Author: Andrew M. Thaler
For years I have advocated that everyone, particularly business owners, should make a concerted effort to learn what would happen if a financial disaster befell them or their business. As a bankruptcy attorney I have seen once wealthy individuals and thriving businesses fall on bad times, often due to health reasons, business reversals, and divorce. However, who would have thought that the entire world would be struck with the devastating consequences of the COVID-19 Virus? There is no better example than COVID-19 that a catastrophe can hit any one of us at any time. Sadly, we have only seen the beginning of business failures due to COVID-19. Many closely held small businesses have shut their doors never to re-open. Where does that leave the owners of those businesses? The answer may rest with whether they planned for a financial catastrophe or were just lucky.
Financially successful individuals and business owners do want to think about what might happen if an unfortunate life altering event were to happen to them. It’s like not wanting to spend time and thought making one’s own funeral arrangements. Who wants to focus on negative events, even those that are inevitable like death? But, not planning for what might happen in the future is like not having car, fire or health insurance. One event can financially ruin a once successful person or business. That is why everyone should have at least a modicum of knowledge that could protect assets should a catastrophic event occur.
Simply incorporating a business shields the owners from most personal liability exposure. However most small business owners often sign papers they do not understand. Moreover many do not even keep copies of what they signed for future reference. While it may be difficult, co-signing or personally guaranteeing a corporate obligation should be avoided if possible. All paperwork should be maintained for future reference. Very often clients do not even know that they are personally liable for business debts until they are sued in their individual name.
If married and starting or engaged in a business, consideration should be given whether it is advisable to transfer the marital residence to the other spouse if that person is less likely to be at potential personal financial risk in the future. This assumes a solid marriage and that the conveyance is not a fraud on creditors (which is a whole other article in itself).
If a home is jointly owned by a husband and wife, in New York a judgment creditor of only one spouse is prohibited from selling the marital home to satisfy the debt. However judgments obtained against one spouse and filed with the County Clerk will remain a lien against that spouse’s interest for ten years. The lien can be renewed prior to the expiration of the tenth year. The judgment will also incur statutory interest of 9% a year, a tremendous interest rate in today’s market. When owners seek to refinance or sell their home the judgment will have to be satisfied. In a bankruptcy scenario, (if appropriate) a judgment debtor that owns a house will be able to shield and keep up to $170,825 (in the New York Metropolitan area) from a judgment creditor. The same exemption applies in a forced judgment foreclosure sale. Interestingly some judgment creditors with liens on real property that have a lot of equity and are capable of being foreclosed upon (i.e. not owned with a spouse) are quite comfortable sitting with their judgment knowing that they cannot generate a 9% rate of return on their money elsewhere.
Business owners in distress often sign Confessions of Judgment (usually associated with merchant cash advances) take out home equity loans or grant collateral mortgages on their home to lenders to secure business obligations. This places their most precious asset at risk when other options may have been available to discharge that debt and preserve exempt equity in their residence. Worse is where a spouse, who is not obligated for the debt or involved in the business, agrees to guarantee the debt or consents to placement of a mortgage against their interest in the home.
Similarly, pensions and retirement accounts that are outside the reach of most creditors (some exceptions: IRS debt and domestic support obligations) are often lost by being sunk into businesses destined to fail. An entire lifetime of savings meant for retirement can be lost very quickly if proper planning is not done.
Fiduciary taxes, (sales and withholding) carry personal liability to not only the officers of a company but to those with check writing privileges. These taxes cannot be discharged in bankruptcy.
Sometimes it makes sense to invest one’s personal funds or those of willing family members into a business. Too often those transactions are not supported by proper paperwork and the people the business owner wants to protect the most, including themselves and family members, are not protected at all. Transactions with family members should be documented the same way an arms-length creditor would require. The transaction will then more likely pass muster as a legitimate debtor/creditor relationship, not a gift or a capital contribution. The devil is always in the details. If the transaction is well thought out it can accomplish the intent of the parties and less likely be exposed to outside legal attack when things do not go as planned.
The bottom line is that everyone needs to think about what might happen if a catastrophe arises for them. Consulting with the proper professional can likely lessen the financial damage of an unexpected event.
Simply incorporating a business shields the owners from most personal liability exposure. However most small business owners often sign papers they do not understand. Moreover many do not even keep copies of what they signed for future reference. While it may be difficult, co-signing or personally guaranteeing a corporate obligation should be avoided if possible. All paperwork should be maintained for future reference. Very often clients do not even know that they are personally liable for business debts until they are sued in their individual name.
If married and starting or engaged in a business, consideration should be given whether it is advisable to transfer the marital residence to the other spouse if that person is less likely to be at potential personal financial risk in the future. This assumes a solid marriage and that the conveyance is not a fraud on creditors (which is a whole other article in itself).
If a home is jointly owned by a husband and wife, in New York a judgment creditor of only one spouse is prohibited from selling the marital home to satisfy the debt. However judgments obtained against one spouse and filed with the County Clerk will remain a lien against that spouse’s interest for ten years. The lien can be renewed prior to the expiration of the tenth year. The judgment will also incur statutory interest of 9% a year, a tremendous interest rate in today’s market. When owners seek to refinance or sell their home the judgment will have to be satisfied. In a bankruptcy scenario, (if appropriate) a judgment debtor that owns a house will be able to shield and keep up to $170,825 (in the New York Metropolitan area) from a judgment creditor. The same exemption applies in a forced judgment foreclosure sale. Interestingly some judgment creditors with liens on real property that have a lot of equity and are capable of being foreclosed upon (i.e. not owned with a spouse) are quite comfortable sitting with their judgment knowing that they cannot generate a 9% rate of return on their money elsewhere.
Business owners in distress often sign Confessions of Judgment (usually associated with merchant cash advances) take out home equity loans or grant collateral mortgages on their home to lenders to secure business obligations. This places their most precious asset at risk when other options may have been available to discharge that debt and preserve exempt equity in their residence. Worse is where a spouse, who is not obligated for the debt or involved in the business, agrees to guarantee the debt or consents to placement of a mortgage against their interest in the home.
Similarly, pensions and retirement accounts that are outside the reach of most creditors (some exceptions: IRS debt and domestic support obligations) are often lost by being sunk into businesses destined to fail. An entire lifetime of savings meant for retirement can be lost very quickly if proper planning is not done.
Fiduciary taxes, (sales and withholding) carry personal liability to not only the officers of a company but to those with check writing privileges. These taxes cannot be discharged in bankruptcy.
Sometimes it makes sense to invest one’s personal funds or those of willing family members into a business. Too often those transactions are not supported by proper paperwork and the people the business owner wants to protect the most, including themselves and family members, are not protected at all. Transactions with family members should be documented the same way an arms-length creditor would require. The transaction will then more likely pass muster as a legitimate debtor/creditor relationship, not a gift or a capital contribution. The devil is always in the details. If the transaction is well thought out it can accomplish the intent of the parties and less likely be exposed to outside legal attack when things do not go as planned.
The bottom line is that everyone needs to think about what might happen if a catastrophe arises for them. Consulting with the proper professional can likely lessen the financial damage of an unexpected event.
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