Getting closer to BK - What happens to PayPal account?

[chrisld]

I wrote about our situation here last December and got some good info. We had a coffee shop that was not doing well. Since then we tried our hardest to get it to work and while we were not going deeper into debt, we were not really doing any better than our minimum payments. Here's a synopsis of our situation:

$150k all borrowed on credit cards and personal lines of credit.
Coffee shop was losing $2k per month, I was covering that shortfall with my full-time salary and other side-hustle.
Outside of the coffee shop losses, we have a total household income of $120k annually.

We had put the coffee shop up for sale, but then the shutdown hit. COVID-19 is the final straw. We've been closed for 6 weeks and we've decided we're not going to reopen. I did apply for the EIDL and PPP loans last month (I still had hopes we could make it.) We received the PPP loan a couple weeks ago. But even with an infusion of $15k in government cheese, we still can't make it. That just buys us a few extra months and would add more to the pile of debt.

I've contacted our SBA lender and told him we're not going to reopen and asked what to do with that money. I'm hoping we can simply return it.

But would that end up looking like a "preferential transfer" and cause problems for a trustee?

What about my side-hustle? I design and sell electronic hobby kits online. My average annual net income from that is $30k. I use my PayPal account to collect payments and to buy parts. Will my PayPal account be shut down in a bankruptcy? I don't want the BK to result in a loss of 1/4th of my income.

[justbroke]

The major question is what is the organization of the coffee shop(s)? Is it a sole proprietorship or some other entity (LLC, LLP, Corporation)? The answer so depends on the organization of the shop. For example, if the shop is organized as an LLC then it's a separate legal entity. I don't know if the Trustee, and especially a Chapter 13 Trustee, would want anything to do with running something that's already broken. Besides, if it's a separate legal entity, then that legal entity is responsible for paying back the PPP (no blowback on the owners as the PPP has no personal guarantee... except in cases of outright fraud).

As for side hustle on PayPal, you'll have to disclose all that in your filing. It will likely affect your payback. Unless you need that side-hustle, I would shut down that (sole proprietorship) business just to not have the headache. The headache comes because a Chapter 13 Trustee may want detailed reports on some monthly or quarterly basis. Chapter 13s work well when the income is regular and consistent... and paid by a third party. When you own and operate a business (or businesses) while in a Chapter 13, it makes it complex.

If you need the side-hustle, as you indicate it's 1/4th of your income, then be prepared to provide some sort of reporting to the Trustee. Your PayPal accounts won't be closed because you filed bankruptcy (mine never were... neither of them).

Of course, this can all be a very different picture if this is a Chapter 7.

You are going to need a very qualified bankruptcy attorney for this. I don't know if you're contemplating the Chapter 13 route, but this is going to require some skill with the continued operation of the PayPal business.

[chrisld]

The coffee shop is an LLC. My side hustle is a sole proprietorship. I'm not looking to hide anything, I'm totally comfortable disclosing everything. I did meet with a lawyer last December and he thought a chapter 7 would be the most likely course.

The PPP loan is for the LLC. I emailed the SBA lender today and told him we're closing. He's going to look into the best course of action and get back to me tomorrow.

While the coffee shop is an LLC, all of the debt is our personal debt. I really never handled anything correctly when we were starting the coffee shop. I always thought the coffee shop would cash flow, so anytime I needed money, I assumed it would be a short term need, and just put purchases on a credit card. For the first four years, we were growing at a rate of 50% annually. I ignorantly assumed that would last forever. Well, the last three years we've been shrinking at a rate of 12% annually. Due to the location we're in, I think it's fairly likely that falloff will continue.

Now, if I decided to just stop my side hustle, would the trustee wonder why I had this extra income of $30k over the past three years?

[justbroke]

For the PPP, if you normally pay yourself and anyone else, then you can use the PPP for that purpose for about 2 months of payroll (and a certain small portion for other expenses). I applied but haven't received any for my coffee shops. (Yes, I own 2 and we have now been closed for 45 days.)

As for coffee shops, I learned from Starbucks. They only seem to do kiosks (bit to mega kiosks, but never) when inside a mall/building unless they have a freestanding with a drive-thru.

Yes, the Trustee will look at your income over the last 2 years (at least... maybe 3) and may ask about a decline in income. Whether or not yoru particular panel Trustee wants to dig deeper is the question. But I suspect that they will because your past tax returns will show the sole-prop stuff under a Schedule C which will make the Trustee ask more questions about "that" business. (They'll also see your K-1s and ask about that as well... and especially probe to see if that's a single-member LLC... which is really just a sole-prop -- alter-ego.)

This is why you should have a decent lawyer that can navigate these shark, uh.... Trustee... infested waters.

[chrisld]

The coffee shop is a two-member 50% partnership with me and my wife. I will just continue my side-hustle, even through the chapter 7 unless my lawyer tells me different.

I heard from my SBA lender. Apparently I'm not the first one to get the PPP loan and later decide they didn't want it. There is template to fill out and they basically take back the money and "unapprove" your loan.

I'm probably going to find a lawyer that specializes in bankruptcy. The guy I talked to last December was kind of a kid, and I didn't get the feeling it was a specialty for him.

[flashoflight]

I would talk to a seasoned and highly experienced bankruptcy attorney before making any moves including turning down the PPP.

I hope you don’t end up in a 13 because you may have to continue the side hustle for the exclusive benefits of your creditors.

[chrisld]

I have an appointment Friday with an attorney that has only been working on bankruptcy for more than 20 years. I won't do anything with the PPP until I talk to him.

So what would put me in a chapter 13 instead of chapter 7? Honestly, I want to pay my debt, so if chapter 13 helps, I'll do it. I started my side hustle three years ago with the plan that anything earned would be used to pay debt.

[justbroke]

There's no way to tell, easily, which Chapter of bankruptcy is required without running the numbers. A lot comes down to whether you're over-the-median and whether your "allowed" expenses exceed your income. (Allowed expenses are those that are allowed by the IRS Collection Financial Standards as used and provided by the United States Trustee, with consideration given to those expenses that will no longer be paid after bankruptcy.)

If your debt is primarily business debt, then you may be able to still file a Chapter 7 regardless of whether you're over-the-median or not, if that business debt is at least 51% of your total debt. Additional considerations may come if you have a home or other property (such as a car) which you're trying to save.

[chrisld]

I talked to another lawyer today. He was VERY good and knowledgeable. All he does in bankruptcies and has done more than 12,000 in his career.