Tag Archives: assets

Bankruptcy Alphabet - S is Sole Proprietorship

by Jeff Curl

What happens to my sole proprietorship in bankruptcy?

Operating a sole proprietorship is a huge topic in bankruptcy that covers a lot of ground. So let’s take a couple of smaller bites and break down what operating a sole proprietorship means in bankruptcy. We have the pleasure of working with a lot of business owners, and sole props have their own special issues.

 

You Cannot “Just File for the Business”

A lot of sole prop owners in financial distress ask if they can file the business only, and not involve themselves personally. The short answer is no. Having a license from the city to operate as a DBA (doing business as) does not create a separate legal entity. Corporations and LLCs are formed as separate entities under the laws of the state where they are formed. Sole proprietorships do not obtain this legal designation. So if you are John Smith DBA John’s Auto Shop, you will be filing yourself and business as one.

 

Filing a Sole Prop in Chapter 7

It is really important to understand what happens when filing Chapter 7 and you are operating a business as a sole prop. Here are couple of major considerations:

  • When you file Chapter 7, all of your assets go into the bankruptcy estate, including the inventory and receivables of the business. Your Chapter 7 trustee is the trustee of the estate, meaning she or he controls the assets. Understanding the values of your assets is paramount because you are allowed to exempt and keep a certain amount, but it is not unlimited. If you cannot protect everything, the trustee may liquidate your unprotected assets.
  • The trustee is also responsible for any liabilities that arises from the business. Therefore, there’s a risk that the trustee may demand that you cease operating your business while the trustee administers your assets. This varies by trustee to trustee and varies by the business. For example, operating a restaurant as a sole prop has many inherent liability potentials, such as payroll taxes, suits by employees against the business owner, and injuries claimed by patrons. Contrast this with the person working as a consultant with his or her laptop out of their home that raises less concerns from a liability perspective. This is a factually sensitive discussion you should have with your bankruptcy attorney.

Filing a Sole Prop in Chapter 13

There are several distinction between Chapter 7 and Chapter 13 when it comes to operating a proprietorship. Here’s a couple of important ones:

  • The sole proprietor can continue to operate the business in Chapter 13 without the threat of shutdown by the trustee as can happen in Chapter 7. A sole proprietor can also opt to shut down the business before or during a Chapter 13 as well.
  • A Chapter 13 trustee does not liquidate assets like a Chapter 7 trustee.

In other words, Chapter 13 generally offers flexibilities and forgiveness that are not available in Chapter 7. But sometimes one chapter is better than the other, or sometimes you only qualify for one. Operating a business leads to a lot of complicated issues quickly in the bankruptcy world, so please consult with a bankruptcy attorney familiar with these complications.

Photo by elycefeliz

Bankruptcy Alphabet: C is for Cars

Will I lose my car if I file for bankruptcy?

This is probably one of the most common question and concerns I address for clients contemplating bankruptcy. (I’ll also add Harley’s but that should go into its own separate category.) So, what happens to a car in bankruptcy? The answer to this seemly simple question is “it depends.” (I know. We lawyers give this answer a lot.)

Is there equity?

The first thing we need to look at is if there is any equity in the car. Obviously, if the car is owned outright, without any loans, it has equity. In this situation, whether you can keep the vehicle or not depends on what other assets you have.

Let’s assume your vehicle is worth $10,000. Assuming you don’t have a home with equity, we are going to use the 703 exemption. First, we use the vehicle exemption to protect the first $3,300. Then the remaining $6,700 would have to come from the “wild card.”

What if you have too much value in other assets to be able to protect your vehicle? In this situation, we would file a Chapter 13 to protect the vehicle. The other alternatives are to work out some sort of a buy back deal with the Chapter 7 trustee or allow the trustee to sell the vehicle and give you cash for the amount you were able to exempt.

The next situation is where you have a vehicle but there is a loan securing the vehicle. In this situation, we also look to see if there is equity. For example, if your vehicle is worth $13,000 but there is a car loan against it for $10,000, you have $3,000 in equity.

Just like in the example above, we need to use an exemption to protect the $3,000 in equity. Oftentimes, the loan balance is greater than the vehicle value, so there is no equity to protect.

In such situations, the next thing we look at is if you are current on your loan payment. Frequently, you can keep your vehicle after Chapter 7 bankruptcy by staying current your loan - before, during and after bankruptcy.

Protecting your car through Chapter 13

Chapter 13 has additional tools which allows you to keep your vehicle. If you have too much equity in the car, you can repay the unexempt value over a 3-5 years and keep the car. For example, if we can protect everything but $3,000 in equity, that would be approximately $50/month ($3,000/60 months*)

*This is an oversimplified calculations. There are other factors that go into the calculation such as liquidation value and trustee commission.

Additional benefits in Chapter 13

In Chapter 13, there are three additional benefits that doesn’t exist in bankruptcy.

1. Reduction in interest rate. If you have a high interest loan, we can reduce it down to about 5%. Obviously, this can lead to significant savings.

2. Lengthen the repayment term. Chapter 13 allows you to stretch the repayment term to 60 months, hence reducing the monthly repayment amount.

3. Cram down. If you have a vehicle that is worth less than the loan balance, we may be able to “cram down” the loan, provided the loan is more than 910 days old.

 

Other C’s from Bankruptcy Attorneys

Chapter of Relief
Collection Agencies
Competence and Compassion
Conversion
Cosigner
Counseling
Cramdown
Cramdown
Credit counseling
Credit counseling
Creditor
Creditor
Creditors Meeting

Image credit: Leo Reynolds