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CORPORATE ASSETS IN PERSONAL CHAPTER 7 BANKRUPTCY: AN EASY VEIL TO PIERCE
An individual or personal Chapter 7 bankruptcy is a Chapter 7 proceeding filed by a human being to rid him- or herself of personal debt.
A common misconception in Chapter 7 bankruptcy is that, if assets are moved into the ownership of a corporate entity they will be sheltered from the Chapter 7 Trustee.
The Chapter 7 bankruptcy process is known as a “liquidation” bankruptcy because, on one hand, the person filing it “liquidates” or discharges all of their dischargeable debt without being required to repay any of it to creditors.
It is also, on the other hand, called a “liquidation” bankruptcy because, in some circumstances, the person’s assets are seized by the Chapter 7 Trustee assigned to the case by the US Bankruptcy Court and sold off in order to generate a pool of money with which creditors will be repaid at least in part.
This Chapter 7 asset liquidation process is discussed in detail here.
Your wish to preserve your assets in opposition to the hope of the Chapter 7 Trustee that he or she can liquidate your assets is the primary tension in the Chapter 7 bankruptcy process. It is why Chapter 7 bankruptcy is an adversarial legal process and not mere form-filling.
All of a person’s personal property, or claims to payment or property, even if not certain to occur, are assets of the so-called Bankruptcy Estate over which the Chapter 7 Trustee holds authority and are subject to liquidation.
What about assets owned by LLCs or other corporate entities in which the person filing for bankruptcy has full or partial ownership interest?
A common misconception in Chapter 7 bankruptcy is that, if assets are moved into the ownership of a corporate entity, whether LLC, corporation, or trust entity, they will be sheltered from the Chapter 7 asset liquidation possibility.
Even outside of bankruptcy, there is a process of attaching assets of a corporation for payment of personal claims or damages called “piercing the corporate veil.” It is rooted in the English Common Law in which our legal system in the United States finds its origin.
Typically, piercing the corporate veil requires a plaintiff to prove to a court (state or Federal) that a corporation holding assets is a mere sham, a construct serving no other purpose than to hide personal assets which might be seized by the corporate owner’s creditors.
This is, in state court, not always so easy for a creditor to accomplish.
For a Chapter 7 Bankruptcy Trustee within the bankruptcy process, it is not that difficult.
CORPORATE ASSETS IN CHAPTER 7 BANKRUPTCY: THE POWERS OF THE CHAPTER 7 TRUSTEE
It is true that only the assets of the individual debtor filing a Chapter 7 bankruptcy are available for liquidation. Thus, assets solely owned by the debtor’s spouse, for example, are not subject to liquidation.
An individual’s personal Chapter 7 Bankruptcy Estate would also not contain assets owned by a corporation.
However, an individual’s ownership interest in a corporate entity is an asset of the Bankruptcy Estate and subject to liquidation.
When that corporate entity is solely, 100% owned by the debtor, it is entirely within the Bankruptcy Estate and subject to an enormous amount of scrutiny by and the control of the Chapter 7 Trustee.
The Chapter 7 Trustee has the ability to “avoid” or unwind transfers of cash or property from the individual, human debtor to the corporate entity. Thus, a vehicle purchased by a debtor and re-titled to the corporation for no or low value, will be in danger.
Likewise any other property or cash.
Additionally, the Chapter 7 Trustee has the ability to “stand in the shoes of the debtor” and operate the business for a limited time, to the extent that it is in the best interest of the Estate and its creditors.
This is fuzzy language originating in the Bankruptcy Code (and paraphrased here), but, although it seems limiting, allows the Chapter 7 Trustee a great deal of latitude.
The Chapter 7 Trustee can operate the business, write corporate resolutions, pursue creditors of the corporation for collection, and, yes, liquidate corporate assets.
The power to pursue assets goes both ways. When a debtor has used, especially, a single-member LLC as a sort of piggy bank, commingling cash and assets between the corporate entity and him- or herself personally, this “standing in the shoes” power likewise gives a Chapter 7 Trustee the ability to collect on loan from the corporation to others—including the debtor.
And the longstanding “piercing the veil” doctrine remains in play as well.
CORPORATE ASSETS IN CHAPTER 7 BANKRUPTCY: WHAT CAN BE DONE?
The bottom line is that the vast majority of Chapter 7 cases and single-member LLCs and other corporate forms—especially those of the “personal service” variety—have no asset value above and beyond that which an experienced Michigan bankruptcy attorney can legitimately protect utilizing the available exemptions (protections) from either the Bankruptcy Code or Michigan state law.
However, there are exceptions—and a debtor cannot exempt property recovered by a Chapter 7 Trustee through avoidance (fraudulent transfer unwinding) actions.
The best course of action you can take if you are a business owner or investor and are considering filing for Chapter 7 bankruptcy is to meet with an experienced Michigan bankruptcy attorney to discuss your options.
It may be that you have run your single-member LLC in a squeaky clean fashion from an accounting standpoint, have commingled nothing, have transferred no cash or assets between yourself and the LLC, and don’t have any property in either location that a Chapter 7 Trustee could liquidate and generate any reasonable amount of money from.
In this case, a Chapter 7 may remain a viable path forward for you.
If there are any issues and you do wish to continue operating your business, it is likely that a Chapter 13 bankruptcy will be a better option for you.
In a Chapter 13 bankruptcy, no assets are liquidated, and the statutory presumption is that a corporate entity owned in full or in part by the filing debtor will continue to operate in order to generate the income necessary to fund the Chapter 13 Payment Plan.
CORPORATE ASSETS IN CHAPTER 7 BANKRUPTCY: THE BOTTOM LINE
The bottom line is that you need the advice of a highly experienced Michigan bankruptcy attorney to assist you with your bankruptcy filing if you are a business owner or you risk losing your business entirely.
Attorney Walter Metzen has represented thousands of consumers in Chapter 7 and Chapter 13 bankruptcy cases in Michigan. A Board Certified Bankruptcy Expert, Attorney Metzen has dealt with bankruptcy and business ownership issues for over 30 years.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing a Chapter 7 or Chapter 13 bankruptcy in Michigan.
