Ch 7 Business - Consumer

[GWBcasualty]

OK. Some of you may remember me posting a while ago.

I am getting close to filing time and my big issue is still the same... to save or not to save the business?
Is profitable, but not as much as it was... however if things change can become quickly profitable again.

Anyway. My question is this:
Assuming that I file Chapter 7 consumer and I get my business (sole prop.) through it without troubles as it seems very likely.... Further assuming that one year after discharge my business is still a sole prop and is not getting any better and has new debt with vendors, can I just shut it down? Or can I file a Ch 7 business? Or do I remain liable for the new debt with vendors? (Not saying that I want to make new debts... just saying that is a possibility, you know that thing called life... )

OR

Should I "close" my sole prop with or previous the ch 7 filing and "open" a small Corp that I can just shut down if things go wrong?? (I saw this browsing a CH 7 case on PACER... both husband and wife closed their business 3 months before filing and open a similar business 3 months prior to filing, not sure if all those were corps or not, case filed in October - discharged and closed few days ago - almost $400k unsecured).

[AngelinaCatHub]

Well as you probably know, new debt is not released.

I am not a guru on corps, but corps file it seems yearly, like our "Annual Going Out of Business Sale".

If you wish to stay in business and you are making a living, pay cash as you go. Keep inventory low. I don't know what you do but keep it caring you along. Otherwise, what would you do otherwise? 'Hub

[HHM]

First, if its a sole prop, there is no difference between you and the business, they are one and the same. Thus, you will not be able to file another chapter 7 for eight years regardless. So to answer your question, NO, you will not be able file a business chapter 7 on your sole prop a year later.

Here is the catch, if you flip your biz to a corp before the BK, you lose your tools of trade exemption, so any assets or inventory of the business can be sold by the trustee (yes, even in your personal chapter 7). Thus, you would want to set up a corp after our BK discharge. However, realize, that any new debt you get will be personally guaranteed by you anyway (most likely), so having a corp to try to protect you, personally, from future debts is moot.

[GWBcasualty]

First, if its a sole prop, there is not difference between you and the business, they are one and the same. Thus, you will not be able to file another chapter 7 for eight years regardless. So to answer your question, NO, you will not be able file a business chapter 7 on your sole prop a year later.

Exactly what I thought.

Here is the catch, if you flip your biz to a corp before the BK, you lose your tools of trade exemption, so any assets or inventory of the business can be sold by the trustee (yes, even in your personal chapter 7).

But that's not what they did... in this filing (discharged - no asset case) they exempted their interest in their new corps (a total of $5,000) using the wild card (CA System 2) under the heading "stocks and interest in businesses".

So, they discharged all their old business debt and they got their "new" businesses established 3 months before the filing through Chapter 7.
The lawyer fee was $4,500... hefty no doubt, but the case went as smooth as it could be and the paperwork is as simple as it can be.
They didn't even enter the P&L from the new businesses in the monthly and the mean test under "business and farm income"... they entered it under "Other income" - "Income from XYZ $2,500" and "Income from ZDY $1,400" and under "other expenses" they entered "Expenses from XYZ $1,600" and "Expenses from ZDY $1,200". No additional schedules.

They were over the median and passed the mean test ($8K+ income $9K+ expenses)

Trustee apparently had no problems with any of this.

Thus, you would want to set up a corp after our BK discharge. However, realize, that any new debt you get will be personally guaranteed by you anyway (most likely), so having a corp to try to protect you, personally, from future debts is moot.

Not planning to incur any debt that requires personal guarantee, but yes, you would be 100% correct if that was the case.

[HHM]

Well, if you have another exemption to cover your business (like a wild card), that's fine. The point is, as with any asset, you need an exemption to protect it. I was merely making the point that the usual exemption used in these scenarios is Tools of Trade, but you typically lose that exemption if the assets are held in a corporate entity (Inc., LLC. etc).

Good luck trying to get credit without a personal guarantee

[GWBcasualty]

Good luck trying to get credit without a personal guarantee

I am not going to worry about that now! What I think is attractive about what they did (and what I could do) is that they discharged everything including debts vs vendors of the "old" business and started really fresh but with a similar business.

I was under the impression that this was a no-no?

I will research more as I certainly don't want to get in trouble and/or risk dismissal for a biz that now is producing just around $1k a month of profits, but if the economy improves can go back to $5k+/mo

What do you think? I remember that you replied to my thread about Ch 11, so you know that I am researching all options to do the best I can for my family.

[catleg]

No matter how you slice it, you file BK and you cut off your access to credit, unless you have collateral or a guarantor. Can the business survive and thrive as cash only? Could it potentially be worth something more if you sold it to someone with access to credit? Are you using credit to finance inventory or just as leverage?

These are the questions I'd be asking myself.

[HHM]

Businesses are deceptively simply in BK. Your interest in the biz is an asset of your BK, regardless if it is a sole prop, LLC, or Corp. As an asset, you need to assign a value to that business. Most of the time, the value is simply the value of the hard assets and accounts receivables. As with any assets the analysis is (1) how much is it worth, (2) is there a security interest from a lender against the assets, (3) is there an exemption to cover any equity.

[GWBcasualty]

No matter how you slice it, you file BK and you cut off your access to credit, unless you have collateral or a guarantor. Can the business survive and thrive as cash only? Could it potentially be worth something more if you sold it to someone with access to credit? Are you using credit to finance inventory or just as leverage?

These are the questions I'd be asking myself.

I have been running this business on cash basis for the past 15-16 months.
Once the banks blew up, my credit lines and CCs were lowered to the amount used... no credit available... same thing happened to a lot of small and medium sized businesses... after a few months of paying a few thousands only to have it all used up by the jacked up interest rates, I decided that they should just all go to hell and stopped paying.

My business suffered more from the crisis that from the leaner inventory, so the answer is that, yes, it can survive, but not thrive with no credit. Survival is still a decent second job tho... that's why I think it's worth it to get the business through bankruptcy.

[GWBcasualty]

As with any assets the analysis is (1) how much is it worth, (2) is there a security interest from a lender against the assets, (3) is there an exemption to cover any equity.

Thanks again HHM.

Answers:
1) inventory value (at clearance sale prices)
2) No
3) Yes.

[Overmylimit]

My business is a sole prop and we are filing this week, the Attorney said we will need to file for an abandonment motion of the business with the trustee so I can still operate the business...since I am not closing down. To complicate things more I also have a C-Corp I run as well.