December 15, 2017

Will a Personal Bankruptcy Affect my Small Business if I am Self Employed?

Bankruptcy businessmanWith a sluggish economy, I have met with an increasing number of small business owners who are considering personal bankruptcy to deal with credit card debt and personal loans, but who want to keep their business assets and credits separate.  Is this possible.

First, it does make a difference whether the small business is incorporated.  If your small business is a proprietorship (i.e. “Tom Smith d/b/a Tom’s Lawncare”) then there is no way to separate personal assets and debts from business assets and debts.  In this situation, all debts are “personal” because the proprietorship does not have a separate identity from the individual.  All debts would have to be listed – for bankruptcy purposes in this situation, there is no difference between your personal credit card debt that arises from gasoline and grocery purchases and a credit card that you use for business purchases.

Assets of the proprietorship would be considered personal assets – assets that do not fit within the Georgia exemption statute would be at risk.

In a Chapter 7, if you have non-exempt assets you would have to surrender those assets to the trustee or offer to buy the “estate’s interest” from the trustee (usually at a discount from fair market value).

Note that any receivables of the business or any other property with potential resale value (i.e. customer lists, pending contracts) could be claimed as estate assets.

In rare instances a Chapter 7 trustee could object to your small business bankruptcy using an “income suppression” argument.  This argument asserts that you should not be eligible for bankruptcy relief because you have intentionally suppressed your income by leaving a highly paid job or intentionally refused to maximize income opportunities.

If you are incorporated, the shares of your business are assets and you may very well be asked to justify a de minimus (i.e. $500) valuation that you put on those shares.   I see this issue frequently when clients own service businesses.  [Read more…]

Retiree With $25,000 of Credit Card Debt Contemplates Bankruptcy

Thank you for your informative web site.  I have 2 questions I am filing for SS as I am 63 my bill are current however I was laid off last year and my health is failing. If I file would I be able to keep my car?   I owe 16K on it as low milage (17K) my son will be giving me the payments.  Also I have been renting this small house for the past 5 years I have never been late with the rent do I have to notify the landlord if I plan to stay here? I own nothing but have 25K credit card debt all these bill are current but I have run out of savings

Jonathan Ginsberg responds:  Christina, thanks for your questions and the kind words about my Atlanta bankruptcy web site.  With regard to your car, in a Chapter 7, you can reaffirm your car note if (1) you are current on the note and the lender agrees to a reaffirmation and (2) you have less than $3,500 of equity in the vehicle.

Reaffirmation is a voluntary process most frequently used in the case of secured debt in which you keep your property and reassume full legal responsibility for the note.  If you are current and you have a source of funding for the payment, you should have no trouble reaffirming.

The $3,500 figure comes from Georgia’s exemption statute.  Under Georgia law (which applies to your bankruptcy case), you can shelter or "exempt" up to $3,500 of equity in your vehicle.  If you have more than $3,500 of equity, you would need to settle up with your Chapter 7 trustee and pay him the non-exempt portion of your equity – which he would use to pay creditors of your bankruptcy estate.

WIth regard to the lease, technically a rental contract is known as an "executory contract."  This means that its terms have not yet been fulfilled (the terms being your monthly lease obligations).  Until the October, 2005 changes to the law, most lawyers did not include current lease contracts in bankruptcy petitions.  Under the new law, however, an executory contract that is not "assumed" is deemed rejected.  So, it probably makes sense to include the lease contract on Schedule G of your petition and to assume the contract.   The potential problem with including the lease contract in your petition is the notice that will be given to the landlord.  Some large apartment complexes may be reluctant to give you a new lease if you have filed bankruptcy – this is rarely a problem with smaller ownership groups.

I would also note that if your only source of income is Social Security, and you have no assets, then you are basically judgment proof.  If you own only $25,000 and you are judgment proof, I wonder if filing Chapter 7 is really a good idea.


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