Sub S & Chapter 7 (Asset questions & starting a new business in same industry

[betterlife13]

Hello all,

This is my first post, though I have been reading posts/threads for quite a while so I wouldn't ask "stupid" questions. Nonetheless, I am afraid I probably have... So, sorry in advance for the long post -- I have been doing a lot of research, and we met with an attorney last week on a personal Ch 7, but the biggest confusion is on our Sub S...

We are going to file a personal Chapter 7, after fighting since 2009 to keep our heads above water, even by taking IRA early distributions to not only live off but also to loan to our Sub-S to pay its bills. Our house is underwater, and the Sub S also received an SBA Economic Disaster loan that is personally guaranteed (by our home). Needless to say, we're going to have to walk away from the house too. (This heartbreaking - until now, we have never been late on a bill for 20+ years. We are current on everything, save a personal credit card, less than 30 days late, but have a large upcoming business cc payment that we simply cannot make, as well as personal mortage payment that we just don't have the money to pay.)

Here are the specifics of our situation: We have a Sub S contracting business, in which my husband is sole shareholder. We have about $60k of debt in the Sub-S (unsecured credit card debt), with my husband listed as a personal guarantor, but no secured debts on the part of the company, save approx $85k in the company Sub-S disaster loan, personally guaranteed/secured by our home, which is now underwater, due to the failing real estate market.

Basically, my husband is in his mid-50s, and this is all he has done for many years, and it is an industry in which there are few employment opportunities (other than self-employment), so the only option is for him to keep doing what he has been doing, so he must continue in this industry, and needs to be able to use the very old (basically "band-aided") equipment that the current Sub-S owns in order to try and earn a living in his line of work. Much of this equipment was transferred from a sole proprietorship to start the Sub S 10+ years ago, in varying conditions of heavily used, even at that time.

The lawyer we consulted with on our personal bankruptcy suggested that we start a new entity and buy the equipment/assets of the Sub S, but how do we go about valuing that equipment when all of it is very old and needs significant repair? My husband has "tricks" to get it to operate well enough to perform a job, but essentially it is not marketable to anyone else because of all the problems/needed repairs, which would cost way more than the value. Further, a couple of pieces are completely broken down and have been junked... None of this equipment is titled, so how/what do we list for assets (only the running equipment?), and how do we arrive at a value? To others, the operative equipment would be essentially worthless, but to us, he can eke out a living with it, but no one would buy it because it is in such bad shape.

Secondly, the company has 3 vehicles titled in its name - one has been broken down for 4 years, no value (1989 van), one is worth about $500 (an old pickup truck that our youngest son has been driving, and which we'd like to transfer to him), and the other is a 10 year old truck with a "lemon" title (how do we value the latter?). Also, there is an older truck that should be titled in the business, but is titled personally to him since 2004, from a variety of mistakes (none intentional). We have one other vehicle titled personally (an older SUV), so it isn't as though he has another vehicle on which to use his vehicle exemption (or a portion...). So, is this a company asset that we need to purchase, or a personal asset since it was never titled to the company? If the latter, can that be part of our vehicle exemption, or do we have to buy that from the company, even though it isn't titled in the company?

We visited with an attorney re: a personal chapter 7, and he advised dissolving the company, starting a new entity, and buying the assets of the old company with personal funds to start the new entity. Number one, we don't have any personal funds -- we are broke... Even if we did, how do we determine what is "fair market value" of the essentially "pos" equipment? Next, do we start a new entity pre-bankruptcy, or do we wait until after? If we could beg or borrow the $$ to purchase the assets (which we can't begin to determine the value of), wouldn't anything owned by the new entity be an asset and thus almost a double jeopardy type rule if owned prior to bankruptcy?

I know that we need to dissolve the company, but when is proper timing for not only dissolving the Sub-S, but starting a new entity. And how in the heck are we going to come up with the $$ when we are in dire financial straits to buy the assets and allow him to continue to work.

So sorry for the probably very confusing first post -- but I am even more confused than this post comes across! Thanks in advance for any thoughts, etc. You all are a great group, and I have learned quite a bit from this forum already!

[despritfreya]

The lawyer we consulted with on our personal bankruptcy suggested that we start a new entity and buy the equipment/assets of the Sub S.

I have a problem with this as I will bet the SBA is also secured by all of the business assets, accounts receivable, etc. Did it record a UCC1 with your Secretary of State? Further, “selling” assets to a new entity which is nothing more than the alter ego of the old entity can give rise to successor liability issues. Remember, the assets are not just the old equipment and vehicles. What about the phone number and the overall “good will” of the company?

I am not one that believes in putting an entity into a Chapter 7 EXCEPT when the owner of the entity wants to make a CLEAN break and have no issues with successor liability.

