Should I Put My Business in Chapter 7?

Posted by Kevin on September 9, 2017 under Bankruptcy Blog | Be the First to Comment

You wanted to follow the American dream and set up your own business.   Two years down the road, however, you realize that you are working 70 hours per week and the business is not making money.  You have exhausted all your savings and the business has incurred debt out the wazoo.  You just want out, and you have heard about Chapter 11 or Chapter 7.  What to do?

While you can liquidate your business in a Chapter 11 (liquidating plan), this is very expensive and time consuming.  Unless, the business is very large, this may not be the way to go.  But what about a Chapter 7?

The first question you have to answer is who (or what) is going into Chapter 7?  To a degree, it may depend on how your business was set up.  If you have a sole proprietorship (DBA), then under the law of New Jersey, you are the business.  So, if the business fails and you want out, you will have to file a Chapter 7.  A trustee will be appointed and will administer not only your business assets and liabilities, but also your personal assets and liabilities.

If the business is a corporation or LLC, then under the law, the business is considered an entity separate and apart from you.  So, now the issue is who files bankruptcy?  One of the primary reasons to file bankruptcy is to get a discharge of your debts.  However, the Bankruptcy Code states that a discharge in a Chapter 7 is limited to individuals.  The Code defines “individuals with regular income” but not “individuals”.  The Code also defines “persons” which includes people but also includes corporations and partnerships.  Well, without going into too much more detail, the bottomline is that people can get discharged in a Chapter 7 but corporations and partnerships and LLC’s cannot.  So, if you put your LLC into Chapter 7, it does not get a discharge.

But, the analysis does not end there.  Your LLC may be have sued by numerous creditors so you have lawsuits pending.  Also, these creditors have a penchant for not only suing the LLC but suing the principal and that is you.  You have other creditors who have not sued yet but are hounding you on phone.  You have inventory and accounts receivable.  You have the bank pressuring you on that line of credit which you guaranteed.

Even though the LLC does not get a discharge in Chapter 7, it may be worthwhile to file a Chapter 7 for the business.  First of all, because of the automatic stay, all pending lawsuits are put on hold, and your creditors cannot file any new actions unless they get the permission of the bankruptcy court (relief from automatic stay).  Also, the trustee takes over and chases the business’s creditors, deals with the landlord and liquidates the inventory.  You must cooperate, but the trustee does the heavy lifting.

If you cannot work a deal out with lenders on guarantees, or if the collection lawsuits naming you become too much of a hassle, then the owner should seriously consider an individual Chapter 7.

Bankruptcy issues involving a failing business are complicated.  You should seek experienced bankruptcy counsel work work you through the process.

Why You Should or Should Not Worry about Creditors Objecting in Your Bankruptcy Case

Posted by Kevin on September 1, 2017 under Bankruptcy Blog | Comments are off for this article

FACT: In bankruptcy, creditors seldom fight the write-off of their debts. Why not? And when DO they tend to fight?

 

Debts That Creditors Must Object To

This blog post is NOT about the kinds of debts that simply can’t be discharged (legally written off), and don’t need the creditor to object for that to happen. Examples of those are child and spousal support obligations, recent income taxes debts, and criminal fines. Those survive bankruptcy without any effect on them.

Instead this is about ordinary debts and the ability of any creditor to raise certain limited kinds of objections (like fraud) to the discharge of its debt.

Why Objections Aren’t Usually Raised

But if creditors have a right to object, why don’t they do so? If they can make trouble for you, why don’t they?

Simply because doing so is very seldom worth their trouble.

Why not?

1. Creditors seldom have the factual basis on which to object.

2. It takes money for creditors to object, money they may well not recoup.

3. The risk that the creditor would have to pay your attorney fees.

That would happen if the judge decided that “the position of the creditor was not substantially justified.” So if creditors are not very confident of their argument, they could be dissuaded further by the risk of having to pay your costs fighting the objection.

So that’s why most creditors just write off the debt and you hear nothing from them during your bankruptcy case.

When Creditors Tend to Object

Creditors do object sometimes, often involving one of the following two situations:

1. Using leverage against you.

If a creditor thinks it has a sensible case against you, it could raise an objection knowing that you are not willing or able to pay a lot of attorney fees to fight it. The creditor knows that even if you have a good defense to its accusations so that you could well win if the matter went all the way to trial, it would cost you a lot to get to that point. So they raise the objection in hopes of inducing you to enter into a settlement quickly.

2. A Personal Grudge

If a creditor is very angry at you for some reason, he, she, or it might be looking for an excuse to harm you or cause you problems. Ex-spouses and ex-business partners are the most common creditors of this sort. Irrationality is unpredictable, so it sometime drives an objection even when there are little or no factual grounds for it.

The Creditors’ Firm Deadline to Object

Creditors have a very limited time to raise objections: their deadline is only 60 days after the Meeting of Creditors (so around 3 months after your bankruptcy case is filed).

So, talk with your attorney if you have any concerns along these lines. And then if whatever assurances he or she gives you doesn’t stop you from worrying about this, you’ll at least know that you won’t have long to worry before the creditors’ right to object expires.