Filing Bk with a C Corp Business

[huffydogg]

My wife is thinking of filing for chapter 7, but she is worried because she is the only shareholder of her C Corporation. She wants to include in her BK a business loan and some business credit cards that she obtained while the business was a sole propietor. The business loans and credit cards are under her name and the old business's name. The business name was changed when it was made a corporation. My wife is concerned that the trustee can still come after the corporation's assets. My wife has seen 2 attorneys, one said that they can come after the corporation, and the other one said no because the business is a separate entity and that the business loan and credit cards were taken out as personal credit because the business used to be a sole propietor. Any advise???

[justbroke]

Yes, the Trustee is likely to pierce the corporate veil if this "C" corporation is nothing but an alter ego of your wife. Usually, they can't pierce the veil, but closely held corporations are tough. The Trustee actually steps into your shoes and can do what you would be able to do as sole owner.

Whether the Trustee would do that, is really the question. No one can tell you with certainty! The Trustee could determine that the corporation is worthless and abandon the "shares" owned by your wife. In an alternate reality, the Trustee may find something salvageable and decide to liquidate the shares, operate the business, or outright sell of the assets. There are just too many factors. You need a really good attorney!

Even if she discharges her personal obligation, the business would still owe the money! A business can't discharge debt.

I would make sure I find an experienced attorney that understands both personal and business bankruptcy law. Ask the attorney about a closely held corporation that is just an "alter ego" of your wife. Ask about piercing the corporate veil and what powers the Trustee would have in exercising rights as the sole shareholder.

[frogger]

My wife is concerned that the trustee can still come after the corporation's assets.

You need to shop for a good bk attorney that is experienced with corporations. The corporate shares are an asset of your wife, and as such, it will be a part of the bankruptcy process. As justbroke has stated, the corporation can not discharge its debts, so you most likely will need to close the corporation as part of the bankruptcy process. Get a good attorney and start planning.

[despritfreya]

It is the shares of the corporation that are assets of the bk. The Trustee would have the right to sell the shares, not the assets of the corporation. He is not likely to sell the shares if the corporate debt is substantially higher than the corporate assets since no one will want to buy the shares. The Trustee is not going to operate the business since he has no authority (without a court order) to do so and the liability of operating any business is way too great.

We file bks for folks who own corps all the time. So long as the debt of the corp exceed its overall assets and there is no competitor out there who would like to see the company out of business, there should be no problem. If the Trustee thinks the shares might be worth something, you can offer to purchase them from the estate. Not a big deal.

Now, if there is “equity” in those shares, you would want to stay away from a Chapter 7.

As to the corporate debt, your bk will not eliminate the corp’s responsibility to pay the debt. However, the only debt the corp is responsible for is the debt IT incurred in ITS name.

Des.

[huffydogg]

Thanks for the advise!! The business debt was not incurred under the corps name, it was incurred under the old business name, with a different tax ID# that has been closed. When the business was made a corp, it was given a new name and a new federal tax id#, on paper it looks like a total different business. We had to open new bank accounts, new merchant accounts, and so forth.

When I filed for chapter 13 almost 3 years ago I was able to include some business credit cards into my bankruptcy with no objections. The Trustee didn't question anything, and the only reason I did a chapter 13 was to strip my second mortgage. I'll be done with my 3 year chapter 13 in October. The difference with my wife is that she is a shareholder of the corporation, while I wasn't.

Currently, the business is not making any money, its barely paying the bills, and my wife hasn't received a paycheck since December. We are hoping the bk will help us out.

[justbroke]

If the business is in such bad shape, would it not be wise to step back and re-assess the entire situation? Perhaps shutdown the business, file Chapter 7 personal bankruptcy, then receive your discharge. Then, after the dust settles, start a "new" business? I don't know. I had a similar issue and I did shutdown my business (S Corp). My business had debt and no assets.

[huffydogg]

The problem is that we have about $300,000 in merchandise, but sales are really slow, and it takes long to sell the merchandise.

[huffydogg]

If the business is in such bad shape, would it not be wise to step back and re-assess the entire situation? Perhaps shutdown the business, file Chapter 7 personal bankruptcy, then receive your discharge. Then, after the dust settles, start a "new" business? I don't know. I had a similar issue and I did shutdown my business (S Corp). My business had debt and no assets.

We saw another attorney, and he recommended that we close or dissolve the corporation, and reopen it under another name. He said to make sure not to reopen it under my wife's name, and that she could file in 6 months.

