Forming an LLC to protect assets just before bankruptcy?

[kharvel]

What is the name of your state? Colorado

Here is an interesting link:
Colorado ruling on utilization of LLC to protect assets from bankruptcy

The most relevant piece of information is as follows:


Section 7-80-702 of the Limited Liability Company Act requires the unanimous consent of "other members" in order to allow a transferee to participate in the management of the LLC. Because there are no other members in the LLC, no written unanimous approval of the transfer was necessary. Consequently, the Debtor's bankruptcy filing effectively assigned her entire membership interest in the LLC to the bankruptcy estate, and the Trustee obtained all her rights, including the right to control the management of the LLC.

So in order to protect some assets from bankruptcy, I would form a LLC with 2 members: myself and a relative. The LLC agreement would give me control of 95% of the LLC while the remaining is controlled by the relative. I would give most of my assets to the LLC.

Then I would file for bankruptcy. Under the Colorado law (7-80-702), the bankruptcy trustee would be unable to gain control of the LLC because the other member of the LLC would refuse to give approval to any transfer in management control. Thus, even after bankruptcy, I would continue to control the assets within the LLC and the assets would be protected from any bankruptcy proceedings.

My question is whether I can effectively and legally protect my major assets through this strategy when filing for Chapter 13 or Chapter 7 bankruptcy? Thanks.

 

[HomeGuru]

What is the name of your state? Colorado

Here is an interesting link:
Colorado ruling on utilization of LLC to protect assets from bankruptcy

The most relevant piece of information is as follows:


Section 7-80-702 of the Limited Liability Company Act requires the unanimous consent of "other members" in order to allow a transferee to participate in the management of the LLC. Because there are no other members in the LLC, no written unanimous approval of the transfer was necessary. Consequently, the Debtor's bankruptcy filing effectively assigned her entire membership interest in the LLC to the bankruptcy estate, and the Trustee obtained all her rights, including the right to control the management of the LLC.

So in order to protect some assets from bankruptcy, I would form a LLC with 2 members: myself and a relative. The LLC agreement would give me control of 95% of the LLC while the remaining is controlled by the relative. I would give most of my assets to the LLC.

Then I would file for bankruptcy. Under the Colorado law (7-80-702), the bankruptcy trustee would be unable to gain control of the LLC because the other member of the LLC would refuse to give approval to any transfer in management control. Thus, even after bankruptcy, I would continue to control the assets within the LLC and the assets would be protected from any bankruptcy proceedings.

My question is whether I can effectively and legally protect my major assets through this strategy when filing for Chapter 13 or Chapter 7 bankruptcy? Thanks.

**A: nice try.

 

[kharvel]

Re: Re: Forming an LLC to protect assets just before bankruptcy?

**A: nice try.

Meaning?

 

[Ladynred]

Meaning - Any transfer of assets within 1 year prior to your filing for bankruptcy can and will be seen as a fraudulent transfer and you'll be in BIG trouble !

 

[HomeGuru]

This writer is always trying to pull some scam or another.

 

[kharvel]

Meaning - Any transfer of assets within 1 year prior to your filing for bankruptcy can and will be seen as a fraudulent transfer and you'll be in BIG trouble !

Right. Let me rephrase my question.

If the assets were transferred to the LLC at least one year before the filing of bankruptcy, would the strategy work?

 

[Ladynred]

Better be MORE than a year. You see, Trustees CAN go back as much as THREE years on asset transfers if they think something doesn't smell right. I've seen where people WERE questioned for sales of assets 2 and 3 years prior to their filing.

You must have a lot of non-exempt assets to be even thinking about this. Ch 7 is the only danger. CH 13 is meant for protecting ALL assets because you pay back on the debts, not just get them wiped away.

 

[kharvel]

Better be MORE than a year. You see, Trustees CAN go back as much as THREE years on asset transfers if they think something doesn't smell right. I've seen where people WERE questioned for sales of assets 2 and 3 years prior to their filing.

The question is, if the assets were transferred to a LLC, can the Trustees legally pierce the limited liability veil afforded by the LLC if they do not think the transfers were proper in any way?

I would assume that the Colorado ruling on Section 7-80-702 would prohibit the Trustees from piercing the limited liability veil regardless of whether the transfers were appropriate or not in the eyes of the trustees (this is true only if it is not a one-person LLC).

Let me put it in another way: do the Bankruptcy laws pre-empt the LLC laws when it comes to the limited liability protection? The Colorado ruling seems to say NO.

 

[InsulinRules]

>>Let me put it in another way: do the Bankruptcy laws pre-empt the LLC laws when it comes to the limited liability protection? The Colorado ruling seems to say NO.>>

Actually, Kharvel, the ruling says MANAGEMENT, not ownership, meaning that the trustee could not participate in the actual day to day affairs; as a limited partner it would be entitled to any benefits.

Under your scenario, you and your friends would be managing the assets for the benefit of the trustee and your creditors. Additionally, the trustee would get 95% of the economic benefit...and your friends might just say, "Hey! Trustee we'll buy you out! Here's 3 cents on the dollar!".

Second, since you no longer have ownership in the LLC, what part of CO law says that you would still exercise membership control?

 

[kharvel]

You are correct regarding the management of the LLC rather than the ownership. I think the whole point of the exercise is to prevent any assets from being liquidated to meet trustee obligations. Since the trustee/creditors would have only a passive economic interest in the LLC, they would not be able to liquidate the LLC assets to meet obligations. I doubt that the trustee or the creditors would be interested in sticking with the LLC for the long term and recovering their money through the passive economic benefits accordingly, especially if the LLC assets are non-performing and/or cannot be liquidated immediately.

Thus, in such case, the trustee would be far more amenable to a negotiated buy-out that heavily favors the individual in bankruptcy. As you said, my friend/relative can offer the trustee a buy-out offer of "3 cents on the dollar".

Leverage is the name of the game and I believe that a manager-managed LLC with at least 2 members affords enormous leverage over the trustee and creditors in the event of personal bankruptcy.

 

[kharvel]

Second, since you no longer have ownership in the LLC, what part of CO law says that you would still exercise membership control?

That is why you would give 5% membership AND management responsibilities to a trusted friend or relative. You can use that individual as proxy to exercise membership control after filing for bankruptcy.

 

[Ladynred]

You're still trying to play the system, and you could still find yourself in deep doo-doo.

 

[HomeGuru]

I agree with Ladynred and repost my first response:

This writer is always trying to pull some scam or another.

 

[earl618]

ENOUGH ALREADY!!!!!!!!!!

Why even try to explain to this jerk. Let the trustee have'm.

 

[kharvel]

I agree with Ladynred and repost my first response:

Got a trick question for you:

If the letter of the law is followed, is it a scam?