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Why file a Chapter 7 for a Corporation?
Tom had this fantastic example in a post:
I asked this very question of a nice gentleman I met yesterday.
He wanted me to file a bankruptcy petition for his flat puppy corporation.
I pointed out that such a filing would not discharge the debts of the corporation.
He knew that.
I told him I’d have to charge him to file the Chapter 7 for the corporation, and to attend the First Meeting of Creditors with him, and to attend the probable Rule 2004 exam with him if the trustee wanted to know more about the flat puppy.
He knew that.
I pointed out that he’d have to list ALL the debt and ALL the assets, and explain where the assets went if they’re not there, and if he sold them he’d have to account.
He knew that.
I pointed out that such a filing would not discharge HIS personal guarantees.
He knew that.
I pointed out that the corporation does not survive the process; the legislative history says that after the corporate estate has been fully administered, the corporation simply ceases to exist. The legislative history says that’s to prevent trafficking in corporate shells. Whatever that is.
He didn’t know that but wasn’t surprised and didn’t care.
I pointed out that the corporate Chapter 7 filing would not give him as President the benefit of the automatic stay.
He knew that.
I pointed out that he’d have to give the Chapter 7 trustee the unsold pile of worthless widgets in his garage.
He knew that, and said his wife would kiss him the day she could park again in the garage.
So WHY, I asked, do you want to file this corporate Chapter 7?
To make my phone stop ringing, he said.
Well, okay then, I said.
I also pointed out that it won’t make the phone stop ringing entirely, because you may have personally guaranteed some debt.
Yep, he said, but three calls a month beats three hundred calls a month.
I had to agree.
Don’s DIY store chain was probably struggling year-after-year just making ends meet ever since it bought out its largest competitor in the region.
Sometimes management decisions can be catastrophic.
With that one bold (or foolhardy) move, Don’s DIY expanded from a small time do-it-yourself equipment retailer with a couple of stores to a major player in several cities along the West Coast.
The company then proceeded to invest heavily in the transforming of its new stores into its own brand.
Unfortunately, Don’s DIY failed to gain enough consumers to justify its large financial layout in buying and modifying the new stores.
Things certainly started to get out of hand when consumers started complaining on social media that shopping at the new locations was more expensive than when they were owned by their original DIY hardware retailer.
Don’s DIY began reducing staff working hours at first as well as firing some of its employees to try to get back on a more even financial footing but shortly after, it was forced to shut most of its locations, including many of its most profitable ones in San Fransisco.
Bankruptcy accountants say the chain ignored its competition and also failed to prepare for the many choices Californians have when it comes to DIY hardware purchases.
The company was all but shut down shortly after its Chapter 11 bankruptcy filing, although it has managed to maintain an online presence in the space to sell some of its excess inventory.
Given the way the economy has been shaken up, it’s totally reasonable to assume that realtors need to worry. When houses aren’t moving, banks are on the fence about lending and contractors are fighting to stay above water; things look fairly grim for an industry that has been unzipped.
That’s not to say that navigating these rough economic waters is impossible.
Some folks have been able to stay afloat in spite of the problems plaguing their industry, but for many it’s not that easy. Naturally, the question eventually surfaces where people asked if Realtors filing for Bankruptcy are allowed to keep their commissions.
When Tom was asked about Realtors being able to keep their commissions in the midst of their Arizona Chapter 7 Bankruptcy, he replied with the following:
Maybe, maybe not.
The analytical framework is understood by most experienced Arizona bankruptcy lawyers, because a lot of our clients over the last three decades that we’ve worked have been realtors.
Here’s the Reader’s Digest version of the story: maybe you get to keep the real estate commission you receive after you file your bankruptcy, and maybe you don’t.
The statute that controls is 11 USC 541, Property of the Estate. Remember that when any bankruptcy is filed, an estate comes into existence automatically, and the important exception to property of the estate in a Chapter 7 is “except such as are earnings from services performed by and individual debtor after the commencement of the case”.
Courts have held that the earnings exception applies only to earnings generated by services personally performed by the individual debtor post petition, and NOT to invested capital, accounts receivable, goodwill, employment contracts with the firm’s staff, client relationships, fee agreements, and so on.
Cut to the chase: if you did a bunch of work on a real estate deal prior to filing your Chapter 7 bankruptcy in Arizona, and you list your real estate contracts as assets AS YOU ARE REQUIRED TO DO in your schedules, you may:
-get a Chapter 7 trustee who demands 100% of your commissions received post-petition, that were based on pre-petition contracts;
-get a Chapter 7 trustee who understands that a commission that was partly earned pre-petition and partly post-petition should be pro-rated because it’s partly property of the debtor and partly property of the bankruptcy estate;
-get a trustee who doesn’t care what the facts are or the law is, he wants your commissions and he means now.
