Business debt and personal bankruptcy question...

[jsparkles]

A worry has been creeping into my mind...I hope I can get some answers here!

The reason we filed for bankruptcy is because my husband cosigned on a business loan. The business went under, the other signer went bankrupt and he was left holding the bag. During this time, he was trying to make payments on this business loan from his own separate business line of credit, thinking that something would turn around (dumb, I know). At one time, he was a consultant and opened an s-corp for tax purposes. That business is no longer running, and the license is expired, although no dissolution papers were filed.

So my husband's business has no assets and isn't running or anything. I know that when our personal bankruptcy is discharged, that releases us from liability from the business debt (he was a guarantor for the line of credit). But what happens next to the business debt? Is it just gone? There isn't anybody else they can go after, but I'm worried about what else they can do...

I'm sorry this is long. I hope it makes sense. There is always such good advice on this forum. I have looked for answers online, and haven't found much.

[davetedge]

I can't speak from experience yet, but I'm preparing to do something very similar.

I'll be filing personal bankruptcy but only dissolving the corporation. It has no assets and has ceased operations so there is nothing for any creditor to take. It has significant debt including tax debt. I plan on paying the tax debt since that's what stands in the way of dissolving the company, and those debts ultimately become personal debts for any officers of the corporation.

From what I understand, any creditor still has the right to sue and seek payment, even after dissolution. To answer your question, the business debt doesn't go away unless the business settles the debt or files for bankruptcy itself. Since there are no assets there's little incentive for them to go to that trouble, and the dissolution is a pretty strong signal that it's not worth the bother. I believe all creditors need to be informed of the dissolution, but I haven't done enough research into how that works yet. A few consultants I've talked to have said that companies like mine simply fade away without issue, and suggest bankruptcy isn't worth it. Their only warning is to resist temptation to use the company for anything in the future. Dissolve and move on.

In my personal bankruptcy, I do need to make sure I list all business debt that I personally guaranteed.

For peace of mind, your husband could file bankruptcy for his businesses to get a clear discharge of all the business debt, but since the businesses are judgment proof it may not be worth the headache of going through another bankruptcy process.

[jsparkles]

Thank you. Your reply was helpful. In essence, it looks like the business debt still stands, but there is nobody left to pay it once our personal bk is discharged. The only way to get a clear discharge of the business debt is for the business to file bk. However, creditors might not go after it anyways since there is really nothing left to go after.

So I guess we need to file the dissolution papers and go from there. What a headache these last two years has been. I CANNOT WAIT for this to be done and to move on with our lives! Good luck with your filing, and thank you for your informative response.

[HHM]

davetedge is right on, the creditor can still go after the business, so that business entity must be shut down.

The only other risks are possible fraud risks...I am little unclear on the timeline, but the biggest risk would be if your husband was accessing the biz line of credit while the underlying biz was not functioning, but again, all that does is transfer liability to him, and he is filing personal BK. The creditor would need to prove fraud with a big F, which is very hard to do.