCBDesigns:

Depending on which state you are in and what exemptions you have, you might consider having your husband file BK as well since it often doubles the exemptions you have over personal property and some items which I'm sure you could argue are household goods (we get $12k each person for household goods in Nevada, so $24k for a married couple filing jointly.)
You might also consider having your own liquidation sale where you mark everything down to try to sell it quickly, and once you do, convert that money to exempt assets such as a Roth-IRA for both you and your husband. If you file before April 15th/tax day you can fund $5k each for your 2009 Roth-IRA and $5k each for your 2010 Roth-IRA protecting $20k in cash before you file BK. It'll cost you 10% to get it out early (<5yr on deposit) but $18k is better than $0k.

--William

[Mensa1]

having your own liquidation sale where you mark everything down to try to sell it quickly, and once you do, convert that money to exempt assets such as a Roth-IRA for both you and your husband. If you file before April 15th/tax day you can fund $5k each for your 2009 Roth-IRA and $5k each for your 2010 Roth-IRA protecting $20k in cash before you file BK. It'll cost you 10% to get it out early (<5yr on deposit) but $18k is better than $0k.

--William

Wm:

What is the reversion period for IRA contr? Wouldn't this be like any other property transfer, 120/365 days?

[LCBDesigns]

My Husband does not want to file bankruptcy.

[BKDefender]

Mensa1: There is no reversion period for a retirement contribution as long as you only contribute up to the maximum amount allowed for that type of account. In the U.S. the max/year contribution on a Roth-IRA is $5k/year, but you can fully fund last year's Roth IRA up until tax day the following year. i.e. you can fund a 2009 Roth IRA for $5k and fund your 2010 Roth IRA for $5k then file BK and once it's discharged, withdraw everything and pay the $1k (10%) early withdrawal penalty and have $9k ride-through BK.
Of course, it's better if you kept the money in the Roth IRA and used it as your starting piece for retirement.

William

[Mensa1]

Slick idea... why don't more Attys mention this strategy?

[BKDefender]

Honestly - I have no idea. It's saved my clients thousands of dollars that they otherwise would not have been able to retain through bankruptcy. I have to provide copies of the Roth IRA statement showing that the account was opened immediately before filing bankruptcy and have yet to be challenged by the trustee on it.
Remember - with a married couple you can fund TWO Roth-IRAs for each year, i.e. theoretically protecting $20k.

--William

[BKDefender]

Mensa1 - note that I know this works great in Nevada where we exempt up to $500k in retirement funds such as IRA, Roth-IRA, and 401(k). Your state might be different.

--William