Personal BK When you own a corporation

[ndkblondie]

I am filing personal bk and need to know if the money I have in my corporate accounts is accessible to the trustee. We have a small S-corporation and I am the president and my husband is the VP of the company.

My attorney does bk services but is not a full time bk attorney and says that as long as we are not able to access the funds at will and they are strictly corporate funds we are ok.

Is this true?

Thank you!

[jq26]

It doesn't matter who is the president and vice president. That's just an officer role, not ownership. Who owns the S-Corp, you? And what is its total value?

[ndkblondie]

I own it and it is worth about 100k I think. Some in money in the bank and some in assets.

[Denita]

Sounds like your corporation is an asset of you and your husband. All assets have to be declared in your BK.

You need an experienced BK attorney to help you. NOT one from a BK mill type place. If you have a business and you are filing personally, your business will be affected. Don't make any transfers into or out of the business before you speak with an attorney.

[jq26]

Wow, you never mentioned the business before. That's one giant asset that will kill most Chapter 7s...

[ndkblondie]

I started making money again through the company at the beginning of the year. Before, nada.

So, can they take it if I own the corp? It still doesn't even come close to covering our debt but it would leave us penniless, once again.

[ndkblondie]

If I add another owner, will that protect it?

[WhoCares1000]

No because they can still take money you get from selling the shares as an asset and still take your shares.

This is one situation where it would have been better to have remained a sole-proprietorship. Then some of the business equipment could have fallen under the work tools category for exemption.

At $100,000, you have pretty much excluded yourself from a Ch. 7. You may still be able to do a Ch. 13 if you are making money off of the business however.

[jq26]

You own the company. How much revenue the company brings in doesn't matter. It is an asset. Asset and income are two totally different concepts.

You should list it on line 13 on schedule B. Do your lawyers know you own a business?

The $100k asset value doesn't exclude you from a Chapter 7. This is an asset not income (though people with 100k+ incomes file Chapter 7s all the time as well). But you need to list it as an asset or you are committing perjury. And of course adding someone else to it won't work. That's a fraudulent transfer. The trustee will snap their fingers and reverse the transfer.

Edited September 10, 2010 by jq26

[ndkblondie]

Yes the attorneys know I have a company, I have been completely honest with them about everything. The company has made enough to pay me some, but not even close to 100k.

[jq26]

Okay. I'm not concerned about the income. But the business as an asset could be a major issue. As an asset of yours, unless exempted from the bk, the business and all of its assets are now an asset of the bk estate and is under trustee control.

[ndkblondie]

I know we listed the company when we filed, I'll have to look to see if it was exempted. Can the trustee deny an exemption? The value if were to sell this company is 0. If they were to liquidate it, it owns a car with a lien on it, some other equipment and there are some funds in the bank, just enough to keep it running until the next project which could be six months to a year out. Is it really even worth anything in their eyes?

[jq26]

How the heck are you getting a value of $100k then? Maybe it is worthless on paper. What value did you use in your filing?

Liquidation value = sale price of all assets & cash - all debt. Ignore going concern value and the value of any carryforward NOLs. That's what your trustee cares about. If there is non-exempt value in your corporation, the trustee could (& should) dissolved the corporation, sell the assets, take their cut, and distribute any remaining funds to creditors. That's what they're commissioned to do. Trustees are really just stand-ins for your creditors. In business cases, there is no need for a trustee because they have creditor committees that perform this function.

[ndkblondie]

They put unknown for value.

I thought a corporation was a separate entity and would be protected. This is not good news, my company won't be able to function and it's our only source of income.

How much and what can I exempt in the company? Sounds like they need to do an amendment?

[willingtocope]

Its an S Corp...that really complicates things. Its not exactly an enitity by itself. It kind of shares your tax liabilities and, at the same time, protects your personal assets from business disasters. However, it doesn't work in reverse.

Your personal bankroptcy wiil include the S corp as an asset. However, since it has little actual value, you still may qualify for a BK 7. If so, that's good.

Close your current company and open up again under a new name...make it a C Corp or LLC next time. Home builders do this all the time....

[Denita]

If you have not actually filed BK yet, I would seriously consider interviewing other BK attorney's. For your attorney to say: "...and says that as long as we are not able to access the funds at will and they are strictly corporate funds we are ok. " means he is not familiar with the complications that come with an S Corp and filing personal BK.

You will have more problems than you can believe if your BK attorney is not an experienced, full time BK attorney. Most BK attorney's limit their practice to only BK's and no other type of legal work as bankruptcy is very specialized and deadline's are fairly quick, especially in a Ch 7. Even those attorney's that do nothing but BK's there is a specialization of areas. Be very careful with your attorney selection. It will make the difference between a successful Ch 7 and a failed filing.

The assets of your S Corp become part of the BK filing - they become assets on your petition. There are other complications. If you have A/R on the date of filing: all the A/R become part of the BK estate and belong to the Trustee. If you do not know this before you file - you can get into a world of hurt.

Edited September 11, 2010 by Denita

[Guest usctrojanalum]

Denita I just want to say you are a genius when it comes to BK and mortgages. That is all I have to add to this thread.