[LadyInTheRed]

We saw another attorney, and he recommended that we close or dissolve the corporation, and reopen it under another name. He said to make sure not to reopen it under my wife's name, and that she could file in 6 months.

And what does the attorney suggest happen to $300,000 in merchandise? If she dissolves the corporation and gets the corporation's assets and then contributes them to a new corporation, I am pretty sure that the transfer to the new corporation is going to be a problem in her BK, even if she waits 6 months to file.

It sounds like the business debt was all incurred by your wife before she formed the corporation, while she was a sole proprietor. Did the corporation formally assume that debt? If not, the debt will be discharged in her BK. It doesn't sound like this is the corporation's debt. But, if the corporation has $300,000 in merchandise and no debt, the trustee very well may try to sell her stock in the corporation if she can't buy it back.

[despritfreya]

Lady is correct and, in my opinion, the most recent attny advice you got is not the greatest.

1. If the corporation has $300k in inventory/assets and no debt, the shares are worth $300k. Transferring the assets to a new entity in your wife’s name means you have devalued the shares of stock in anticipation of filing bk. You have, in essence, conveyed the value of the stock to someone without consideration. Trustee will set it aside as a “fraudulent conveyance”.

2. If the corporation has $300k in inventory and owes money to creditors, Transferring the assets of the corporation to a new entity without consideration may make the new entity liable for the debts of the old one based upon “successor liability”/ “alter ego” theories.

I think you need to talk to more attnys. Sounds like you will not be filing a Chapter 7.

Again, just my opinion.

Des.

[huffydogg]

And what does the attorney suggest happen to $300,000 in merchandise? If she dissolves the corporation and gets the corporation's assets and then contributes them to a new corporation, I am pretty sure that the transfer to the new corporation is going to be a problem in her BK, even if she waits 6 months to file.

It sounds like the business debt was all incurred by your wife before she formed the corporation, while she was a sole proprietor. Did the corporation formally assume that debt? If not, the debt will be discharged in her BK. It doesn't sound like this is the corporation's debt. But, if the corporation has $300,000 in merchandise and no debt, the trustee very well may try to sell her stock in the corporation if she can't buy it back.

I also spoke to our CPA, and told her what the attorney told us to do, and she said that it would be easy to dissolve the business because of the large debt the business has, and because the business has been on the negative (Corp Income Taxes) the past 5 years.The business hasn't been making any money! We can sell the remaining assets in a closeout sale, and pay some of our suppliers.

Is this possible???

[despritfreya]

I also spoke to our CPA. . . and she said that it would be easy to dissolve the business. . . The business hasn't been making any money! We can sell the remaining assets in a closeout sale, and pay some of our suppliers.Is this possible???

I have no problem with this if done before you file bk AND you have no intention to go back into the same business using a similar name, the current phone number, customer lists and general “good will” of the current company. If you intend to go back into the business (either you or your wife) then you could be facing the successor liability problem. Now, since the company is losing money I am not sure why you would want to continue on in it so I will assume you will not open a new business.

Assuming there are no UCC1 liens on the assets of the business, the proceeds of the fire sale should be used to first pay any business related taxes (payroll, sales). You can continue to draw ordinary and normal salary, but you cannot raid the corporate coffers and you would try to distribute the remaining funds equally (on a pro rata basis) between other corporate creditors. Make sure all transactions are traceable through corporate bank accounts.

Des.

[justbroke]

Yes, definitely pay the "trust fund" taxes first if you liquidate!

[huffydogg]

Things have changed since I began this post. My wife and I have separated because of this financial dilemma. She has decided to liquidate the business and dissolve at the end of this year. Since the lease of the storefront is still good for a few more years, I was thinking of starting my own business similar to hers. The business would be under my name, with a different name than hers, different Tax EIN #, different telephone number...... Will the trustee question my business if she were to file chapter 7?

[justbroke]

Your status, as a married couple, may be a factor since California is a community property State. If your divorce is final, or you have a "legal" separation, that may be different. You should definitely seek a divorce and/or bankruptcy/asset protection attorney's advice. I don't live in a community property State so I don't know the affects of using, potentially, marital funds to start a business. Still seems too sticky to me, but I'm not the expert. If it were me, and speaking only as a business person, I would put distance between the marriage, community property, marital funds, or any other commingling.

Who holds the lease on the storefront? Is it the corp or a personal guarantee?