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.

[StartingOver08]

Yes, unfortunately in a BK the LLC (or any wholly owned S-Corp of yours) is considered an asset of yours.

That means all the assets of the LLC belong to the BK estate and can be liquidated to satisfy your debt and conversly any other assets you own (your home, cars, personal goods) can be liquidated too.

All accounts receivable of the LLC as of the FILING date belong to the Trustee.

I was in a similar circumstance (not as large as you) and had to close my S-Corp and file personally.

You need to speak with a BK attorney (several) that are experienced with small businesses so you don't get a surprise. If just the business files BK and not you - then I would think you would have issues with the personal guarantees that have been made (the creditors come after you).

You may be able to just file personally and just close the business, as opposed to having a business filing. Business filings are much more expensive (think $10k rather than 3k).

[ronjen]

Thank you for the response. We definitely do need to see an attorney, several as you suggested. I guess I just thought that with a Corporation, the assets that have nothing to do with the business would be protected. It must be a case of if the business goes down, then we personally go down with it. I think I need more than an attorney because I'm angry that this may happen when we've done everything right in business and had a huge cash flow to sustain us in the event that sales were slow. Now we're going to lose it all! Sorry to whine!

[StartingOver08]

You can whine! Its allowed here...remember what brings us together on this forum.

It is frustrating. When you formed the corp it was great for taxes and other things. It never occured to me that I could lose everything personally while having an S-corp either. I guess that is why we are here - at least you know early enough going in to prepare properly.

[FloridaGuy]

Hi Ronjen,

StartingOver08 is correct. I also was an S-Corp. Everything for the business unfortunately had a personal gaurantee by me. Since it is an S-Corp... all income/loss flows through you (and your taxes).

We ended up filing a persoanl bankruptcy... but when filling out the means test, had to include ALL business income and expenses as well.

After seeing several lawyers, they all advised to file a personal, and not a business BK. As, even if the Business was liquidated, they can all still come after me because of the persoanl gaurantees.

This is a tough spot, 'cause even if the biz files... they will very likely go after your personal assets.

Definately talk to several attorneys, and get your ducks in a row as early as possible, putting off BK as long as you can. Be sure to read the forum here... there is a huge weatlth of knowledge. Most is geared toward personal, but much of the advice will help.

[MARKETSACRIFICE]

Hey guys-

If you are unfamiliar with filing personally as a business debtor look into it.

if the majority of your debts are business related then you qualify and there is no means test.

This is very practical for those of us with investments property that is now underwater.

PM me if you want to talk.

MRM