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Elizabeth Prentice
Elizabeth Prentice, Attorney
Category: Bankruptcy Law
Satisfied Customers: 170
Experience:  Managing Attorney for one of the largest consumer bankruptcy firms in America.
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I am a lawyer myself and do not want to be the proverbial "fool"

Resolved Question:

I am a lawyer myself and do not want to be the proverbial "fool" of a client, so I am seeking input for the following situation.

I am the sole shareholder of my professional corporation (s-corp) organized in 2012. I receive a bi-weekly salary and have one other employee. My withholding tax liability is paid monthly by EFT to the IRS. My practice is a general one with no contingent fee cases. I have a few clients that owe me money but of course there is no guarantee that they are ever going to pay me.

In 2008-2009 I went through serious issues including a foreclosure and defaulting on credit card debt and the suspension of my license to practice(reinstated in 2012). Things now are better than ever but I have approximately $50,000.00 in personal debt including judgments and judgment liens hanging out there that I just can't manage to pay and still exist.

My main issue is that I have a small amount of money in reserve in my office general operating account. This money is what I rely on to ensure that I can meet payroll and pay the withholding taxes on those wages. I know that the money will be a personal asset of the bankrupt estate. Is there an exemption for the liability that I would owe to my employees (including myself) for wages and the taxes owed on those wages. I know that I will probably have to surrender some of the money (total is under 10K) but I would like to continue the business entity. Of course if it is more practical I have no problem winding it up and being done with it. I have no corporate liabilities other than regular monthly expenses such as rent, utilities, advertising, supplies, etc.

Any input would be greatly appreciated.
Customer
Submitted: 8 months ago.
Category: Bankruptcy Law
Expert:  Elizabeth Prentice replied 8 months ago.
I am a bankruptcy attorney and I would be happy to assist you. If you were to file a personal bankruptcy, you are correct that your sole shareholder status would allow the trustee control over the non-exempt assets, such as an operating account. However, wages, salaries, or commissions, including vacation, severance and sick leave owed to employees are considered a priority debt. The caveat is that there is a limit on the priority amount. Pursuant to 11 U.S.C. §507(a)(4), the priority amount is limited to $10,000 for each individual employee that is earned within 180 days before you file your bankruptcy petition or before your business ended, whichever occurred first. Thus, the trustee would be required to pay your employees if you owed them any money. The IRS would also have priority. However, this applies to money owed at time of filing, not after.
Additionally, you could use Ohio exemptions to exempt at least $1,475 in cash either in your personal or business account (using the wildcard and cash exemptions together).
If you went into bankruptcy not paying yourself right before, you could also exempt the wages owed to yourself, as long as the amount was: "If paid weekly, thirty times the current federal minimum hourly wage; if paid biweekly, sixty times the current federal minimum hourly wage; if paid semimonthly, sixty-five times the current federal minimum hourly wage; or if paid monthly, one hundred thirty times the current federal minimum hourly wage that is in effect at the time the earnings are payable, as prescribed by the "Fair Labor Standards Act of 1938," 52 Stat. 1060, 29 U.S.C. 206(a)(1), as amended." See, O.R.C 2329.66(13)(a). You can find all the exemptions at ORC 2329.66.
The accounts receivable are not exempt; however, if the trustee feels the amount is too low to take action on, then they will simply abandon those assets. This is is completely dependent in which trustee you are assigned and how motivated they are to make money. Some trustees won't go after assets if they are under $1,000 and some don't care if it is under $2,500.
Also, don't forget the preference rules regarding the payment to creditors in the 90 days before you file.

I hope my answer has assisted you and that you will leave me a positive rating!
Customer: replied 8 months ago.


Just a quick follow up. If I document that I have paid X amount of wages and as such have Y amount of tax liability owed to IRS, Worker's Comp, Unemployment, etc., that amount would have priority and be required to be provided for by the Trustee, correct? They would either have to leave that amount in the account for me to pay those obligations or take that amount of money and pay the obligation themselves. Since my salary is a bit more than the 30 hour calculation would it be beneficial to simply try to file the case say the day or so after I get paid, thus reducing the amount of money in the operating account and generating priority debt, and then pay regular household expenses such as car insurance, groceries, car payment from my income. My ultimate goal here is to keep the business in tact and discharge my personal debts while not setting the corp (and myself) up for trouble with the IRS. I was considering attempting to negotiate the settlement of these debts but don't think I can handle the 1099 debt forgiveness on my taxable income.


 


I feel somewhat better knowing that, as I read the information that you provided, my tax liabilities will be provided for.


