Question

Karen, a talent agent, has hit hard times and needs cash. She borrows $50,000 from her mom. In January 2018 , mom realizes that Karen will not be able to pay her back and forgives the $50,000 debt, telling her daughter she does not need to pay her back. Soon thereafter in February, Karen gives her mom her diamond necklace, valued at approximately $10,000 as a thank you gesture for forgiving the loan. Karen eventually files bankruptcy under Chapter 7 in May 2018. In her bankruptcy schedules she does not list her mom as a creditor nor does she list the transfer of the necklace to her mom. At a meeting of creditors, one of Karen’s creditor tells the Trustee about the necklace because he saw Karen wearing it. Karen explains that she gave it to her mother as a thank you for a loan that was forgiven and she just forgot to schedule it. what if karen owns 100% of the stock in her talent agency, a california corporation. there are no employees; it is just karen and her assistant. is there anyway karen can keep the stock in her company under the chapter 7?

Answer 1

In chapter 7 bankruptcy, all assets must be disclosed, and trustees can undo preferential transfers. The stock in Karen's company is likely part of her bankruptcy estate unless exempted by specific laws, and it's possible that the trustee may sell the stock to satisfy her debts.

Step-by-step explanation:

When filing for Chapter 7 bankruptcy, all assets and debts must be disclosed to the bankruptcy trustee. This includes transfers of property made prior to filing for bankruptcy. Under Chapter 7, a trustee can unwind preferential transfers made to insiders (like family members) within one year before the bankruptcy filing if it appears that the transfer was made to hide assets from the bankruptcy estate or to favor one creditor over another.

In Karen's case, the transfer of the diamond necklace to her mother might be considered a preferential transfer, especially since it was not disclosed. As for the stock in her talent agency, whether Karen can keep it depends on the equity she has in the business and the exemptions that she is allowed under California law. California has two systems of exemptions that debtors can choose from when filing for bankruptcy. However, in general, business interests are not exempted to the same degree as, say, personal items or tools of one's trade might be.

If Karen's talent agency has value as an ongoing business and there are no exemptions that apply to allow her to protect the full value of her stock, the bankruptcy trustee may have the right to sell her stock to pay her creditors. As Karen is the sole shareholder and there are no employees, the entirety of the stock's value would be considered part of her bankruptcy estate.