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mortgaged their home as security for the loan. The $42,000 came
from petitioners’ savings.
Shortly after Michael purchased the business, serious
competition arose in the pet store business. A new Wal-Mart
store opened in Lexington, Kentucky, and competed directly with
Michael’s business. Then another large pet store opened. By
1999 or 2000, Michael became insolvent, and it became clear that
Michael’s independently owned smaller store could not survive.
The store was closed, and Michael filed for bankruptcy under
Chapter 7 of the Bankruptcy Code. Michael’s indebtedness to
petitioners was unpaid, except for a few monthly payments he made
to the bank in the earlier years prior to his insolvency.
Petitioners filed a proof of claim in the bankruptcy proceeding;
however, there were no assets that were available to unsecured
creditors (including petitioners).
With respect to the $97,000 in financing that petitioners
provided to Michael, $55,000, as noted above, came from a loan
petitioners received from their local bank, which Michael agreed
to pay. When Michael defaulted on the loan, petitioners were
required to pay. The Court is satisfied from the record that, at
the time Michael purchased the store, petitioners fully expected
that the $55,000 of indebtedness to the bank was an indebtedness
that Michael was liable for. At the time of the purchase,
petitioners consulted an attorney, and, based on that attorney’s
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