As the economy continues to worsen, I am seeing an increasing number of self-employed business owners facing a crushing amount of debt and no place left to turn. In some cases, my clients have owned their businesses for 20 years or more and have no sense of what the job market might hold for them if they were to close the doors of their business. As a result, I find many business owners in a position of owning a business that could generate a reasonable income…except for that little inconvenience called debt.
Where I practice, self-employed debtors are not allowed to use property of the bankruptcy estate to generate income without the express written consent of the trustee or a court order. Shutting down for an indefinite period of time is not an option for business owners because they could quickly lose their customer base and a viable alternative is needed.
With few exceptions, most self-employed debtors I see would be better off incorporating to take advantage of tax deductions not available to sole proprietors. After incorporating the business, the debtor then transfers all of the business assets to the new corporation in exchange for the issuance of the corporate stock. The value of the new corporation is typically very small and the debtor can usually claim the shares of stock as exempt when filing for bankruptcy.
Under the law, a corporation is a separate entity from the debtor and can continue to operate despite the bankruptcy of the owners. Unless the bankruptcy trustee decides to run the corporation to generate income for the creditors or to sell the business, the debtor will remain in control of the business and continue to receive a salary as an employee. The valuation of the new company and the risk of it being sold for the benefit of creditors is something that should be discussed with a qualified bankruptcy attorney prior to filing for bankruptcy. I have employed this strategy successfully for a number of Chapter 7 debtors.
When the bankruptcy is filed, the debtor will list the shares of stock in the new corporation as an asset. The transfer of assets to the corporation will also be disclosed. In most cases, the corporation will be of little value to the trustee. Upon completion of the bankruptcy, entry of a discharge and closure of the case, the corporation will belong to the debtor. The debtor will have their business and a fresh start on a pathway to success.
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. If you are a business owner in Southern California with debt problems, please contact us for a free consultation to see how we might be able to help you.