Will My Merchant Account Be Closed?

[Dan76]

I run a small home based business and accept credit cards online through my website. I am not incorporated and operate as a sole proprietor. If I file Chapter 7 will my merchant account be shut down?

What about my business checking account? It's at the same bank my regular checking is and also many of my unsecured debts. Should I open a new checking account at another bank before I file?

[backtoschool]

I run a small home based business and accept credit cards online through my website. I am not incorporated and operate as a sole proprietor. If I file Chapter 7 will my merchant account be shut down?

What about my business checking account? It's at the same bank my regular checking is and also many of my unsecured debts. Should I open a new checking account at another bank before I file?

Merchant accounts are tied to credit rating, so there is a good chance that your merchant account will be closed if your company is not a separate entity credit wise from you. Same for your business checking account if it is at a bank or credit union that does cross collateralization. You should definitely open a new checking account at a new bank.

[Dan76]

I opened the checking account up under a EIN so the business is not associated with my SSN does that still matter, or do I still need to be a separate entity? So I'm thinking the best thing to do would be transform my business into an LLC and open up a new business checking account before I file?

[backtoschool]

I opened the checking account up under a EIN so the business is not associated with my SSN does that still matter, or do I still need to be a separate entity? So I'm thinking the best thing to do would be transform my business into an LLC and open up a new business checking account before I file?

I wouldn't take any chances since there is probably some way to tie the EIN to you. I would open an account at another bank and make your business an LLC. As far as credit and your merchant account goes however, if you have kept your business transactions totally separate and have established a history under an EIN and you become an LLC, you probably will stand a decent chance of keeping the merchant account open. Any credit lines that you have personally guaranteed will probably be closed however.

Of course opening an LLC right before filing will be a big red flag for the trustee and US Trustee, so keep meticulous documentation and make sure it does not appear that you are trying to transfer any assets to the LLC. Many people stay in business after filing personal bankruptcy. The key is keeping scrupulous and very detailed transaction records and keeping everything separate. Any assets that are in your accounts and under your name, including inventory, cannot be transferred to the LLC within a year of filing. That will be considered a fraudulent conveyance and could jeopardize your case. Are you filing a personal chapter 7 or a business chapter 7?

[Dan76]

I am considering filing personal Chapter 7. My business has no credit lines it's all cash. I have very little in my business checking, under $1000. During my consultation the attorney told me not to worry because I own nothing and they won't close my business checking account, but I forgot to ask him about my merchant account. My business is new and getting off the ground so I have not actually used the merchant account yet, but plan to soon.

[backtoschool]

I am considering filing personal Chapter 7. My business has no credit lines it's all cash. I have very little in my business checking, under $1000. During my consultation the attorney told me not to worry because I own nothing and they won't close my business checking account, but I forgot to ask him about my merchant account. My business is new and getting off the ground so I have not actually used the merchant account yet, but plan to soon.

If you are not transferring significant assets (including cash assets) to the LLC, then I don't see an issue. To be safe, I would open up a new checking account at another bank. I would also open up a new personal checking account at another bank. As for the merchant account, if you do not have a history of transactions, and you are personally filing for bk, they may close the account. But there are third party services that will allow you to process transactions until you can re-establish a merchant account, worst case scenario. I would establish the LLC and use the merchant account as the LLC before I file.

[Dan76]

OK thanks for your input. I will think about this some more. I do have Paypal so worst case I can use it. The only thing that sucks is the early termination fee on merchant account if they do close it.