In brief, it means that the debtor is requesting that the court compel the trustee to abandon the asset from the Bankruptcy estate. It does not mean that the debtor is abandoning the asset. Once the motion is granted, the asset is no longer property of the Bankruptcy estate. (Or as people often like to say, the asset was taken out of the Bankruptcy.)
Now, what does all of that mean?
In some cases an attorney or the trustee will suggest or encourage you to file a motion to compel the abandonment of an asset of yours. This is common practice if debtors own an interest in a business.
For purposes of this article I will focus on the scenario of the compelling the abandonment of a business in the case of Chapter 7 Bankruptcy. Similarly, the issue with compelling the abandonment of businesses in Chapter 7 cases is most common with sole proprietorships. If the business is a corporation or LLC, this is often not an issue that arises. So for this scenario I will focus on sole proprietorships.
First, let me cover some basics of Bankruptcy estates and trustees.
When you file Bankruptcy, all of your assets (everything you own, have an interest in, or have a right to) are included in your Bankruptcy. This is referred to as the Bankruptcy estate. In this blog post we are focusing on why you might want to file a motion to compel the abandonment of a business. If you are wondering more about whether or not you can keep your stuff, you can read more here.
The court assigns a trustee to oversee your case. The trustee supervises and manages your case (the Bankruptcy estate). As related to this discussion, this basically means that they are responsible for and can control or manage your assets.
Generally debtors do not see much of this control administered other than the trustee asking for documents, reviewing through the information in the debtor’s petition, asking questions and essentially just reviewing through their case.
If a debtor has an asset such as a business, this power can become more evident. This is when the motion to compel abandonment comes into play.
Not often does a trustee actually walk in and take control of a business, but they could. A trustee could also walk into a business and close it down. Not only that, but a trustee could be held liable (responsible) if anything should occur while the Bankruptcy is open.
For example, imagine the debtor operates as a sole proprietor running a restaurant. If someone should get sick from the food, choke on a bone, or fall on the premises while the Bankruptcy is open, the Bankruptcy estate and by their legal position the trustee, could potentially be held responsible/liable for that injury. The trustee is legally managing or administering the Bankruptcy estate which includes that business, which is why they have control or could be held liable.
In our example we will also imagine that the restaurant is completely underwater. The restaurant business owes people or businesses far more money than the business is worth. In that scenario the trustee is not interested in the business as an asset that could be sold to pay off creditors.
In the case of a business, such as our restaurant where the business is worth less than what is owed, the trustee would likely not want to sell the asset. Instead, they just want to make sure that they could not be held liable for anything that should occur while they are overseeing your case and while your case is open. They also probably just do not want to have to operate the business. The business is not worth anything to the Bankruptcy estate (because in our example it was underwater).
In some cases the trustee will only check that you have insurance, and maybe ask that they be added as an additional insured. They will then let you continue to operate without any further action.
Many trustees, however, will take a step further and will (if you have not done so already) request that you close down the business while the case is open, or file a motion to compel the abandonment of the business.
Now we are getting to the point of this post. What exactly does abandonment of the business mean? It does not mean that you, the debtor, are abandoning the business.It means that the debtor is requesting that the court compel the trustee to abandon the Bankruptcy estate’s interest in the business.
Many people at this point ask why the trustee is asked to abandon their asset when it is their asset. The reason the trustee has to be asked to compel the Bankruptcy estate’s interest is because the trustee is managing the Bankruptcy estate. The Bankruptcy estate is comprised of your assets.
And in our example the debtor wants to remove the business from being property of the Bankruptcy estate. Since the trustee is responsible for managing the Bankruptcy estate, they are the proper person to request to abandon or remove the business from the Bankruptcy.
The trustee can object to this request, and sometimes that does happen. However, in a situation such as our restaurant where the trustee may have even requested the motion, and the asset has no unprotected equity, they will likely join the action. This means that they will file a response with the court saying that they have no objection to the motion to compel the abandonment of the business being granted.
Beyond the trustee joining in the action, in order for the court to grant the motion to compel the abandonment, the debtor must first prove that the asset/business has inconsequential or no value.
Once the motion is granted, the debtor can continue business as normal. The trustee is no longer overseeing the business, and the business is no longer property of the Bankruptcy estate.
So to summarize, a motion to compel abandonment is basically removing an asset from the Bankruptcy. In the case of businesses, filing a motion to compel the abandonment of the business allows the business owner/debtor to continue to operate their business during the bankruptcy.
Filing motions to compel abandonment of assets can be thorny issues. Operating or having interests in a business when filing Bankruptcy can also create more complex cases.
Additionally, between the need for motions, proper service and defending the motion at court hearings, I definitely recommend that you seek assistance from an attorney if you do have a business and are intending to file Bankruptcy.
Contact me today to discuss your case!