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Michigan furniture store owner files for Chapter 7 bankruptcy

In a community just west of Wayne County, a local furniture store is going to be closing its doors for the last time. The owner of Naked Furniture has filed for Chapter 7 bankruptcy and the store's inventory is being sold off in order to pay the owner's creditors and customers who paid for orders they never received.

The owner may have begun to sink into debt in part because of the way the store's ordering process worked. The furniture was made-to-order; customers would pay for their order at the time they placed it. The manufacturer, however, did not require payment until the job was complete. The bankruptcy trustee speculated that the owner was spending the customers' money in the interim, and was then unable to pay the manufacturer and deliver the furniture to the customers.

The owner filed for Chapter 7 in February listing over 70 creditors and over $500,000 in debt, including $125,000 owed to the IRS and other large debts to state and local agencies. However, the law states that the store's customers who paid for products they never received must be paid back first, before any money goes to government debts.

While it is difficult for any Michigan business owner to put themselves in this situation, the fact is that sometimes tough decisions have to be made. Faced with over half million dollars in overwhelming debt and customers' orders going unfulfilled, this one chose Chapter 7 bankruptcy as a way to address his financial challenges and seek a fresh financial start. Chapter 7 can discharge a filer's unsecured debt -- credit cards, medical bills and other debts -- while creditors will be able to make a claim regarding those debts "secured" by a house, car or other tangible assets.

The fact that customers will be repaid first from a Chapter 7 liquidation sale like this may be of some reassurance to any Michigan business owner who is considering filing for Chapter 7, but hesitates due to a perceived stigma or tarnished reputation.

Source: MLive, "Naked Furniture store in Ann Arbor aims to sell all inventory at one-day federal bankruptcy sale," Jeremy Allen, May 7, 2014

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