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Chapter 13 and paying back subcontractors

Ronkonkoma, NY |
Filed under: Sole proprietorship

I have a business that I am looking to dissolve and I owe vendors as well as subcontractors for work they performed for me. I am owed about $80,000 in receivables that I expect to collect most of. I was told by someone that the subcontractors must be paid be first with the money owed to me in receivables under article 3A or I could face criminal penalties. I wanted to know if I should pay the subs back with the receivables first or file the chapter 13 and just list the receivables as an asset that will be used to pay back all my creditors equally over the plan period? I heard you can't give preferential treatment to some creditors over others but is this a special case because they are owed money for work performed on jobs that I am owed money on?

Attorney Answers 5


If you are going to dissolve the business anyway, you could file a Chapter 7 and let the Trustee worry about collecting your receivables and paying your creditors. Essentially that is what a Chapter 7 Trustee will do in an asset liquidation of a business, of course, you won't have control over who gets what, but you wash your hands of the matter--and have no continuing liability.

If you want to do a Chapter 13, which is really a reorganization, not dissolution, it will depend on a number of factors, including your debt limit, your form of corporation and the custom and practice of your Chapter 13 Trustee. Some Chapter 13's will not let an incorporated entity file 13--they will force you into the more expensive Chapter 11 (filing fee alone is $800 and legal fees usually in the thousands.)

Finally, you discussed paying off debts in some type of priority and while this does happen in bankruptcy, the priority probably isn't what you would want. In other words, you can't pay first those people you like more or that you want to continue to do business with simply because that is what you would prefer. Paying debts off by priority requires an understanding of the differences in the legal obligations of the debts. Essentially that is the key basis for priority.

By the way, if you do file a corporate entity in either 11 or 13, you will need an attorney representing you and of course, a corporate resolution to file the bankruptcy in the first place.

Given the complexity of your question and also your financial structure, you should consult an experienced bankruptcy attorney in your area, if you don't know of any, consult:

Good luck,

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The only thing I will add (Mr. Kim covered the issue thoroughly) is that the business cannot file for Chapter 13 bankruptcy. If the business is nothing more than a sole proprietorship, you can file. Talk to a local bankruptcy attorney before doing anything with the receivables.

Mr. Goldstein is a Virginia-licensed attorney only. The information is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation. Answering this question does not in any way constitute legal representation. Contacting Mitchell Goldstein or the Goldstein Law Group does not constitute legal representation, nor is any information you provide protected by attorney-client privilege until otherwise advised.

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if you file bankruptcy with 80k in the bank you will be under the Court's protection as to who gets paid what. I cannot comment on criminal law as that is not my area of expertise, but I believe the issue you are referring to is more in the line of a fiduciary holding money from your customers for services performed by subcontractors.

Many or some times a GC will take the money and use it to pay other bills and not pay the sub. That is when the GC faces liability.

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DO NOT FILE FOR BANKRUPTCY with this much money out there. You are going to give the trustee a fund from which they will go after you. Talk to a lawyer. Also, Chapter 13 would not likely be the best chapter for you as an individual. The corporation must file Ch. 11 or Ch. 7. It sounds like you are under some pressure, but you need to do much better planning before jumping in.

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I am sorry to hear about your situation.

You should contact an attorney to discuss your questions as additional information would be helpful. Why are you filing a 13 instead of a 7?

Our firm has many years of experience in the bankruptcy field.

I wish you the best of luck.

Please remember that I do not normally monitor these questions after I have posted a reply.

Free phone consultation Monday — Thursday 1-5 pm.
Hayley Greenberg
Greenberg & Merola, LLP
Attorneys at Law
521 5th Ave. Ste. 1700
New York, NY 10175
(212) 593-6111, facsimile (516) 887-1720
(Additional offices: Brooklyn, Queens, Long Island)

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