If you get a smart trustee who understands the law well, or a smart trustee lawyer, there will be a discussion in which In re Wu, 173 B.R. 411, figures prominently.
In re Wu tells us that an “all or nothing” analysis is probably not correct, and that it’s difficult to precisely determine the amounts that are property of the estate, and that legal proceedings to make that determination can take years and cost a lotta dough.
Enter smart trustees and smart counsel for trustees.
Your best friends.
They don’t want to torture you without necessity. They just want to do their job and get the dough that belongs to the estate over to creditors, which means extracting it from you, the debtor.
But if a realtor has not decided to go on vacation for six months prior to filing, which might have the effect of making the means test pretty easy, and letting cases close pre-petition and living off those commissions pre-petition, and then filing a Chapter 7 bankruptcy, the realtor will need to list the outstanding contracts in the bankruptcy schedules as an asset, and take his chances (or, of course, her chances) on the precise nature of the trustee or his lawyer in the case.
The best result that’s available is when the trustee is smart, knows the caselaw, and says if you kept hourly records, we can pro-rate the commission based on pre and post petition hours.
Or if you didn’t keep time records, and there’s clear evidence that you were doing work (your daytimer shows all the meetings you had both pre and post), then maybe you prorate based on the number of days prepetition and post, after the contract was signed.
Recently I watched a smart trustee (who’s also a pretty tough customer) ask a realtor with a smile, “I see that you received a seven thousand dollar commission two days after your filed your Chapter 7 bankruptcy; that was already in the hopper when you filed, wasn’t it?”
The debtor’s lawyer was clueless about the reason for the question, and about what was about to happen.
But it wasn’t good for his client.
If you’re a lawyer and want to figure out how the analysis goes for realsies, just plug In re Wu into fastcase.com and you’ll be able to wander through cases to your heart’s content. And the State Bar of Arizona GIVES fastcase.com to Arizona lawyers for My Favorite Price!
Freedom isn’t free. The price Freedom often costs is too great to ask of any one man or woman, and yet there are those willing to put themselves on the line to ensure we can continue living in freedom.
Our office salutes our American Veterans; valiant heroes who sacrificed everything to preserve the freedoms we hold dear. To our friends, family and proud soldiers serving today and forever we thank you from the bottom of our hearts for honoring us with your stalwart protection and service.
God Bless you and God Bless America.
Rembrandt filed for Bankruptcy when he was fifty.
No one remembers him for that though. Why would you be remembered for it?
Tom shared this delightful snippet on fame and Bankruptcy:
I am reminded that fame is no protection against insolvency. Nor prior success. Nor intelligence. Nor spiritual attainment.
Insolvency happens. Bankruptcy happens. I’ve heard it said that the average American millionaire goes broke four times before he or she gets to keep the dough. And that makes sense to me. Nobody in the United States or elsewhere teaches how to run a business (you hear me, Harvard Business School?).
And running any business becomes more difficult as government dumps additional regulation on businesses. You hear me, Washington?
I didn’t think so.
So who besides Rembrandt filed bankruptcy?
Well, Barnum (but then he merged with Bailey, and became “The Greatest Show on Earth”).
Mark Twain filed for bankruptcy, but he doesn’t really count because he paid everybody back. Nice going, Mark! Ruin it for everybody else, why don’t you!
Mathew Brady, the photographer, filed; and afterwards he reopened his museum. Henry Heinz filed, and afterwards started a new company and also started selling ketchup, so history was made.
Oscar Wilde was the subject of a bankruptcy, and wrote my favorite question about wealth: who, being loved, is poor?
Hershey failed four times and then made it big; Henry Ford failed twice with car manufacturing. Number three was the charm.
Micky Rooney blamed drinking for his money problems (although I’ve known business guys who made their best deals in the drunk tank). Sweet Debbie Reynolds, strong Johnny Unitus, rockin’ Jerry Lee Lewis, studly Burt Reynolds, smooth Wayne Newton, hot Kim Basinger, good ol’ Walt Disney, old Larry King (twice!), and Iron Mike Tyson all filed.
For everyone, there was life after bankruptcy, and for most, huge success.
It’s good that in the United States we have the right to fail and move forward.
Because they don’t teach you how to run a business in school. So typically you find out as you run your business. And sometimes you guess wrong. So you fail.
And that’s what separates Henry Ford and Hershey and Heinz from some of the rest of us.
They were just too stupid to know they were beat.
p.s. I forgot to add: it’s better to be lucky than smart.
Like Gelatin, people look at Bankruptcy and often wonder where it comes from?
The great news, for those curious about Bankruptcy anyway, is that it involves less in the way of hooves and more in the way of legal rights.
When people asked Tom where Bankruptcy comes from, he would say this:
Where does bankruptcy law come from?
Well, it starts with the Constitution.
