Expert: Mark J. Markus- California Bankruptcy Attorney - 12/21/2009

Question
I purchased a buisness in Aug 2006, three years later sales have been dropping ever since.  The seller took back a huge dollar amount 150,000 and the bank loan is 300,000.  My wife and I were going to declare chapter 7 just to get rid of 150,000 as his lawyer never filed a UCC against my wife and I.  After preparing to do this we discovered that all buisness assets were sold to my wife and I and  not transferred to  my corporation and they never filled UCC against my wife and I therefore they are also unsecured creditor.  They are claiming reformation, will this arguement work?  What would be the worst case if we file? The sellers attorney drew up bill of sale and presumably never looked at by bank, this is a SBA loan and my guess is there guarnte is worthless becuase of no due diligence.  Our total assets are under the exmption level so its a no asset 7 but I just need advice on the bank and what they can do.  We are creating a new corp as of Jan 2 and moved all assets into it as of that date.  We have not paid loan in 5 months and they have not filed anything as to default and they would not take a settlement offer.  

Answer
There are a lot of different issues here, and you need to consult with a bankruptcy attorney in your area for more complete examination and analysis of your situation.

That having been said, if I am understanding this correctly, you stated that you and your wife currently hold among your assets all of the assets that you thought were part of your corporation.  You also state that your state's exemptions are enough to cover all your assets including these "business" assets.  I find that unlikely unless these assets are truly almost worthless, but I will take your word for it.  If true, then filing a chapter 7 case now should prevent the seller from subsequently taking a security interest in your assets, and would discharge you of an personal obligations on the debt (unless they proved that you incurred the debt through fraud or one of the other discharge exceptions....for more on this see http://www.bklaw.com/discharge.html)

You CANNOT move the existing assets into a new corporation unless you SELL them for fair market value.  If you simply transfer them without receiving equivalent value, then your creditors can sue the new corporation to recover the value of the transfer, and it could also be grounds for denial of a discharge of the debt in a bankruptcy case.

http://www.bklaw.com/