[ndkblondie]

I'm going to throw up.

We already filed. Can I cancel the bk after filing and re-file at a later date?

This is a disaster. We will be even worse off than we were before, with the company we've been working so hard to build gone and all the money in the corp that is our only hope to continue earning, gone too.

We were cruising along one year from our SOL and no lawsuits yet... we were advised to file to stop the foreclosure on our house because the bank won't work with us anymore. They said that since our debt is so big and we are so upside down in our home that the chance of recovery was impossible.

I'm in So Cali, our house is now worth less than it was when we bought it as a tear down, it's just unbelievable. There's no way out.

Edited September 11, 2010 by ndkblondie

[willingtocope]

I guess I'm not understanding what you think your;re giving up by closing your current company. The only asset you appear to have is your customer list, and maybe some letterhead and business cards. The trustee won't take those.

Go thru with the BK7, close the doors on your S corp, and open up the next day as another company. Change the name just enough to get registered with your state. (ABC Inc.becomes ABC and Dogs, LTD). If you were providing value to your customers before, they won't care that you're operating under a new name.

[ndkblondie]

We have cash in the company, the sales value of the company is zero but the only cash we have to get us by until we work again is in the s corp.

[Denita]

Since you have filed you need to get with your attorney to amend your filing if you have not disclosed the S Corp in your BK filing.

Once the Ch 7 has been filed, you can not 'withdraw' the filing. There are other things you can do: convert to a Ch 13 if necessary or have the case dismissed. If you have your case dismissed it will still stay on your CR for 10 yrs.

Send a pm to jq26, he is an attorney and maybe he can refer you to another attorney in your area to help you with this mess. However, many attorney's will not look at your case at all if you have an attorney already. Contact your attorney too. Have all your documentation ready regarding the S corp. You do not want the Trustee to find out about this S corp before you disclose it - and they very easily can find out. After all, your corp is public record

Look at a site called BKForum.com in the stickies to familiarize yourself with BK. For others reading this thread, it is best to research first before filing. You have lots to do this weekend.

[Denita]

I know we listed the company when we filed, I'll have to look to see if it was exempted. Can the trustee deny an exemption? The value if were to sell this company is 0. If they were to liquidate it, it owns a car with a lien on it, some other equipment and there are some funds in the bank, just enough to keep it running until the next project which could be six months to a year out. Is it really even worth anything in their eyes?

I missed this before, thank goodness you listed the corp as an asset in your BK petition.

The Trustee's job is to find assets and liquidate all the assets that are not exempted to pay your creditors. The Trustee actually gets a commission for locating and selling those assets. Cash in your company is considered a very desirable asset as it is already liquid. The equipment and car are also assets unless the debt on each is more than the value. Make sure you revalue your equipment and the car to take into account the current market.

[WhoCares1000]

OK, an S-Corp is a different beast so I am not totally sure. In any case, the value of the business in this case would be the total of all the assets or book value. There is no goodwill or profit determination because the business would not have either without you.

Now, if you can consider an S-Corp a sole proprietorship when it comes to determining assets, you may be able to simply list the assets of the business separately rather than fully as one business asset. If you can do that, see first what you can exempt as tools of your trade since that is a totally separate exemption. That way you can at least keep the business tools to get back to work. Next, see if there is some wildcard exemption you can use to shield the cash and A/Rs. This would allow you to keep the company funds away from the creditors. Also, realize that items that are usually kept for less than 1 year are considered expenses and not assets. This would be stuff like pens, card, post-it notes, etc. Those would probably not be included in determining the business value or counted as assets. The IRS rules would determine that.

Also, if the S-Corp is considered a sole-proprietorship for this purpose, then any Accounts Payable MUST be included in your BK too as well as any business debt.

You really need to make sure your attorney understands all the ins and outs regarding BK of business owners. If not, find one that does because otherwise, you will find yourself in a bigger mess that before.

Personally, you should have tried a short-sale and barring that, let the bank Foreclose on your house and sell it and try to get the difference before filing for BK. Quite possible that it would have taken more than a year and you would have had more time to work through these issues than filing quickly thinking that there was an emergency.

[ndkblondie]

We did try a short sale but the bank would only accept the sale if they could reserve their right to come after us for the difference in the sale and what was owed. In hind sight we should have taken it but we were still hopeful that with enough time, the banks would start really working with people. Instead, in our experience, they've actually gotten tougher.

I looked again at my schedules, and the attorney exempted the SCorp. Will that automatically be accepted by the trustee or will there be something they do to decide if they will allow that?

If I go forward, am I risking that they could deny the exemption and we lose it all?

I will get with my attorneys tomorrow, they've been on religious holiday since Wednesday afternoon. It's been five days of total stress... thank you all so much for being my life line.

[Denita]

The petition is the starting point for the Trustee to review your financials. If the Trustee see's anything in the petition to get his attention (eg the S Corp), then they can ask for all kinds of additional documentation. Usually if you are a small business owner filing personal BK, the amount of documentation you need to provide to the Trustee is more than is typical for your w-2 type filer.

Have you had your 341 yet?