An experienced bankruptcy attorney told me about a creative planning technique to save and reorganize a financially stressed small business by using Chapter 13 bankruptcy. Remember, Chapter 13 is for individual only. Businesses use the more expensive and complicated Chapter 11 reorganization. The attorney’s plan is a bit complicated for laymen readers, so here is a very condensed version.
Assume you own a small business in an S corporation or limited liability company. The business has significant assets but even greater liabilities. The business cash flow is “negative” on a monthly basis. You have to pump more money in the business to keep it afloat in hope the government’s economic recovery plan takes effect in time to turn your market positive. A bankruptcy attorney suggest you reorganize your debts in Chapter 11, but states his Chapter 11 retainer fee would be at least $25,000.00. If you had $25,000 available the business would be healthy. You are personally liable for business debts.
Here’s the plan. The owner dissolves the corporation and assigns all the corporation assets to himself personally. The individual personally assumes all corporation debt. There is no fraudulent transfer from the corporation to the individual because the net value of what has been transferred is zero. After the dissolution, assignment, and assumption the business without its corporation continues operation as a sole proprietorship.
The individual owner files a Chapter 13 bankruptcy (assuming he is under the debt limits). The former business creditors are listed along with his personal consumer debt. He pays the business creditors and consumer creditors his available cash flow for five years. During the five year plan the owner continues business operations as a sole proprietorship. At the end of the five year plan, any unpaid business debt is discharged. The debtor can then create a new business for prospective asset protection and contribute the business assets to the new company.
I have not yet tried to apply this Chapter 13 strategy for any of my clients. I expect many businesses will have debts in excess of Chapter 13 debt limits. It will be interesting to see if the plan works or if there are unforseen pitfalls.