Keeping a Business in a Chapter 7 Bankruptcy in Arizona, Part II

This issue will provide a ton of sequels, because every small business situation is totally different.

Kinda like snowflakes.

Today's lesson, however, will be brief.

In today's variation, the small business owner, still a haircutter, has a tiny sub S corporation, and owns 100% of the stock in that corporation. No employees except the debtor.

So if she wants to continue cutting hair at the same place, under the same corporate umbrella, with the same phone number, and the same name, that MIGHT be a doable project. Here's how: the minute the filing happens, the debtor, though counsel, files an application to abandon the stock in her tiny business as being burdensome and worthless to the bankruptcy estate.

Now, if there's a debt load of $10,000 in the corporation, mostly from the lease, the trustee should (no guarantee) take a look at the $300 replacement value of combs, mirrors, telephones, signage, carpets, and half-empty cans of hair spray, balance that against the $10,000 owed by the corporation, and then agree that there's no reason to object to the abandonment of the stock from the estate.

The stock then flies out of the estate, into the waiting hands of the debtor, and the debtor now gets to run the corporation just as though she (the individual debtor) never filed a bankruptcy.

Sounds simple.

If only it were.

First, this works much, much, MUCH better if the corporation has gone dark (no business being done, at all) prior to the filing of the individual bankruptcy. It muddies the water no end if the business is being run after the filing, because then the poor trustee has to consider going concern values, and who owns the money being generated inside the corporation, and a lot of other arcane legal issues.

If the corporation has cooperated by going dark, the analysis is much simpler for the trustee.

And we don't want, ever, to confuse or anger the trustee. A happy trustee is a beautiful thing.

Note: if the trustee objects to the abandonment of the stock, everybody gets to talk. Then the debtor may or may not decide to make some offer to purchase the stock.

Or the debtor will decide to set up shop down the street, with a new set of combs and clippers that she bought with dough from dad.

See? It's all simple, but it's never easy.

And worse, there's no way to predict which way the trustee will jump on the application for abandonment.

That's why there has to be a plan "B", and a plan "C", and a plan "D", fully formed and ready to go PRIOR to any bankruptcy filing.

Because all of the trustees are actual, factual humans; and as different as snowflakes. Ditto the Bankruptcy Judges.

And Judges differ in their opinions. You heard it here first.

And that brings us to my next area of interest: when Judges don't agree, what's the right answer?