- Bankruptcy Law - Free Fotosearch Clipart-The Scales of Justice
There are many questions to be answered when filing for small business bankruptcy. First of all, what happens to your corporation if you file personal bankruptcy? While this answer seems simple enough, it can actually be more complex. A corporation is considered to be a separate entity. Therefore, the bankruptcy of a shareholder does not affect the corporation as a whole. However, personal shares of the corporation are considered to be personal assets. These shares will be sold and the proceeds will be repaid to creditors.
What Happens to You During a Corporation Bankruptcy?
A corporate bankruptcy does not directly affect the shareholders unless Chapter 7 is filed. For instance, shareholders would lose their stocks' value if all shares have to be sold and the business ceases to operate. However, if the corporation chooses to file for Chapter 13, then all creditors will be repaid over time and individuals will be able to keep their businesses open.
Chapter 13 will allow the corporation to keep faith with both its creditors and its stockholders. Unfortunately, Chapter 13 may not be an option if one or more of the partners have personally guaranteed loans or leases. In this case, the partner would have to file for personal bankruptcy separate from the corporation if the assets collected would not cover the guaranteed debt. Also, that partner is liable for suits filed against his personal assets.
Your Corporation is a Sub S Corporation; Does that Affect the Available Bankruptcy Remedies?
Designation as a Sub Chapter S Corporation or a Chapter C Corporation means that the business is not responsible for paying income taxes. For the purposes of filing bankruptcy, these types of businesses are still considered corporations. However, the tax issues become rather complex if this type of cooperation files for bankruptcy due to past and future taxable income.
Shareholders are actually severely affected by Chapter S bankruptcy because they are responsible for any income generated during and after the bankruptcy proceedings. Therefore, the shareholders suffer the consequences of the corporation’s failure.
Can You File Bankruptcy Only for Your Business and Not File Personally?
Yes, if the owner is not considered to be a Sole Proprietor or Individual Business Owner. In general, personal assets are protected if the owner is a partner in a corporation and the business as a whole files for Bankruptcy. Again the exception would be if the owner personally guaranteed any loans or other debts.
Can You be Self-Employed as a Consultant If You File For Bankruptcy?
While, the short answer to this question is yes; the owner may still be liable unless the Bankruptcy Court exempts them. Filing for bankruptcy does not prevent owners from finding other means of employment. However, the assets of a sole proprietorship are considered personal assets. If they file for Chapter 7 and their creditors are unhappy with the outcome of the settlement; they may be sued for collection of their future earnings.
What If You Incorporate Before You File?
Incorporating a proprietorship creates a legal entity separate from the debtor. However, this step may not save an owner from paying back assets to the stockholders. Incorporation may purchase them much needed time so that they would not have to file for bankruptcy; however, if their debts are overly consuming, this course of action may actually cause more of their personal assets to be repossessed.
In terms of bankruptcy law, incorporation of a sole proprietorship does not constitute a fraudulent transfer. However, owning stock in a corporation that is failing will not change the fact that bankruptcy may be inevitable. Seeking the advice of a well-qualified tax attorney and bankruptcy attorney would be their best course of action if they are trying to avoid bankruptcy.
Korie Schmidt - I am a former High School and Middle School English Teacher that decided to stay at home after the birth of my second child. I am a ...