 


One last issue. Should I 'pay up and over' certain things such as utilities (for the corp) so that I have a credit on those accounts? I have no guarantee that I am going to have any paying clients in any month after I file bankruptcy so I would like to ensure that the lights are on and the telephone can still ring. I assume that I can still stock up on office supplies and could purchase certain office equipment that would be exempt under the tools of the trade exemption. All of these I would pay for from the operating account as a regular business expenses.


 


Thanks for your help.

Expert:  Elizabeth Prentice replied 8 months ago.
I am going to answer your questions below in order:
1) If I document that I have paid X amount of wages and as such have Y amount of tax liability owed to IRS, Worker's Comp, Unemployment, etc., that amount would have priority and be required to be provided for by the Trustee, correct?
Yes, but I always think it is better to err on the side of caution and make sure the IRS has been paid enough up front before you file. You don't want to end up with a tax liability later on.

2) They would either have to leave that amount in the account for me to pay those obligations or take that amount of money and pay the obligation themselves.
Correct. Each trustee is different. If you filed, you or your bankruptcy attorney could call the trustee and explain that you plan to continue using those operating account funds to pay the employees (and yourself). The trustee won't be able to make a determination about that operating account until the 341 hearing, he may just want documentation of what is being paid and where the money is going after you file. If you are doing it, it makes less work for him, so some trustees don't mind if you are paying the bills. This is on a trustee by trustee basis.

3) Since my salary is a bit more than the 30 hour calculation would it be beneficial to simply try to file the case say the day or so after I get paid, thus reducing the amount of money in the operating account and generating priority debt, and then pay regular household expenses such as car insurance, groceries, car payment from my income. My ultimate goal here is to keep the business in tact and discharge my personal debts while not setting the corp (and myself) up for trouble with the IRS. I was considering attempting to negotiate the settlement of these debts but don't think I can handle the 1099 debt forgiveness on my taxable income.
Yes, that makes sense. You could definitely file after everyone has been paid, including the IRS. Regular household expenses are not only permissible, but necessary so keep paying those. Particularly, keep the car payments on time if you want to keep it.

4) One last issue. Should I 'pay up and over' certain things such as utilities (for the corp) so that I have a credit on those accounts? I have no guarantee that I am going to have any paying clients in any month after I file bankruptcy so I would like to ensure that the lights are on and the telephone can still ring. I assume that I can still stock up on office supplies and could purchase certain office equipment that would be exempt under the tools of the trade exemption. All of these I would pay for from the operating account as a regular business expenses.
As long as your total office supplies and business equipment (computers, etc) are under the value of the tools of the trade exemption it is fine to use that operating account to buy more supplies before you file. You can use that operating account to purchase business supplies, because you need them.
With regards XXXXX XXXXX there was some law about that I need to double check. Let me get back to you in a minute.
Customer: replied 8 months ago.


Thanks so much. I will await your response regarding the utilities. I usually pay my rent for January in December so as to reduce the taxable income in the account and also ensure that I have enough money to pay it. Any problem with doing that again?

Expert:  Elizabeth Prentice replied 8 months ago.
Ok. Here is the law on paying business expenses, because it intertwines with preferential transfers.
A preferential transfers is if the total cumulative payments made exceeded $600 in the 3 months prior to filing. Below are some examples of payments you might make, so it is not all inclusive but probably the most relevant for your situation.
- Rent for Office - Yes and No (Should the debtor assume the lease, then a payment made to the landlord within 90 days of the bankruptcy is not treated as a preference, since the landlord will be entitled to the payment as part of the assumption of any lease. If the lease is rejected though after you file, the debtor or trustee in bankruptcy may require that the money received within the 90-day period be returned.)
- a personal utility bill,unless the utility company can prove they would have no reason to know she was insolvent, or they recorded a lien against her, or the qualify for an exception as demonstrated in Lightfoot v. MX Energy Electric, Inc. (In re MBS Management Services, Inc.), 690 F.3d 352 (5th Cir. 2012). This is new law and not yet widely accepted.

The following are not voidable preferences:
- a home mortgage or car loan you plan to reaffirm
- Any education loan payments - these are non dischargeable
- your office utility bill, since a payment by an individual debtor in the ordinary course of business is not subject to attack as a preference. So you can pay your utility bills, but try not to go too crazy in the over payment or the trustee will see that something is off. However, now that it is getting colder out, your utilities are going up anyways.

I hope my answers have assisted you and that you will leave me a positive rating!
Elizabeth Prentice, Attorney
Category: Bankruptcy Law
Satisfied Customers: 170
Experience: Managing Attorney for one of the largest consumer bankruptcy firms in America.
Elizabeth Prentice and other Bankruptcy Law Specialists are ready to help you

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