S-Corp small business facing possible bankruptcy

[ronjen]

I don't know where to start, so I'll just plunge right in!

Fifteen years ago hubby and I started a general contracting business and have done ok in the last few years. We even spent the last couple of years planning for the worst, but never did we dream that the economy, especially home sales, would plummet like they have.

We have an S-Corp and I always thought that our personal assets were protected in the event of a bankruptcy. Seems that our huge bank loan of over 1 million dollars is secured by our home and I'm wondering how far the tentacles will reach into the rest of our personal assets in the event of our business going under. We personally own free and clear another piece of real estate and a vacation home.

If our business files bankruptcy or we foreclose on land and unsold homes, will the bank be able to take everything we personally own as well? This feels like it could be the beginning of the end for us and I just need to know how to salvage anything I can. We have two kids in college right now too. Any thoughts would be much appreciated.

[myid4u2c]

Most loans to small corporations require a personal guaranty, if your husband singed a personal guaranty then it will become part of your personal debt.

[ronjen]

Only our personal residence secures the loans from the bank. We have acquired considerably more assets since the time the loan was set up. So, my question really is can they take more than our personal residence? Do they get to take the furniture we have and the vacation property too?

[StartingOver08]

If you have personally guaranteed the loan and you have defaulted on the loan - the bank can go after the pledged collateral AND sue you for the deficiency. That is why many people find themselves here - so the bank can not go after them for the deficiency.

In exchange for filing BK (and getting rid of the debt), you have to give up your assets in a CH 7 that are over the exemption amount for your state.
(Some states allow federal exemptions to be used rather than state exemptions, but you have to check for that in the BK law for your state.)
In what state are you located?

If you file a BK 13, then you have a repayment plan that you set up rather than giving the assets. The repayment plan is based on your disposable income, schedules I and J. There is a lot on this forum regarding CH 13's. There is a limitation as to the amount of debt (unsecured) you are allowed to have in a CH 13.

Also, because you are a small business, you can consider CH 11 - but the cost to file is much higher. Ch 11 is business reorganization.

You have options. You need an experienced attorney to help you. Also keep coming back to ask questions.

[ronjen]

Thank you, first of all, for encouraging me to ask questions.

We are in WA state. We haven't defaulted on anything yet, personally or business wise. We just know that without home sales, or a sale that results in having to write a check to the bank at the time of closing, we cannot stay in business. We owe the bank over one million dollars in construction loans, etc....

The thought is that if we just give the lots and/or finished homes back to the bank will it end there or will we have to file bankruptcy in order to give them back. It makes little sense to continue to build the homes if we have to sell them at a loss. We do not have extra cash left anymore to write checks to the bank if we did sell them at a loss. That brings us to the bankruptcy issue because with no business there is no income, period!

I have a couple of names of attorneys in my area that we will be seeing very soon. I just can't sleep at night with this worry and all these questions.

[StartingOver08]

This is the link to your states BK exemptions (check the appropriate area):

http://www.legalconsumer.com/bankruptcy/state_bankruptcy_info.php?st_fullName=Washington

[Barkri12]

Last year the number of business bankruptcy filings increased by an astounding 50-percent over the previous year. According to Bloomberg.com, a New York-based information service, nearly 20,000 businesses filed for bankruptcy in the first quarter of 2008. This number is expected to nearly double in the first quarter of 2009; leaving half a million employees without work.

Business bankruptcy affects everyone. When small businesses are forced to close their doors, the affects are generally felt within the community where the business was located. When large corporations file bankruptcy, both consumers and employees around the globe are affected. Regardless of business size, it's never a good thing when a company goes belly-up.

Filing business bankruptcy is a complex process. The new bankruptcy laws enacted in 2005 have placed restrictions on business owners seeking debt relief. The Bankruptcy Abuse Prevention and Consumer Protection laws require debtors to reorganize and repay a portion of their debts whenever possible.

There are four chapters that preside over business bankruptcy: Chapter 7, 11, 12 and 13. Also known as 'liquidation bankruptcy', Chapter 7 requires debtors to liquidate assets to repay creditors. Corporations who wish to reorganize debts and continue conducting business use Chapter 11. Chapter 12 is exclusive to farmers and allows restructure and repayment of debts. Chapter 13 is a repayment plan available for sole proprietors.

Limited Liability Corporations (LLC), corporations and partnerships must file for reorganization of debt. Sole proprietors might qualify o file Chapter 7 and have their debts discharged, but typically must file for Chapter 13 first.

When a business files for bankruptcy protection, an 'automatic stay' occurs. This action stops creditors from moving forward with collection action. The business owner must present a repayment plan to the court for approval. Once in place, payments are made to a Trustee who then disburses funds to creditors until debts are paid in full.

[BigJohn]

Ours is a business bankruptcy/personal chapter 13.

We are keeping the business, the home and 2 vehicles. It can be done but I think you really need the advice from several lawyers who specialize in such matters.

From the lawyers I talked to, it seems most lawyers do not want to get involved with these type of bankruptcies so you might want to ask the lawyer up front if he takes these cases, it saves a lot more time.

If you can do a 13, it is a lot cheaper then a 11. I first thought about doing a 11 till I found out I could not find one lawyer who does such cases. They exist, I just could not find them.