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"It's Our Only Source of Income!"

By Joseph McDaniel, Esq.

Sometimes it makes me sad when people make up stories to make themselves feel better. Bankruptcy myths, for instance.

For instance, some people believe that if a house is a "homestead" in Arizona, they get to keep it without making payments on the mortgage.

They don't, of course.

Only a little less sad is this: some folks insist on believing that they should be able to keep their tiny business when they file a bankruptcy just because it's their only source of income.

And, of course, it doesn't work that way. At least, not exactly.

The stock in their tiny, underwater corporation is a non-exempt asset of the bankruptcy estate.

In the past, a bankruptcy trustee might abandon such worthless stock back out of the bankruptcy estate, so that it handed in the lap of the debtor, so he could keep making lemonade at the same stand. Note, of course, that the debt owed by the corporation is still owed by the corporation; the discharge of the owner doesn't discharge the corporation.

These days, it's not likely that a trustee will simply abandon stock in a business that the debtors continue to run; the Chapter 7 Bankruptcy Trustees in Arizona are in the "make me an offer" mode.

And if you want to keep a crummy little lemonade stand after you file your Chapter 7 Bankruptcy in Arizona, you'll make the offer.

Note that you gotta know the territory; a trustee will simply sell the accounts of a dba pool cleaning business, in most cases, because there's a ready market for those accounts. The results could be different if the company is a corporation or an llc, and if it has substantial debt inside of the corporation.

There are about seven different basic patterns that a small business can fall into, for purposes of trying to buy back ownership from a bankruptcy trustee in a Chapter 7. And there's a dividing line for businesses that are still operating, and those that went dark prior to filing the bankruptcy. Obviously, it's easier to buy back a business that's dark, because it's...well, dark! It pretty clearly has no going concern value because it's not going!

And on the other hand, the care and feeding of a tiny business, when the owners have filed a Chapter 7 Bankruptcy, is a post-graduate project.

If it were easy, I guess everybody would be doing it, you know?

Full post as published by Arizona Bankruptcy Attorney Blog on December 10, 2010 (boomark / email).