A Big Question

[lisac77]

We own a business that is going under. We put down over $100K for the purchase of the store and materials. The banks put in the rest of the money in the amount of $525K.

DH is being given an opportunity to join a friend of his in running a body shop. He wants to take the inspection machine (worth approx. $25K used) the car lift (worth approx. $10K used) and the tools (worth approx. $300 used) from the store and take them with him to the body shop.

We have a $60K personal property exemption in TX. Our household property probably doesn't even max $5000, so we have a lot of unused exemption left.

Now I know that this is technically not our personal property... it is our company's property. But we wholly own the company. And that was our personal money that we put down for use by the business.

Is there any way that this could possibly work? We are going to ask a lawyer, but this board is so helpful, I'd really like people's ideas.

Texas Exemption for Personal Property:

Personal property of a debtor which may be exempt from garnishment, attachment, execution or other seizure may include property having an aggregate fair market value of not more than $60,000, exclusive of liens, security interests, or other encumbrances if it is provided for a family

...

These property may include:

home furnishings, including family heirlooms; provisions for consumption; farming or ranching vehicles and implements; tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession; wearing apparel; jewelry not to exceed 25 percent of the aggregate limitations prescribed by Section 42.001(a);
two firearms;
athletic and sporting equipment, including bicycles;
a two-wheeled, three-wheeled, or four-wheeled motor vehicle for each member of a family or single adult who holds a driver's license or who does not hold a driver's license but who relies on another person to operate the vehicle for the benefit of the nonlicensed person;
certain animals and forage on hand for their consumption;
household pets;

[Spartan]

The trustee is going to ask to see the book. How are you going to explain what happened to the assets? $335,000 worth of equipment/asset. If he is joining a business, that needs to be reported to the trustee. They will ask. If you don't inform them of the truth, then that is perjury.

EDIT:
Oops!! NEVER MIND. I read the equipment value wrong. I thought the $300 was $300 K.. Duh!

[lisac77]

The trustee is going to ask to see the book. How are you going to explain what happened to the assets? $335,000 worth of equipment/asset. If he is joining a business, that needs to be reported to the trustee. They will ask. If you don't inform them of the truth, then that is perjury.

He's not joining the business... he'll be working there. All the other assets will be going back to the bank, we're not keeping all of it! Just a couple of things that might fall under the personal property exemption. We won't be hiding anything, just exempting some property. My question, I guess, is will they view that stuff as our personal property?

[lisac77]

EDIT:
Oops!! NEVER MIND. I read the equipment value wrong. I thought the $300 was $300 K.. Duh!

Yeah I was wondering where you came up with $335,000!!

[Spartan]

He's not joining the business... he'll be working there. All the other assets will be going back to the bank, we're not keeping all of it! Just a couple of things that might fall under the personal property exemption. We won't be hiding anything, just exempting some property. My question, I guess, is will they view that stuff as our personal property?

If you categorize them as tools of trade, then they are exempted.

http://www.texasbankruptcylaw.com/exemptions.html

Moreover, since you are going to dissolve the business, that means all the assets and liabilities will be your personal assets and liabilities.

[SinkingFast]

If you categorize them as tools of trade, then they are exempted.

http://www.texasbankruptcylaw.com/exemptions.html

That's my thought.

You ran a now defunct gas station, right LisaC??!! Where I'd presume Hubby performed service repairs for customers??!!

If that's the case, I don't see why Hubby couldn't use the tools in another job. Unless there's specific wording that would preclude the inspection machine and the car lift. Such as "hand tools" is the phrasing.

[HHM]

I suppose the only issue is whether the equipment your husband is planning on taking is subject to the bank's lien (it probably is, even if you bought it with your own money). Generally, these types of business loans are collateralized by ALL business assets, so I would imagine the bank would consider the Car lift and inspection machine part of the business and therefore security for the bank's loans.

[lisac77]

That's my thought.

You ran a now defunct gas station, right LisaC??!! Where I'd presume Hubby performed service repairs for customers??!!

If that's the case, I don't see why Hubby couldn't use the tools in another job. Unless there's specific wording that would preclude the inspection machine and the car lift. Such as "hand tools" is the phrasing.

Yes, they did repair cars at the shop. And it specifically says "tools and equipment" in the exemption wording.

[lisac77]

I suppose the only issue is whether the equipment your husband is planning on taking is subject to the bank's lien (it probably is, even if you bought it with your own money). Generally, these types of business loans are collateralized by ALL business assets, so I would imagine that bank would consider that the Car lift and inspection machine part of the business.

Right but the bank realistically holds a lien on everything we own since we signed a personal guarantee for the loans. That's what exemptions are for... keeping them from seizing certain personal assets.

[bige1030]

I take it that your business is a corporation, right?

Even if the bank's lien doesn't cover the tools and equipment that your husband wants to keep, the bank could sue the corporation and attach all of its assets with a judgment lien. As far as I can tell, a corporation cannot claim exemptions like individuals can.

It would probably be safest for your husband to purchase the equipment from the corporation for its fair market value, given its condition. That would be a reasonable disposition - it's not fraudulent because the corporation gets fair market value in that case.

As far as the bank's lien on all of your personal assets goes: your lien will survive the bankruptcy unless avoided (see

[SinkingFast]

"Household goods" is tightly defined. It includes:
Clothing, furniture, appliances, 1 radio, 1 television, 1 VCR, linens, china, crockery, kitchenware, educational materials and educational equipment primarily for the use of minor dependent children of the debtor, medical equipment and supplies, furniture exclusively for the use of minor children, or elderly or disabled dependents of the debtor, personal effects (including the toys and hobby equipment of minor dependent children and wedding rings) of the debtor and the dependents of the debtor, and 1 personal computer and related equipment.

