Sole Creditor on LLC Bankruptcy

[DusB]

Jurisdiction

Virginia

Hi All!

I've bolded the most important bits, since I don't know how to write concisely.

I handle collections for a very small financing company (~20-30 active accounts, $750k-$1m total receivables at any given time).

I have one debtor in collections that never showed up for the initial proceedings, and we got a default judgement back in 2020. Since then, it's been a lot of back-and-forth trying to get him to chip away at the balance. Sometimes he is communicative and seems honest, but he hasn't been able to stick to any payment arrangements we have discussed over the course of collections.

The judgment is against the LLC, and it's a 1-man shop that doesn't carry any assets that we were able to go after. (I don't typically go directly after assets, anyways. We deal with small businesses, and I have always found it successful to deal with people directly, be fair with them, give them a lot of time, and they usually pay it off).

I summoned him recently for a follow-up interrogatory, and he explained he is planning to file for bankruptcy and shut down the business permanently. I haven't had to deal with a bankruptcy case, yet, so I don't know much about it.

He explained that we have the only outstanding debt against the business. We finance his insurance, so technically it was a secured debt at the time, but that collateral expired with the original term of the loan years ago.

My understanding with personal bankruptcy is that the debt is typically restructured, and lower priority creditors lose out, while higher priority creditors end up settling for a portion. But, if we are the only creditor, and we've demonstrated a willingness to take very small payments over a long period, what avenue does the law provide for him to walk away from the debt?

If he has been operating during periods that he wasn't making payments, is there an precedent to pierce the veil and make him personally liable for any of the debt?

 

[Tax Counsel]

If the judgment is only against the LLC and not the owner of the LLC then you may have a problem if the LLC files bankruptcy. The bankruptcy of a business entity like a corporation, LLC, etc is typically done under either Chapter 7 or Chapter 11 of the bankruptcy code. The Chapter 7 results in liquidation of the business entity and paying out the cash to the creditors in order of priority; something that can be done without filing bankruptcy, so it would not be common to see a small LLC with just one creditor filing Chapter 7. All the creditor would get is the money from whatever was obtained from the selling the assets, or perhaps the actual assets if the creditor is will to take them. You've said the LLC essentially has no assets, which if true would mean that the single creditor of the LLC would get pretty much nothing out of liquidation of the LLC, whether it is done in bankruptcy or outside of bankruptcy.

If the owner guaranteed the debt the owner would also be liable. In that case, the owner should have been sued personally in the same lawsuit as the case against the LLC. If that was not done, the creditor will need to see an attorney who handles collection matters to see if the owner may still be sued on his/her guarantee. One risk her is that with all the time you spent dealing with the LLC the statute of limitations to sue the owner may be expired, leaving the creditor with no remedy against the owner.

If the owner did not guarantee the debt, that was a mistake by the creditor. Anytime a creditor extends significant credit to private closely held business entity like a one person owned corporation or LLC a guarantee of the debt by the owners should be obtained by the creditor as part of the deal. That guarantee puts the owner on the hook for the debt too, and the owner may have assets the creditor could go after to collect. Without the guarantee, the creditor may be left with empty pockets in a situation like this one.

 

[zddoodah]

Please clarify a few things.

First, are you an attorney? I ask because some of the things you mentioned you have done are things only an attorney should be doing.

Second, your employer's judgment is only against an LLC and not also against the individual to whom you've referred in your post. Right?

Third, the individual has informed you that he is going to file a personal BK, not that he's going to have the LLC file BK. Right? Also, he's planning to abandon the LLC. Right?

 

[DusB]

Please clarify a few things.

First, are you an attorney? I ask because some of the things you mentioned you have done are things only an attorney should be doing.

Second, your employer's judgment is only against an LLC and not also against the individual to whom you've referred in your post. Right?

Third, the individual has informed you that he is going to file a personal BK, not that he's going to have the LLC file BK. Right? Also, he's planning to abandon the LLC. Right?

I am not an attorney, but I work with an attorney for court proceedings. I have done some debt warrant fillings for simple cases before on my own, but nothing more a couple thousand dollars.

The judgement is against the LLC.

The debtor indicated he was filing bankruptcy on the LLC and shutting down the business. I told him I thought that may effect his credit personally (and argued it would make sense to discuss a settlement amount with me, instead of walking away from the whole balance), and he argued that wasn't right. That indicates to me he is not considering personal bankruptcy.

 

[adjusterjack]

he is planning to file for bankruptcy and shut down the business permanently.

There is no planning to file, there is only file or not file. Debtors often say that to creditors to scare them into not pursuing the debt.

Until the bankruptcy is actually filed with the court (which you can monitor on PACER) you can continue any collection efforts that you can think of.

 

[welkin]

He explained that we have the only outstanding debt against the business. We finance his insurance, so technically it was a secured debt at the time, but that collateral expired with the original term of the loan years ago.

If all you financed was his insurance, how large is the current debt (principal and interest)?

Explain why you say, technically it was a secured debt.

 

[despritfreya]

OP holds a default judgment against an LLC that apparently has no assets and either has or is about to stop operating. Bankruptcy or no bankruptcy IMHO, the judgment is worthless.

Des.

 

[zddoodah]

The judgement is against the LLC.

The debtor indicated he was filing bankruptcy on the LLC and shutting down the business.

An LLC cannot receive a discharge, so it seems pointless to do that in this case, and I agree with "despritfreya's" comment.

I told him I thought that may effect his credit personally (and argued it would make sense to discuss a settlement amount with me, instead of walking away from the whole balance), and he argued that wasn't right. That indicates to me he is not considering personal bankruptcy.

Unless your employer wants to go to the trouble of trying to amend the judgment to add the individual as an alter ego (or file a separate lawsuit for that purpose), there's no incentive for the individual to pay the judgment. The primary purpose for creating LLCs and corporation is to avoid personal liability for business debt.