Question on Discharge of Debt

[paulywalnutz]

I am in CT. I own a small business and am considering filing Ch. 7 as the former owner will not negotiate the note I have with him. In the "Guaranty Agreement" with him there is the following language:
The Guarantor further jointly and severally guarantees that all payments made by Borrower or by any Guarantor to the Lender \vith respect to any Liabilities will, when made, be final, and agrees that if any such payment is recovered from or repaid by Lender, in whole or in part, in any bankruptcy, insolvency or similar proceeding instituted by or against the Borrower or any Guarantor, this Guaranty shall continue to be fully applicable or reinstated.

The obligations of Guarantor hereunder shall not be affected, modified or discharged, in whole or in part, upon the happening of any of the following events, whether or not with notice to, or consent of, Guarantor: ...(vii) the full or partial discharge of Borrower or any other guarantor in bankruptcy or similar proceedings;

In the "Promissory Note" there is the folloing language:
Upon default in the payment of any installment of principal and/or interest under this note or of the aforesaid taxes, or any other monies due hereunder, for a period of ten (10) days after the same shall be due and payable;.... or should a petition be filed or an action commenced by or against the Corporation or any Guarantor under the federal Bankruptcy Code ... then and in every such event, the unpaid balance of this note together with interest and all other sums due hereunder shall, at the option of the holder hereof, become due and payable without demand.

My attorney tells me this is worthless if I file Chapter 7 and that he will not be able to restate the note. I have significantly more non-consumer than consumer debt so I do not have any sort of means test.

Anyone have an opinion? I know many of you are not attorneys but just looking for commentary. Thanks!

[despritfreya]

Rephrasing in English and answering whether or not it's enforceable:

1. "The Guarantor further jointly and severally guarantees that all payments made by Borrower or by any Guarantor to the Lender \vith respect to any Liabilities will, when made, be final, and agrees that if any such payment is recovered from or repaid by Lender, in whole or in part, in any bankruptcy, insolvency or similar proceeding instituted by or against the Borrower or any Guarantor, this Guaranty shall continue to be fully applicable or reinstated."

Translation:

Business and you agree to be jointly liable. If one of you files bk and the Trustee recovers payments as a preference (paid within 90 days prior to filing) lender can get the money back from the business or you.

It is enforceable? Yes, against the party that DID NOT file bk.

2. "The obligations of Guarantor hereunder shall not be affected, modified or discharged, in whole or in part, upon the happening of any of the following events, whether or not with notice to, or consent of, Guarantor: ...(vii) the full or partial discharge of Borrower or any other guarantor in bankruptcy or similar proceedings"

Translation:

Your promise to pay is not eliminated if the business or you file bk.

Is it enforceable? Yes BUT ONLY against the business if you file bk. Your liability under the guarantee WILL be discharged unless you sign a Reaffirmation Agreement (stupid to do) or the lender obtains a non-dischargeable judgment against you under Section 523 (highly unlikely unless you committed some sort of fraud or misrepresentation). This is an "adhesion clause" and is completely unenforceable against an individual who files bk.

Now, if the business files bk and you do not, you will still be liable.

3. "should a petition be filed or an action commenced by or against the Corporation or any Guarantor under the federal Bankruptcy Code ... then and in every such event, the unpaid balance of this note together with interest and all other sums due hereunder shall, at the option of the holder hereof, become due and payable without demand."

Translation:

If either one of you file bk then the entire note becomes due and payable.

Is it enforceable: Yes but ONLY against the non-filing party.

_____________________

Your attorney is correct. These provisions are not worth the paper they are printed on once you file bk.

I will assume the entity (business) is dead (no assets and pretty much not operating) and is not going to file bk as such would be a waste of time and money. If the lender wishes to sue the business who cares? It is suing a dead person. Go try to collect.

The moment you file bk the personal guarantee you signed is gone.

One last point. If the former owner retained a security interest in the assets of the business by filing a UCC1, the former owner, once there is a default in the payments, would have the right to repossess the collateral thus taking back the business that was sold to you. I suppose, however, you would not care if that should happen.

Des.

[AngelinaCat]

That is a very good translation and explanation, Des. Thank you. I may wish to make this a 'sticky' with your permission.

[despritfreya]

In response to:

"That is a very good translation and explanation, Des. Thank you. I may wish to make this a 'sticky' with your permission."

Thank you for the compliment and no problem with the "sticky" thing.

Des.

[paulywalnutz]

Des,

Thanks for your assistance!

I will assume the entity (business) is dead (no assets and pretty much not operating) and is not going to file bk as such would be a waste of time and money. If the lender wishes to sue the business who cares? It is suing a dead person. Go try to collect.

The moment you file bk the personal guarantee you signed is gone.

One last point. If the former owner retained a security interest in the assets of the business by filing a UCC1, the former owner, once there is a default in the payments, would have the right to repossess the collateral thus taking back the business that was sold to you. I suppose, however, you would not care if that should happen.

Des.

The busines is not dead but is currently operating at a loss every month. I am going to have an appraiser come in to determine Fair Market Value of our assets and slowly sell them at FMV over the next 6 months to cover our losses. There are not many assets besides some computers, desks printers and some vehicles. He did not file a UCC lien so I can sell off everything. It was a stock purchase agreement so if I default he has thr right to take back the company which at that point would be worthless. Thanks again Des. Any problem with selling ofassets to cover our losses so long as they are appraised and I document everything?

[despritfreya]

In response to:

"Any problem with selling ofassets to cover our losses so long as they are appraised and I document everything?"

You really need to check with your attny but here is my concern with this. You stated that it was a stock purchase agreement. If the assets you wish to sell were in existence at the time you entered into the stock purchase, selling the assets, IMO, is the equivalent of devaluing the stock. On the other hand, if the proceeds of the sale of the assets are solely used to pay down business debt, especially that which was in existence when you entered into the stock purchase, such may be ok. This is a very tricky issue. You do not want to leave yourself open to a "breach of fiduciary duty" or “willful and malicious injury to property” argument which could lead to a 523 Complaint.

Des

[paulywalnutz]

Thanks Des. When I purchased the Corporation back in 2005 all the cars/trucks were junk and the same with the computers. I have sold all of the tangible assets I purchased as part of the agreement years ago as it was cost prohibitive to keep repairing the vehicles and fixing the computers/office equipment which were extremely slow / dated. Correct I want to ensure I do not leave myself open to a 523 complaint which is why I am checking every step of the way with my attorney. Thanks for all of your commentary.

[cowgirlup289]

Des rocks!!! My boyfriend filed personal (Chap 7) and has an LLC that is dissolved. The only asset he has is a goosneck trailer that the IRS has a lien on, it's worth about 4K, if he's lucky. He literally has no assets. Because the bk attorney is somewhat "lost in translation", we didn't know what to make of a lawsuit (a bank that tried to tie a business LOC with a vehicle into a reaffirmation, he couldn't consciously do) served against the business (him as sole member), but he's been discharged personally, we are just awaiting closing. The trustee (this is Texas) has hired outside counsel and we've provided further documentation, but it isn't rocket science to look at his books and statements to see that he was writing (business) checks to pay subs and bills well over the amounts coming into the bank account. No luxury living here for the last 3 years. ;-)