How can I protect inheritance money in a bankruptcy situation

September 19, 2014 6:36 AM

Our business is not doing as well as we hoped and we're considering closing it. The problem is that we're in a 5 year lease and have 4 years left. I confirmed with our lawyer that despite our business being an LLC, we are personally guaranteeing this lease. From what I understand, the only way to get out of a business lease like this is to declare personal bankruptcy. The only asset we have (besides the equipment, etc in the business) is a small inheritance. I don't want to lose that.

I'm looking for some advice on what I can do to NOT lose that money. From what I understand, I can only move $5000 of it per year into a protected retirement account, so that won't help. Can I gift some of the money ($13k/year max, I believe) to family members?

If there's no way to protect this money, our only option is to just bleed this account slowly while our business limps along and I'd rather not do that if there's a chance we can protect that money.

I'll be talking to our lawyer shortly, so I know I'm not getting real legal advice from all of you. I'm just hoping to hear some anecdotes from other people who have lost their business and NOT lost the rest of their assets as well...

posted by SheIsMighty to Work & Money (19 answers total)

IANAL but I'm not sure that you want this question out there under your own username. A creditor might see this as a signal of your intent to fraudulently convey your assets.
posted by mullacc at 6:41 AM on September 19, 2014

I'd prefer not to do anything fraudulent. I'm hoping for some legal way of doing this.
posted by SheIsMighty at 6:47 AM on September 19, 2014

Can't the property be leased to some other business?
posted by eas98 at 6:49 AM on September 19, 2014

Years ago I worked for a startup, and we had the opportunity to get a great office space. We wanted it for a variety of reasons, but it was significantly larger than we needed at the time (and more than we wanted to pay). We got it, then we got a couple other smaller companies who needed space, and let them work out of our office and pay us for the space/materials. Something akin to a shared office space that people rent out in cities, but with a bit more of a commitment from the incoming org. It worked out really well for us, and for them.
posted by NotMyselfRightNow at 6:54 AM on September 19, 2014

Why not first try negotiating with the lessor? If it's already clear to you that you simply won't be able to continue with the lease you should meet with the lessor, explain that, and see if you can negotiate an exit. That frees up the space to be re-leased to another business, and everybody wins.
posted by mono blanco at 6:56 AM on September 19, 2014

So you should really look deeply at your lease yourself, in addition to talking to your lawyer.

There's a big difference between a "good guy guarantee" and a personal guarantee. In the former, your LLC would *not* be on the hook. This will be expressly stated in the lease.

You also need to look at your rights to sublease as declared in the lease.

If you don't have these express rights as stated, or if those rights aren't denied, you do have some options.

That being said, even if you don't, your landlord may be amenable to making arrangements. Declaring bankruptcy is a massive and troublesome move to deal with this.

A lot depends on where you are geographically as well. In NYC, for instance, your landlord right now would be (eventually) thrilled to have you skip out, because right now in this insane market, s/he can easily get a new tenant at a higher asking rent.

In *general* most landlords would rather have an active tenant rather than a lawsuit. (Sadly that is not always true.)

If you would like me to take a look, please memail me.
posted by RJ Reynolds at 6:56 AM on September 19, 2014

You may be able to sub lease the property. Some landlords spoil let you out of your contact of you arrange another tenant, if your only other alternative is to declare bankruptcy so the landlord gets pennies on the dollar you may find them open to all sorts of compromises. Get your lawyer to go over your lease.
posted by wwax at 6:56 AM on September 19, 2014

Can you find someone to take over your lease? Or negotiate your way out with the lease holder?
posted by J. Wilson at 6:57 AM on September 19, 2014

It it unlikely that you will be liable for the full cost of the remaining four years of rent unless you are in an extremely weak rental market. "...most states require landlords to keep losses to a minimum by trying to rerent the property reasonably quickly. In legal jargon, this is known as the landlord’s duty to 'mitigate damages.' Once the landlord finds a new tenant, you will only be responsible for his loss of rental income during the time period the property is vacant."

IANAL, laws vary by state, and cases vary within state, but this is one of the first things you should ask your lawyer about.
posted by Mr.Know-it-some at 6:58 AM on September 19, 2014

Not good given what you just told us virtually any transfer - even into an IRA is a fraudulent conveyance. Whether your creditors go after it I have no idea. I imagine that will depend on the size of the inheritance, the size of the debt, and if the creditor used those assets to underwrite the original loan.

