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‘Abandoned’ Business Assets in Bankruptcy

It’s a sad truth that many businesses in New York fail, prompting twin chapter 7 bankruptcies for both the business and the owner. The two most common causes of businesses shutting their doors is lack of sales (obviously) and liquidity problems, which usually involve solid sales, but the business nevertheless can’t pay its creditors because some customers still owe it money and don’t pay on time. In business terms, it can’t collect on its accounts receivable.

This is a particular pitfall in the current climate.  Customers of the first business may fully have intended to pay their debts on time.  Now, due to the coronavirus lockdowns, these customers may very well be owed money by their own customers.  Their own customers may not be able to afford to pay them, and so it goes.

In a chapter 7 business filing, as in all bankruptcies, the entity is obligated to list all its assets on its petition so creditors and the trustee know what they’re worth. If the assets have any value, the trustee will take possession, liquidate them, and use the proceeds to pay off the creditors. The more liquid the assets are, the more likely the trustee will claim and liquidate them, so accounts receivable are at the top of the list. Once this process is finished, the trustee will file a final report with the bankruptcy court stating that the assets have been cashed out.

That’s not the only option trustees have, however. The bankruptcy code authorizes the trustee to ‘abandon’ an asset of the estate if it is either “burdensome” or of “inconsequential value or benefit” to the estate (11 U.S.C. § 554). Assets are rarely burdensome, but sometimes they are of so little value that the trustee abandons them, after notifying the other parties and a hearing is held on the matter.

For businesses, this means that the assets return to the owner of the business, and if it’s the business’s accounts receivable, then what happens if there are still debts that the trustee didn’t liquidate? Answer: The owner of the assets is free to pursue those debts.

Now, obviously anything in the accounts can’t be worth a whole lot, but sometimes there are a few debts to be wrung out of old clients. Whether it’s worthwhile to pursue them is obviously a judgment call, but what happens if the owner is able to squeeze money out of the business’s former debtors? If the owner didn’t file a personal bankruptcy, it’s his or hers free and clear. If the owner did file within the last 180 days, however, then the gain must be reported to the bankruptcy court. If the filing occurred after the 180 days, then the owner gets to keep it.

For answers to more questions about businesses in bankruptcy, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy lawyers near me Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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