Chapter 7 Risks Everything For Operating Business

padlockShut the business down, the Chapter 7 trustee told debtor’s counsel.

Or get an order allowing continuing operation.

My addition to the litany: bring a motion to abandon.

Why order shutdown?

The debtor was a partner with his parents in a restaurant that they wanted to continue to run.

Yet somehow, no one had considered the position of the bankruptcy trustee who is charged with managing the assets of the business when one partner filed Chapter 7.

Chapter 7 is, after all, a liquidation proceeding.

Continued operation involves continued expense, continued regulatory compliance, continued interface with the consuming public.  All elements that could go wrong from the perspective of the trustee, charged with preserving assets.

It is hard to see that continuing operations is likely to benefit the creditors of the bankrupt partner.

Operation in Chapter 7

A trustee can continue operations.  Note the limitations in the statute:

The court may authorize the trustee to operate the business of the debtor for a limited period, if such operation is in the best interest of the estate and consistent with the orderly liquidation of the estate.

I see “may”, the need for court authorization, “limited period” and “best interest” of the estate.  Lots of qualifiers.

During the 10 years I represented Chapter 7 trustees, I can recall one occasion where we operated a hotel until the pending advantageous sale could close.

Abandon

Debtor’s counsel with the restaurant in the trustee’s crosshairs could consider bringing a motion to abandon the estate’s interest in the restaurant.  We earlier reported here the willingness of my local trustee’s to cooperate with an expedited motion.

The supporting declarations and the approach to the trustee has to show that the business is adequately insured; provide proof of the value of the business or its assets;  and address how operations will be funded while the motion is noticed out.

All of that is time consuming and risks delays or resistance on the part of the trustee or the judge.

Convert

The other option is to convert to Chapter 13.

Chapter 13 explicitly allows continuing operation of a business.  Operation  is the default rather than the exception.

(b) Unless the court orders otherwise, a debtor engaged in business may operate the business of the debtor and, subject to any limitations on a trustee under sections 363(c)and 364 of this title and to such limitations or conditions as the court prescribes, shall have, exclusive of the trustee, the rights and powers of the trustee under such sections.
(c) A debtor engaged in business shall perform the duties of the trustee specified in section 704(a)(8) of this title.
Even if the debtor expected to withdraw from the partnership or surrender his interest in the partnership business, a Chapter 13 would allow the doors to stay open while that happened.

My rule

In my  office, the rule for clients with unincorporated businesses that they expect to continue to run:  incorporate before filing Chapter 7 or file 13.

Actually, I have pitched to clients that resist those choices:  pay me twice the quoted cost of a 7 and we will bring the immediate motion to abandon, with the client assuming the risks that all does not go quickly.

Plan ahead and counsel your clients so you aren’t on the receiving end of a directive to shut the doors.

Related Posts Plugin for WordPress, Blogger...
  • Malcolm Ruthven

    Cathy, I assume you don’t mean this to apply to all sole proprietorship businesses. I often have clients with personal-service businesses with no storefront, for example a consultant. I’ve no problem with those, including one who sold items at farmers’ markets. Do you have a rule for yourself about when you go into the mode described in your article?

    • Cathy Moran

      It’s a continuum in my view. Is there a business premises? Employees? Sales of a product/service with consumer risk? Secured business debt? Vehicles on the road? Each one adds risk for the trustee.

  • http://freshstartsolutions.com.au/ Fresh Start Solutions

    All the
    things you have discussed here are really so important and should be noted.

  • Jon Beck

    Good topic, this can be a trap for the unwary attonrey. I have filed many cases involving sole proprietors. It is up to the appointed trustee if business is to continue. I think having a handyman incorporate just to file bankruptcy is overkill.

    Insurance is usually always required. Accurate disclosure of business assets on the schedules is helpful to the trustee. Immediately upon filing we send a letter to the trustee with proof of insurance and the trustee usually gets right back with approval to operate the business.

  • DocsToWork

    Making oneself a shareholder in a corporation for the purpose of sheilding assets seems like bankruptcy planning.

    How can one avoid scrutiny if questions are asked about the debtors intentions in creating a corporation after he/she has decided to file chapter 7?

    • Cathy Moran

      The point is not shielding assets, it’s allowing the trustee to permit continuing operation of a business that presumably is supporting the debtor.

      Incorporating doesn’t change the balance sheet much at all. If the assets or the business has a value, without the debtor, then the trustee can put a value on it or negotiate with the debtor to purchase it.

      But the reality is that usually the business, without the debtor, has no saleable value. So the point is to protect the estate from liability from continuing operations.

      Also, bankruptcy planning is not, per se, impermissible.

      • DocsToWork

        I see. Exceept there really is no “continuing business” in actuality. It’s a business that was created to avail the debtor to protections that would otherwise be unavailable with the more conventional exemptions.

        This is not an easy concept but you do simplify it. Thank you.

        • Cathy Moran

          It IS a continuing business, it’s just operated in a different form: now a corporation where previously a proprietorship.

          It doesn’t really have much to do with exemptions at all; it’s about enabling continuity.