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FAQ

Q:

What Happens to My Corporation if I File Personal Bankruptcy?

A:

If a business owner, entrepreneur, or corporate shareholder files for bankruptcy, it can affect the business, its partners, or its shareholders and assets. It all depends on the way in which the business is legally organized – whether it is a sole proprietorship, partnership, LLC, or corporation. The best thing you can do is work with a lawyer who can help you structure your business in a manner that provides the greatest protection should you encounter personal financial struggles.

Q:

What Happens to Me if My Corporation Files Bankruptcy?

A:

If you are forced into corporate bankruptcy it will have no direct effect on you personally. A corporate filing does not affect the shareholders, including you. However, if the shareholders or officers, including you, have accepted personal responsibility for the debts of the corporation, you will be affected. Despite the automatic stay implemented by the bankruptcy filing, creditors can seek to collect debts from anyone else who is liable. The automatic stay only protects the corporation.

Q:

My Business Is a Sub S Corporation. Does that Affect the Available Bankruptcy Remedies?

A:

Not really. Your business’ designation as a Subchapter S corporation or a Chapter C corporation has nothing to do with its legal entity, just its taxes. Your business, be it an S corp or C corp is just a corporation and it has all of the remedies available to it that are available to corporations. Your business’ designation could affect the tax situation of shareholders, so it’s important to work with an expert regarding bankruptcy.

Q:

Can I File Bankruptcy only On Personal Debts or Only on Business Debts?

A:

No. Your bankruptcy filing must include all of your entity’s debts no matter how or why they were incurred. However, it might be possible to separately classify business debts and pay them in full in a Chapter 13. This can help you continue to utilize vendors and make the situation easier if you intend to carry on doing business because your vendors will receive repayment of all or a portion of the debt they are owed.

Q:

Can I Continue Self-Employment After Filing for Bankruptcy?

A:

Perhaps. There are no laws against continuing your line of work when you file for bankruptcy. The problem occurs because your assets become the property of the bankruptcy estate and are not exempted or abandoned by the trustee. There are also instances in which the trustee will want to close down a sole proprietorship because of employees or because the business exposes the estate to lawsuit risk because customers of the business were harmed.

Q:

What if I Incorporate Before I File for Bankruptcy?

A:

Incorporating a business creates a legal entity that is separate from you. In most cases, the bankruptcy trustee will not interfere in the business operations of a corporation, even if it’s owned by the person filing for bankruptcy. The trustee can make the debtor buy the stock back from the estate or demand that the corporate be dissolved and the proceeds are put into the estate. If you are concerned about it being considered a fraudulent transfer, it is usually viewed as a change in form of assets, not a transfer.

Q:

Should I File a Business Bankruptcy or A Personal Bankruptcy?

A:

Whether a debtor should file personal or business bankruptcy varies from situation to situation. In most cases, the answer depends on whether or not you are personally liable for your business debts. So, for instance, a sole proprietor would file for personal bankruptcy, but if your business is structured as a limited liability corporation, you can keep the bankruptcy separate. It is best to discuss the specifics of your situation with a bankruptcy lawyer.

Q:

What Type of Debt Qualifies as Business Debt?

A:

Business debts include loans, leases, contracts, notes payable, and anything else you are contracted to pay periodically. Debt is categorized based on its purpose. For instance, business debt exists due to a business owner’s desire to turn a profit. You acquire business debt to help you make money in a business venture. Business debt includes:

  • Standard business loans

  • Cost of leasing office space

  • Personal and business taxes

  • Balance owed on business assets

Q:

How Often Can a Business Declare Bankruptcy?

A:

It varies based on the chapter bankruptcy you are currently using and the chapter you used in your previous bankruptcy. For instance, in Chapter 7 bankruptcy, you are not eligible for a discharge if you received one in a previous Chapter 7 or 11 filed within the last eight years. In Chapter 12 or Chapter 13 it is within the last six years, with exceptions. In a current Chapter 13 bankruptcy, you are not eligible if you received one in another Chapter 13 case within the last two years, or the last four years for other chapters.

Q:

Who Can Authorize a Bankruptcy Filing on Behalf of A Business Entity?

A:

Sole proprietors are always authorized to file bankruptcy on behalf of their business. However, when a business is categorized as a partnership or corporation filing for bankruptcy is handled a bit differently. In a corporation, a corporate resolution allowing for bankruptcy is required. This means all general partners must agree to the bankruptcy in order for it to be considered voluntary. The trustee checks ensure the corporate resolution was included with the bankruptcy petition.