6 Points about What Happens to Recovered Business Assets in a Personal Bankruptcy

Some, but not all Las Vegas bankruptcy cases involve ownership of small businesses. The business fails, files Chapter 7, and the owners of the business file Chapter 7 bankruptcies as well. These types of situations are usually significantly more complex than the common consumer bankruptcy. One thing that can happen is the bankruptcy Trustee can elect to abandon some of the business’ accounts receivable. Obviously, the business’ owners can still collect that revenue, but since they’re in bankruptcy too, what happens next?  Six things:

  1. The debt to the corporation becomes an asset to its owners. Moreover, contrary to what one might expect, bankruptcy doesn’t automatically dissolve businesses, they can be going concerns after bankruptcy if the owners elect to maintain them.
  2. If the corporation manages to collect on the debt, the owners can distribute the proceeds among themselves, even though they are in bankruptcy personally.
  3. What happens to the money depends on where the owners are in their own bankruptcies. If they are about to file in Chapter 7, the income will count towards the means test, and it may throw them above the median state income, requiring them to file in Chapter 13.
  4. If the owner has already filed and receives the income, it’s treated as a windfall, much like inheriting an estate from a deceased relative or winning the lottery. When this happens, the owner-petitioner must notify the bankruptcy court if the windfall occurred within 180 days of the initial filing.
  5. Unless the petitioner can claim an exemption, the Trustee will add the business’ recovered debt to the petitioner’s bankruptcy estate. The Trustee will then distribute it to the creditors. There is a small chance that the petitioner will be able to keep some of it if there’s anything left over.
  6. If the windfall occurred after 180 days of the filing, it will not be included in the bankruptcy estate

These types of situations don’t occur often, but as with all business bankruptcy situations—especially those that involve the owners’ filing as well—an experienced bankruptcy attorney is necessary to navigate the pitfalls, as well as the potential benefits.

For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation by calling us at 702-880-5554.

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