Chapter 13, Sole Priopertiorship, & Cash On hand

[BKFreedom]

My friend lent me $100K to help me start my Sole Proprietorship.

It was intended to be a loan to help provide purchasing power for items that I buy and resale.

Now facing a Foreclosure and Bankruptcy as follows:

State: California
1st mortgage: $668K
2nd mortgage: $168K
Property: rental property with tenant.
Current Student loans: $100K
Unsecured credit debt: $120K.
Chapter 7 means test: failed
Cash on hand: $100K in the bank (from the loan)
Current business income: positive Net Income to qualify for Chapter 13
Other: Currently 2nd year PhD student.
The business has no other significant assets beyond the exemptions.
I have no other tangible assets.

Question 1: I want to know the options to repay this loan, in full, asap, to my friend. However, I am afraid to repay this loan in event that it will be recalled by the court. Am I safe to repay this loan (as part of business operations) prior to the Chapter 13 without disqualifying me?

Question 2: If I repay this loan before filing Chapter 13, would could happen? Denial of plan, increased payment, etc??

Question 3: If my friend does not have the money and court comes looking, what could happen to my friend? Or would it be best to just take the money out as cash, put it in a shoe box, and return to my friend. Then it is all on me to explain.

Question 4: Will Chapter 13 prevent me from being able to take out additional Government student loans to finish the PhD physics program Even though while enrolled at least half time working on dissertation, the loan payments and interest are on-hold. So as long as I am enrolled in school, it helps my Chapter 13 case.

Question 5: Will creating a Corporation, moving the lent money into this Corporation, and then becoming a W-2 employee of this corporation with a 50% ownership solve any problems for me. Or will it cause more problems. The other 50% would be my friend for the investment with company buy back right so if company wants too, can use cash on hand to buy back the ownership (and thereby return money back to my friend) later. If so, which type of Corp (LLC or S-Corp)?

Question 6: What are some legal recommendations/ideas to manage the cash on-hand and the Chapter 13?

[eddiep]

I am a newbie and have no helpful advice but ouch! That sounds like a horrible situation to be in! Get a really good lawyer!

[HHM]

Get a lawyer, this is not something you can tackle pro se

As to your questions

1. Whatever you do, do not do anything until you speak to a lawyer. Since this is a sole prop, there is not legal distinction between you and the business, any payment made to your friend, especially in full is a preferential payment and the trustee could sue your friend to get it back. Basically, your friend is a creditor and will be included in the BK. That doesn't mean you can't pay him back in the future, but if you actually value the friendship, you WILL NOT pay him back before filing BK.

2. See #1, a chapter 13 does not change the parameters of preferential payment.

3. So, you and your friend are conspiring to commit BK fraud Bottom line, if you file BK in the next 2 years (and possibly more), YOU CANNOT PAY YOUR FRIEND BACK, sorry.

4. No...student loans are not based on credit worthiness, but you would want to stipulate in your chapter 13 plan to be able to take out student loans without having to seek trustee approval each time.

5. It's too late. The money was loaned to you originally, creating a corp. now would only strengthen the case for BK fraud.

6. Has the business even started operating in any meaningful way?

[BKFreedom]

Question 6 (response):
The business is operational and profitable on a monthly basis. 2008 was a profitable year. As long as this money (asset) is available for cash flow to the business. It is taken away, the business cannot operate.

Question 7:
As I see it, there are the options toward minimum payment. Are there others options?

Option A: So when I present to the court that I have 100K in the bank, they will basically use this amount as what could be liquidated in a Chapter 7, and the payment plan would be based on: $100,000/36=$2777 per month?

Option B: Alternatively, they will look at my income/expenses and see what this value is on a monthly basis and compare it the Option A, and then use the greater?

If we go with Option A, use business operations to pay the monthly amount, and the money is still left in the business account, then at the end of 36 months, I could pay back my friend?

In summary, the business needs to product $2777 profit every month so that after 36 months, I could pay back my friend?

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Question 8: Could I list my friend as creditor, file the Chapter 13, then pay my friend, legally? Or will the court will still not allow it.