Bankruptcy - who is the debtor? what is protected?

As we all hear and know, small businesses are the engine of our economy. As a result, there are many different business entity. One of the most common is a Limited Liability Company. This form of business protects the owner like a corporation but allows the owner to operate like a sole proprietor or a partnership. This can create an issue in a bankruptcy.

Image courtesy of David Castillo Dominici at FreeDigitalPhotos.net

The biggest question is who owns the asset and who owes the debt. As an LLC, the company can purchase real estate and equipment. If the LLC owns the assets and the owner owes the debt, the assets may be safe. The reverse, the LLC owes the debt and the owner owns the asset, will probably have the same result. What happens if the company owes the debt and owns the asset? That seems relatively simple; the assets are at risk.

But what can happen is the owner and LLC are so close to being a single entity that the owner fails to recognize he or she is not the direct owner of the company's assets. On the eve of a sheriff's sale, the owner files for bankruptcy protection to prevent the sale of the property.  Unfortunately, bankruptcy will probably not stop the sale. The owner cannot protect the LLC's property by filing for personal bankruptcy.

While this may seem obvious to some, this was an actual case discussed at a session in a recent bankruptcy conference I attended. One of the panelist was a creditor's attorney executing on a judgment. The owner filed for bankruptcy to protect the LLC's real property from a sheriff's sale the day before the sale. The property was sold the next day at the sale.

If a business owner is dealing with debt and bankruptcy seems to be an option, he or she must fully understand the ownership of the property at risk. And ownership may be more complex than anyone realizes. Failure to fully  understand ownership could result in an unsuccessful bankruptcy.

If you want assistance, legal representation, or just want to know more about Mark Medvesky or our firm of Wells, Hoffman, Holloway & Medvesky LLP, check out our website at www.whhmlaw.com.

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