Generally we will file a 7 for the entity where successor liability may be an issue. The moment the case is filed the entity ceases to do business (if not before filing) and we contact the 7 Trustee to begin the process of negotiating a buy back which includes all hard assets, receivables and the “blue sky”. All assets are listed with liquidation value, including ones that are equitably owned by the entity (the vehicle mistakenly titled to your husband for example). Receivables are estimated based upon an aging report. A premium is added to the offer to cover “blue sky”. Now, this works if there is no blanket lien by the SBA. If there is a blanket lien by the SBA (or any other creditor) the Trustee will most likely take no interest in a “deal” since there is no benefit to unsecured creditors - and you are back to square one.

Timing is critical as you do not want your personal 7 Trustee meddling in your affairs. Unfortunately the issues are way to complex to discuss here - would take pages of writing. Suffice it to say that the moment you file a 7, the Trustee controls your stock in the old entity. If you have already formed a new entity then he controls that as well. As a result, you will want to set up the new entity after you file the personal 7. Your 7 Trustee has the right to sell the stock of the old entity to the highest bidder - that could be you. Or, he may abandon it. Since the entity has no real value, you probably want to file your bk first and get an abandonment of the stock. Once abandoned, file the corporate 7. Contact the corporate 7 Trustee and begin negotiating the purchase of the corporate assets “free and clear” of the claims of the entity’s creditors. Remember, if the SBA has a blanket lien this will not work.

If you have not already done so, please continue to interview attnys. The more attnys you consult with the more comfortable you will become with your ultimate decision. The above is the way we handle issues such as yours so long as we are comfortable that the Chapter 7 trustee for the individual will abandon the stock. If we are worried about the Trustee taking control over the stock, the individual files a Chapter 13 (or 11) in order to keep control.

EDT to add. . . by the way, welcome to the forum.

Des.

[betterlife13]

I have a problem with this as I will bet the SBA is also secured by all of the business assets, accounts receivable, etc. Did it record a UCC1 with your Secretary of State? Further, “selling” assets to a new entity which is nothing more than the alter ego of the old entity can give rise to successor liability issues. Remember, the assets are not just the old equipment and vehicles. What about the phone number and the overall “good will” of the company?

Des -- Thank you so very much for your reply!

I just reviewed the SBA paperwork and closing packet ad naseum. Definitely, the only collateral guaranteeing the SBA loan is our personal home, and there definitely was no UCC1 filed. It actually seems that the backup paperwork for the loan (I have everything, including the application, was more as to the liabilities of the company, and our personal asset valuation (oddly, even had to state value of personal assets - furniture, furnishings, personal possessions and, of course, our home in the application. In the 5 yrs. since obtaining the loan, our home has lost 100k in value, if not more. Though we were not under water at the time we obtained the loan, due to bottoming out of the real estate market, we were under water within 2 years.

Thank you for your very helpful reply. My "gut" told me that it was not right to start a new entity before we filed. I don't know what is going to happen at the end of things, but I guess it is one day at a time, huh?

We do have a couple of jobs coming up, so I am assuming that it is all right to continue to do jobs, collect money, pay bills, make payroll, etc. with the existing Sub S while we go through the personal Ch 7, realizing that whatever is left in the company (which will definitely not be much) when it is over is fair game for the SBA, trustee, etc.?

The assets are not many, so imagine it is not going to be worth doing a 7 on the business -- the only debts of the Sub S are credit card debt (with a personal guaranty that we will list on our Ch 7) and the Sub S loan; otherwise, all operating type expenses are current (insurance, taxes, telephone, etc.) and will continue to be paid, as long as the company has the money coming in to do so - when that happens, we'll cancel insurance, cut off telephone, etc.).

Thanks again -- so very much for your reply. In the scheme of pre-bankruptcy stress, this small company is my biggest worry/stressor (other than the imminent bankruptcy) and you have helped answer some questions & alleviate some worries!

[paulsk]

My situation is somewhat similar, I run my own S Corp and filed for Chapter 7 just last week. The trustee assigned my case to a "asset case" because of the company. The company is service oriented with no real assets, except me working for it. I will share my experiences as it pans out in the next few weeks.

I also plan to form a new company as a backup, if the trustee takes it away from me. It has nothing but a bank account and a phone number.

[betterlife13]

My situation is somewhat similar, I run my own S Corp and filed for Chapter 7 just last week. The trustee assigned my case to a "asset case" because of the company. The company is service oriented with no real assets, except me working for it. I will share my experiences as it pans out in the next few weeks.

I also plan to form a new company as a backup, if the trustee takes it away from me. It has nothing but a bank account and a phone number.

Paul, thanks so much for your response. Please do keep us posted -- we will be filing soon, and will also keep you updated as to what we encounter.

Thanks to this forum, we realized the first attorney gave us very, very bad advice -- namely, insinuating that we should start a new company prior to bk. We will be seeing a firm who specializes in bankruptcy and business law, and the senior partner has been a trustee since 1979. Our situation will be different than yours -- though we are also a service based business, we do have some old equipment (not worth much) and a couple of vehicles (again not worth a lot, but which my husband needs to use in order to continue in another business in the same industry on the other side of this hell...) Best of luck and sending positive thoughts your way!