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Bankruptcy, Balance Sheets, and Fred

By Russell A. DeMott, Charleston Bankruptcy Lawyer

Filing bankruptcy if you have an interest in a corporation or a limited liability company requires some extra work for you and your bankruptcy lawyer.  Preparing an accurate balance sheet listing the company’s assets and debts is a critically important part of this process.

As we’ve written before, just because you file bankruptcy doesn’t mean that your limited liability company or corporation should file bankruptcy.  (See “Is Bankruptcy the Right Option for My Business?”, Should Your Company File Chapter 7 Bankruptcy?”, and “Should a Corporation or LLC File Bankruptcy?”)

First things first…What’s Fred got to do with this?

It might seem silly, but whenever I explain how limited liability companies or corporations (we’ll just call them the “company” or “companies”) fit into consumer bankruptcy, I always refer to the company as “Fred.”  That, in turn, gets me puzzled looks from clients or some poor new staff member.  I then explain that the company is another person just like a guy named Fred.  Mary, the debtor, isn’t her company, and her company isn’t her.  They are two different people under the law.

And this leads us to another issue…

Once you understand the company is a different person under the law, you should realize that your interest in Fred–err, the company–must be assigned a value.  What’s he worth?  You own stock in him if he’s a corporation, and you own a membership interest if he’s a limited liability company.  Your bankruptcy estate consists of all your “legal and equitable interests.”  This means everything, so you must list your interest in your company in your bankruptcy.

What’s Fred Worth?

This is where the balance sheet comes in.  Let’s say you are the sole owner of a company called Anytown Plumbing, L.L.C.  Your bankruptcy lawyer will need a list of assets and liabilities (debts) of Anytown Plumbing, L.L.C.  It might be something like this:

Assets:

4 computers and peripherals: $1250

furniture: $2000

accounts receivable: $10,000

tools: $1500

supplies: $2000

Total Assets=$16,750

Liabilities:

payroll taxes: $2,000

credit lines: $15,000

company credit card: $10,000

Total Liabilities: $27,000

This tells us that liabilities exceed assets by a significant margin.  Your bankruptcy lawyer would then list the assets and liabilities of the company in your bankruptcy and state that your interest in Anytown Plumbing, L.L.C. has no net value because the liabilities exceed the assets.

Your lawyer needs YOUR help to do this!

Your lawyer doesn’t magically know the assets and liabilities of your company.  She needs your help with this.  In fact, even your accountant won’t have all of this information.  So it’s important that you understand why this information is needed and that only YOU can supply it.  Don’t expect your lawyer to make up this information.  It must be accurate! Your bankruptcy trustee will ask you how you valued your company, and if you can’t explain how you determined the value, this may hurt your case.

But what about my IBM stock?

Note that if you own publicly traded stock, this doesn’t apply.  For example, you must list your interest in IBM, but all you need to do is know how many shares you own on the date you file bankruptcy.  If you file today and own 10 shares of IBM, we look up the price at which IBM is selling and simply multiply that price by the number of shares.

Today, IMB is trading at $146.76.  10 shares times $146.76 is $1,467.60.  It’s that easy.

Don’t forget you’ll also have to supply your bankruptcy lawyer with profit and loss statements for the company!

Doing a balance sheet for your bankruptcy attorney is an essential step in preparing to file bankruptcy.  The other step is finding out how much profit or loss the company is generating during (1) the six calendar months prior to your bankruptcy filing and (2) for the year-to-date when you file.  I wrote about this process in “Profit and Loss Statements for Bankruptcy.”

Understanding these concepts is essential to a successful outcome in your bankruptcy case.

Disclaimer: If your name is Fred, please substitute Richard for Fred when thinking of your company.  Because if your name is Fred, well, you really are Fred.

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Full post as published by Bankruptcy Law Network on January 03, 2011 (boomark / email).