But I agree subleasing or an agreed breaking of the lease should be your first move.
posted by JPD at 6:59 AM on September 19, 2014

In a good rental market, a lease is an asset not a liability.
posted by 724A at 7:14 AM on September 19, 2014

Not sure we're in a very good rental market... the space right next to us has been vacant the whole year we've been there.
posted by SheIsMighty at 7:17 AM on September 19, 2014

Do talk to a bankruptcy lawyer. While transfers to other people would likely be a problem there may be things you could do with the money that would be strategic, depending on the law of your state and how much time you have to work with. For example, paying off a mortgage vs keeping cash in the bank.
posted by steinwald at 7:22 AM on September 19, 2014

Check your lease. The lease will say a lot more than we can about severability, subleasing, and so on. Beyond that, don't declare bankruptcy until you talk to your landlord with the help of a good lawyer. Everything is negotiable, but you have to know to ask.

Depending on the business in question, you might also be able to find someone to sell the business to. (Unlikely, but possible, depending on the area you're in and the type of business.)

Have you talked with your lawyer in depth, or did you just ask them to verify that you're personally on the hook if you break the lease? If you haven't discussed all the options with them, this is way premature.
posted by pie ninja at 7:37 AM on September 19, 2014

If I were in your position, I would investigate all my options before taking such a massive step as declaring personal bankruptcy. Subleasing, getting someone to take over the lease, talking with the landlord about severing the lease, selling the business, etc. You haven't talked to the landlord yet, have you? The landlord may jump at the chance to lease the property to someone else, or be amenable to subleasing or only charge you a few months' rent to break the lease.

Definitely talk to a lawyer, but don't file personal bankruptcy unless it's truly a last resort.
posted by bedhead at 7:44 AM on September 19, 2014

I can't second what pie ninja has written strongly enough. Every thing is negotiable--you just have to know how to ask (and frankly, that's basically what bankruptcy proceedings are; they just have special bankruptcy code rules constraining them).

Businesses fail and there are a ton of attorneys and other professionals available to identify solutions, suggest alternatives and help negotiate your way out of leases, contracts and other liabilities while retaining as much as you can. For you, this is a one time big burden; for your business attorney and almost certainly your landlord, this is business as usual.

Try to relax (I know, that's hard); take time to consider your options calmly; get more than one opinion; work through more than one scenario for closing the business.
posted by crush-onastick at 8:06 AM on September 19, 2014

I work for a company that is often in the landlord position in situations like yours and I work directly with leases and tenants. Responders above are correct in saying that your landlord will expect to negotiate with you with regard to your remaining obligations under the lease. What you are looking for is a settlement and release. Technically, legally, you have personally guaranteed four more years of monthly lease payments. But no reasonable landlord will expect to collect all of that if you close your business. You and the landlord will arrive at a lump sum payment or a payment plan, you will vacate the premises and both you and the landlord will sign a release that severs the lease.

Subleasing all or a portion of your space is also an option if that is allowed in your lease.

In a tough rental market, your landlord might prefer to substantially reduce your rent and keep you as a tenant. If you think this might be a bump in the road for your business and that your business could survive, recover and thrive if you could just get through this rough patch, include this option in your negotiations with the landlord. During tough times, we have agreed to (temporarily) slash rents as much as 50% rather than dealing with the vacancy.

In our case, talking to the landlord is not an ordeal. We are reasonable people and not at all scary. Your landlord may vary.
posted by rekrap at 9:45 AM on September 19, 2014

If there's any hope of salvaging the business, you could also ask your landlord about "percentage rent." In most cases, a business would have a set rent amount and then pay additional percentage rent on top of that. But I've also heard of businesses that pay only percentage rent. The landlord wants the property to be occupied, and he/she may be open to re-negotiating the terms of the lease.
posted by Ostara at 12:07 PM on September 19, 2014

For example, paying off a mortgage vs keeping cash in the bank.

You definitely want to consult a bankruptcy lawyer before attempting this. There are special rules concerning the transfer of assets from non-exempt property (property you can lose) to exempt property (property you can't lose) and in particular to homestead property (your primary residence). This is known as prebankruptcy planning and the judge will look at it very carefully. Rules will vary in different states.
posted by JackFlash at 12:59 PM on September 19, 2014