That definition is the Federal Exemptions definition. If you're using State Exemptions, the Federal definition may not apply. Local Rules may prevail.

In our case, we used State Exemptions. Our attny said we had to inventory our bedroom and the common use areas of the house. The kids' rooms and things were just that. The kids'.

That's the way the Court looks at it here. Each child could have a computer, a TV, a whatever in their room and it doesn't count in the Debtor/Filer's list of household goods.

You need to ask attnys as you Consult how the Household Goods Exemption will be applied for your State in your District and Court.

[HHM]

Right but the bank realistically holds a lien on everything we own since we signed a personal guarantee for the loans. That's what exemptions are for... keeping them from seizing certain personal assets.

No, I am talking about direct collateralizing. The bank's business loans are secured debt, secured by the business assets. Exemptions only protect you from unsecured creditors seizing assets. Secured creditors CAN ALWAYS enforce their lien against the property that secures the debt.

I think you'll be hard pressed to show that a $25,000 inspection machine, and $10,000 car lift are personal assets and not business assets.

Signing a personal guarantee is not the same thing.

[bige1030]

That definition is the Federal Exemptions definition.

I respectfully disagree. From (f), which governs lien avoidance:

(1) Notwithstanding any waiver of exemptions but subject to paragraph (3), the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is--

....(A) a judicial lien, other than a judicial lien that secures a debt of a kind that is specified in section 523(a)(5); or

....(B) a nonpossessory, nonpurchase-money security interest in any--
........(i) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor;
........(ii) implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor; or
........(iii) professionally prescribed health aids for the debtor or a dependent of the debtor.

...

(4)
....(A) Subject to subparagraph (B), for purposes of paragraph (1)(B), the term "household goods" means--
........(i) clothing;
........(ii) furniture;
........(iii) appliances;
........(iv) 1 radio;
........(v) 1 television;
........(vi) 1 VCR;
........(vii) linens;
........(viii) china;
........(ix) crockery;
........(x) kitchenware;
........(xi) educational materials and educational equipment primarily for the use of minor dependent children of the debtor;
........(xii) medical equipment and supplies;
........(xiii) furniture exclusively for the use of minor children, or elderly or disabled dependents of the debtor;
........(xiv) personal effects (including the toys and hobby equipment of minor dependent children and wedding rings) of the debtor and the dependents of the debtor; and
........(xv) 1 personal computer and related equipment.

....(B) The term "household goods" does not include--
........(i) works of art (unless by or of the debtor, or any relative of the debtor);
........(ii) electronic entertainment equipment with a fair market value of more than $500 in the aggregate (except 1 television, 1 radio, and 1 VCR);
........(iii) items acquired as antiques with a fair market value of more than $500 in the aggregate;
........(iv) jewelry with a fair market value of more than $500 in the aggregate (except wedding rings); and
........(v) a computer (except as otherwise provided for in this section), motor vehicle (including a tractor or lawn tractor), boat, or a motorized recreational device, conveyance, vehicle, watercraft, or aircraft.

Also consult p. 6 of Major Consumer Bankruptcy Effects of the 2005 Reform Legislation written for the American Bankruptcy Institute by Eugene R. Wedoff, Chief Judge of the United States Bankruptcy Court, Northern District of Illinois.

[SinkingFast]

I wasn't talking about lien avoidance or anything like that.

We knew about the definition you cited above.

We had more than 1 TV in our household. 2 of our kids and Mom have TV's in their bedrooms. We had more than 1 computer. 2 of our kids have computers purchased with their own money in their bedrooms. We had more than 1 stereo. 1 kid has a stereo system purchased with their own money in that bedroom.

We specifically told our attny about all this stuff and asked what would happen. That's when our attny said if we were using the Federal Exemptions, things would be different. We'd have to follow that rule. Using the State Exemption, Local Rules apply. He said, "Inventory your bedroom and the common use areas of the house." He said the kids' rooms and things were just that. The kids'.

The definition you gave applies when the Debtor/Filer chooses or has to use Federal Exemptions. And I guess from your quote, that may be the way the Local Rules are applied in the Northern District of Illinois as the author is a Judge in that Court. But we did not use the Federal Exemptions and we did not file in the Northern District of Illinois.

This was our experience when we filed. When you filed, did you use State or Federal Exemptions?? Did your attny abide by the Federal Exemptions to the letter of the Code, or did Local Rules prevail??

It is one Federal BK Code, but how it's handled in the local Court under Local Rules does vary. That's why I said, ask an attny!!

[GoingDown]

No, I am talking about direct collateralizing. The bank's business loans are secured debt, secured by the business assets. Exemptions only protect you from unsecured creditors seizing assets. Secured creditors CAN ALWAYS enforce their lien against the property that secures the debt.

I think you'll be hard pressed to show that a $25,000 inspection machine, and $10,000 car lift are personal assets and not business assets.

Signing a personal guarantee is not the same thing.

Oh, I see what HHM means...

it's like if you bought a car with a loan from the bank, the car is the collateral for the loan, and the loan is secured by the car.

If those tools and machinery were bought with that business loan, then they might be secured by it, and the exemption might not apply to them.

You definitely need to see a lawyer about this one, and bring the loan documents with you for him to examine, and let us know what you find out about it.