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.
This may appear to be a good business plan it does not help as well the owner but it will still keep the company but of course a strategic plan into having this business afloat still needs to be done and check.There is the time of falling but once a new light shows that would then signal again a new beginning.
It would take a very diligent and disciplined person to pull that plan off. Would they listen to you? Would they stick to it?
Thank you for sharing this information. The information was very help and saved a lot of my time.