You can find a load of interesting bankruptcy information here, but you have to read it carefully. Bankruptcy law often looks like it’s written in English.
But it’s not!
Many terms used in the Bankruptcy Code are technical terms of art, and mean different or more specific things than you think they do. To begin to understand the way the Code is structured, it’s a good idea to read the definition located at 11 USC 101 (Definitions) and 11 USC 102 (Rules of Construction).
If you don’t read those first, you’ll read statutes inside the Code and believe you understand them, and you’ll be just plain wrong! Okay, I know that’s strong language for a lawyer, but I hope you get my point.
Inside the statute you will be able to read about some topics that I’ll discuss in more detail in other posts.
For instance, you can read about the Automatic Stay, located at 11 USC 362, which is a primary debtor protection under the Code; it prevents most creditors from continuing the “race of diligence”, which occurs in a pre-bankruptcy situation, where the creditor who moves fastest gets the mostest. The automatic stay comes into existence when the bankruptcy petition is filed, and that’s when the bankruptcy estate comes into existence as well.
The property of the bankruptcy estate is described at 11 USC 541, and it’s a broad description. If the debtor owns mining claims on the planet Neptune, those mining claims are part of the bankruptcy estate.
In a Chapter 7 case, which is the most common sort of bankruptcy filing (there are also Chapter 13s which are payment plans, and Chapter 11s which involve plans of reorganization and are usually for businesses but can be for individuals, and Chapter 12s for Family Farmers), property becomes property of the estate, and may stop being property of the estate under several circumstances.
For instance, the property can be abandoned out of the estate. Property that’s abandoned out of a Chapter 7 case is generally worthless, and the application for abandonment is often filed by a trustee who doesn’t want to be burdened with worthless property in the estate.
Or property can be exempted, which is more common. Individuals have a right to certain exemptions, under a sometimes confusing combination of Federal and State law. You can take a look at 11 USC 522 to start your inquiry.
A nice, straightforward laundry list of exemptions used by debtors in Arizona Chapter 7 cases is located at the website of the United States Bankruptcy Court for the State of Arizona, in the faqs, under Debtor Frequently Asked Questions, item 15. At some point I’ll put it in a format that I can include that list here, but for now, blame it on technological clumsiness and go to that website.
Let’s chat a little about a topic most people aren’t ready to discuss, or simply won’t discuss at all because it’s too weird for them. So I’ll just throw it out there for those of you who need it most:
It’s okay to cry.
Having to weigh options about your financial future is not unlike having your whole world precariously teetering on your shoulders. It hurts, it’s scary and it’s difficult to move out of your comfort zone to the point that you’re willing lean on another in deciding your next move.
That just means you’re human and that you are vividly aware of the seriousness tied to the situation before you.
We’ve been doing this Bankruptcy thing for quite awhile and we’ve helped a lot of people get their lives back under control as a result. No one here is going to judge you or the reasons that brought you to us asking for help because we only care about helping you find a solution.
That’s what we do.
Our aim is to help you find a solution to your problem. Sometimes Bankruptcy might not even be the right tool for the job and we tell you the truth about your situation as long as you are willing to do the homework so we can understand your case and advise you appropriately. We can’t provide a complete answer with only half a question, right?
We’re not a Bankruptcy Mill, we’re here to show you the options open to you and to ultimately relieve you of the debt problems keeping you awake at night. It’s okay to cry when problems pile up around you, but don’t let the despair keeping you from taking action.
If you do cry, we’ll be here with a tissue and ready to help you take that next step forward.
So, I’ll assume you’ve heard about the recent uproar coming out of Hawaii?
If not, let me explain: A family stepped into a Hawaiian Safeway grocery store when the mother grew dizzy from hunger, being hungry and pregnant she tore into a pair of sandwiches while shopping in the store with the intention of paying for them on the way out.
After racking up $50 worth of groceries in the store the couple forgot about the sandwiches, the management watched the in-store consumption of the sandwiches and arranged for the Police to nab these customers as they left. Nab them they did, but not before taking their child away to be put in the care of the state while both parents spent the night in jail.
For the record, the sandwiches cost $5 apiece, making five dollar footlongs look real good by comparison.
So at the cost of $10, Safeway had paying customers arrested, their child taken and is looking down the barrel of a lawsuit so spectacularly explosive that you can feel them bracing for the financial blow. All this for $10 worth of Sandwiches it’s said they weren’t even confronted about before being arrested.
While Safeway may not need to file Bankruptcy right now; it certainly could not hurt to explore some options along those lines.
There’s a sports team called the Dallas Stars. The Dallas Stars are about to file a “pre-pack” Chapter 11 Bankruptcy in Delaware, according to the scuttlebutt. But the tuning isn’t fine enough yet, so they’re holding off the filing until the tuning is fine enough. Do you think that the Dodgers have started a trend?