Small Business Ownership Can Complicate Bankruptcy Filing

Bankruptcy is intended to extend relief to people whose debts have become unmanageable.

Small business owners aren’t excluded, but these individuals must exercise a great degree of caution in proceeding. Business owner finances are sometimes commingled with that of the company, and the involvement of family members can further complicate matters.

It is possible to successfully complete a personal Chapter 7 bankruptcy while preserving the integrity of the business or franchise, but it requires an experienced Virginia bankruptcy lawyer.

In the case of Bank of England v. Rice, the question was whether the creditor bank that had provided loans for farming equipment used in connection with a small business operated by a husband-wife team (the debtors) should be entitled to repossess that equipment or whether it was property of the bankruptcy estate, subject to sale with the proceeds equitably distributed among all creditors.

The husband-and-wife small business owners in this case filed for a joint Chapter 7 bankruptcy, listing in their schedule of property a large volume of grain and equipment that was used in connection with their joint venture.

The venture was named after the two, who each had a 50 percent interest in the company. While operating the business, they received loans not just from the Bank of England, but also from state and federal government agriculture departments.

By 2012, the business was performing poorly, and the couple was deeply in debt – both professionally and personally. By filing for bankruptcy, the couple could absolve themselves of personal and business debt that was weighing them down.

The bank in this case filed what is known as an adversary proceeding. It requested an automatic stay to be imposed on the bushels of rice and the equipment named in the bankruptcy schedule, asserting that it had a secure interest in the property. That is, the bank was essentially saying it had more right to that property than other creditors.

Generally in a bankruptcy filing, all creditors are to be treated equally. However, there are some cases in which the courts will entertain an exception when the party filing an adversary proceeding can prove that the debt owed is not dischargeable.

However, in this case, the trustee challenged the bank’s request, countering that the bank had failed to show why it should be elevated above other parties owed money. Further, there was a time element to the situation because the trustee sought to sell the rice before it spoiled.

At a hearing before the bankruptcy judge, the couple testified that their business and personal assets were “one in the same,” and tax documents supported this assertion, as it had never been registered with their state as a separate entity.

Based on this information, the court found that the joint venture was not a general partnership or other separate entity, but rather owned by them individually and, as such, should be included in the bankruptcy estate.

For the bank that had filed the adversary claim, that meant that the property would be sold by the trustee, and the proceeds divided among the creditors.

Not all business owners are going to want to include their company in a personal bankruptcy filing. In fact, there are solid reasons for keeping the two separate. Whether that is a feasible option is something that will have to be answered in consultation with an experienced bankruptcy attorney.

Contact the Bankruptcy and Debt Relief Law Firm of Harris S. Ammerman. In Washington, D.C., call (202) 638-0606. In Maryland, call (301) 890-4500. In Virginia, call (703) 550-7030.  

Harris Ammerman
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