Thursday, April 24, 2008

Personal Bankrutpcy and Business Ownership

Question: I wonder a small S corporation and I serve as president. Will my personal chapter 7 bankruptcy effect the corporation?

Answer: You must list the shares of stock as an asset on line 13 of Schedule B of your bankruptcy petition. When you file for bankruptcy, a bankruptcy "estate" is created that consists of the property that you own.

There are many state and federal laws that determine what property you can keep and what must be given up in a Chapter 7 bankruptcy. Property that you can keep is called exempt, meaning that it exempt from the rights of the bankruptcy trustee to sell it for the benefit of creditors. The decision to sell nonexempt property is generally made by the trustee based on whether it has enough value to be worth selling.

Small corporations are often not valuable enough for the trustee to sell because of corporate debt and other issues. The trustee may file a Notice of Proposed Abandonment and the shares of stock will revert back to you unless your creditors file a timely objection. If the case closes and the trustee decides not to sell your shares of stock, legal ownership will revert back to you.

Credit applications for corporations often ask if any of the officers, directors or shareholders have filed for bankruptcy. While your personal credit history will not impact the corporation's credit rating, it may influence the decision of someone who has been asked to extend credit to the corporation.

The information provided in this article is general information only and is not intended as legal advice. DO NOT use this information as a substitute for obtaining qualified legal advice or other professional help.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.


Anonymous said...

My stepson lives in a house we own and also drives a car we pay for. He recently got a dui and now has lost one of his jobs. If he loses both jobs he will have no income for the for the forseeable future. We recently found out he has over 14,000 dollars in credit card debt not to mention what his dui is going to cost. My wife almost immediatly decided we were going to absorb his credit card debt. I suggested he file bankruptcy.Which is the best choice?

Carl Starrett said...

Your son needs to stand on his own 2 feet, so I would NOT absorb his credit card debt. He needs to deal with any addiction problems first and stabilize his employment situation. Once his life is in order, then he can meet with a bankruptcy attorney to see if bankruptcy is a good option for him.