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Chapter 7 and the Individual Business Owner
You start a business operating as an LLC or S Corp. The reason you have chosen to do business as a corporate entity is to protect your personal assets in case the business goes sour. Your lawyer has told you that if you keep your personal assets separate from the business you should be able to shelter them from being attached or taken in the event a suit is brought against the business.
As a start up business, you find you can’t borrow money you need to buy merchandise or materials unless you personally guarantee repayment. You are optimistic that things will go well and personally sign for business loans. The protection you thought you were getting from operating as an LLC or S Corp. is gone the second you personally guarantee payment to the creditor. Now you are individually responsible for the bills even though you borrowed the money for the business. Unfortunately, business does not go well and you find you and your company are being sued. Sound familiar? After trying to hang on, you finally can’t take it anymore and sell off the inventory and close up shop. Now what?
Depending on what personal assets you have and your disposable income (money left over after paying your rent, food, clothing, utilities, and other living costs) you may be able to file Chapter 7 individually and walk away from the debts, except for unemployment or other tax or "trust fund" obligations. Because your debts are not consumer debts you do not have to take the “means test” to determine whether you are eligible for Chapter 7, however if you have gotten a new job and your income is over the state median income, you still may be required to file a Chapter 13 repayment plan, though the creditors will likely receive very little.
What about the business? Since it is dead and has no value, any judgments against it are not collectible so you can forget about any suits brought against it by business vendors or lenders and generally have no reason to file bankruptcy for the business.
PERSONAL INJURY CLAIMS AND BANKRUPTCY
BY
Carl Beckwith, Esq.
If you have a personal injury case and significant financial problems, including unpaid credit card bills and medical bills, you may be considering bankruptcy and wondering what will happen if you file. To understand the impact of a bankruptcy filing, here is a little background about the bankruptcy system and how it works.
The bankruptcy “estate” consists of all your assets, from furniture and cars, to potential lawsuits. Personal Injury suits and claims are assets. This means that a claim, whether suit has been filed or not, is considered property of the bankruptcy “estate”. As long as the statute of limitations has not expired, a potential lawsuit is a cause of action that must be listed in a bankruptcy petition even if you may ultimately not pursue it. Upon filing the bankruptcy, you no longer own the cause of action as it becomes property of the bankruptcy “estate”.
It is very important that you set forth the personal injury suit or claim in the bankruptcy petition. Failure to schedule a potential cause of action could result in having the personal injury case dismissed as the Bankruptcy Court could hold that you lack standing to bring the action because of the willful failure to list the claim (asset). You have the duty to amend your petition upon learning of any defects in the petition.
What will happen to the personal injury action after the filing of bankruptcy?
A trustee is appointed in each Chapter 7 or Chapter 13 case to oversee the administration of the assets. In effect, the trustee steps into your shoes for the moment. The trustee has the obligation to examine you under oath and assess the value of the assets to determine whether there is anything available to pay unsecured creditors. Most trustees will consider the right to sue for a relatively small injury (e.g., under $20,000) as being of “inconsequential value to the bankruptcy estate” and will walk away from it or abandon it. If the trustee abandons his or interest in the matter it means it is no longer part of your “estate”, you keep ownership of the claim and you will be free to pursue the matter without further involvement with the bankruptcy system.
If the case has significant value, you should expect the trustee will not abandon the claim and will be involved in the matter. In such case, your personal injury attorney will be seeking appointment as special counsel to represent you in the personal injury claim. Once your lawyer is approved to proceed as counsel, the case will proceed in the normal course in Superior Court rather than the bankruptcy court because a personal injury case is considered a “non-core proceeding “, or one that does not directly involve the bankruptcy code. After the case is settled, the trustee must bring a motion for Bankruptcy Court approval of the settlement.
How do the settlement proceeds get apportioned?
Damages get apportioned as follows: 1) the trustee subtracts his or her commission (it is determined on the total disbursements made by the Trustee to interested parties of the estate, excluding any payment to you, the debtor. The commission rate is: 25% on the first $5,000 distributed; 10% on the next $45,000 distributed, 5% on the next $955,000 and 3% for every dollar distributed in excess of $1,000,000; 2) your lawyer gets his or her fee and costs; 3) the exempted amount (set forth below) goes to you, the debtor; 4) the creditors who have submitted proofs of claim get paid their claims if there are sufficient funds, and 5) if there is any money left over after these payments, the balance goes to you.
What do you get to keep?
There are a number of bankruptcy exemptions that protect your right to compensation arising from a personal injury claim. The exemptions differ depending upon how the damages are characterized. General damages are non-pecuniary (money) and include pain and suffering, disability and mental anguish. Special damages are pecuniary and include financial losses such as medical expenses, property damages, and lost wages. All exemptions applicable can be claimed.
Section 522(d)(10)(C) allows an exemption of the debtor’s right to receive a disability, illness, or unemployment benefit, with no limit on the dollar amount.
Section 522(d)(11)(B) allows an exemption for payments on account of wrongful death of an individual upon whom the debtor was a dependent, to the extent reasonably needed for the support of the debtor and any dependent of the debtor.
Section 522(d)(11)(D), authorizes the exemption of $21,625 of proceeds for a personal injury claim, not including pain and suffering and actual out-of-pocket losses (careful drafting of the settlement papers is therefore necessary). This exemption would apply to permanent bodily injury, scarring, and broken limbs.
Section 522(d)(11)(E) allows an exemption for payments on account of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent to the extent reasonably necessary for the support of the debtor and any dependent.
Lastly, Section 522(d)(5) provides an $11,875 “wild card” exemption that can be applied to any portion of the debtor’s accident claim not exempted under the above sections of the bankruptcy law (or used to shelter other assets).
I hope you find this information helpful and will be glad to answer any questions. Please let me know if I can be of assistance.
Carl Beckwith
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