What should you do if you are considering corporate and / or personal bankruptcy? A reader, Wendy, asked this question (reprinted from yesterday).

You’re website is the best I’ve found regarding credit questions and suggestions. Thank you for helping so many of us out!

I am overwhelmed, as many are, right now. My husband was a very successful contractor for the three years he was in business. The economy tanked and none of our potential customers can get loans right now.

Due to the newness of the business, we are still paying on a high amount of equipment and were paying our employees full pay for over a year after prices dropped dramatically and we were not making any profit.

Basically, we paid all of our bills with credit cards and a home equity loan to stay a float during the rough times and now, our debt is bursting at the seams. By some miracle we have managed to make all our payments on time but are not seeing a quick fix to the economic problems that directly affect us.

I have been applying for a second job and my husband is trying to stay busy with small garages and porches while looking for jobs as well. We have applied and interviewed with countless employers to no avail. The competition for job hunting is ridiculous at the moment.

I don’t know how much longer we can pay our bills. Our debt is well over 500,000 including business and personal and our monthly payments are $14,000.00. We are constantly agonizing and stressing over if we will be able to make our payments. It is greatly affecting ours and our young children’s happiness. We are 32 years old with 2 small children.

My question is, should we file bankruptcy and if so, what kind? Should we do credit counseling? Should we try to get a huge consolidation loan?

I am not sure what to do where we haven’t made any late payments yet and with such an unknown income future if we would be able to pay our debt off in 5-10 years as suggested in previous forums.

Most of our business debt was purchased using our personal names so could we file a business bankruptcy only?? Please inform us better of the huge decision we have ahead of us.

Wendy

Wendy,

When considering bankruptcy, the first step is to determine the amount of debt that you will be personally liable for. That will depend on a couple of things:

The type of business that you own:

Sole Proprietorship:

If you are a sole proprietorship, then you and your business are one and the same as far as your debt is concerned. Anything the business owes (as a general rule) you owe too.

Partnerships:

In a partnership, each partner is liable for the entire amount of the businesses’ debt. That means that if you were partnered with someone who had no money or assets, and the business went under, you would still be liable for the entire amount the business owed.

In the event of legal action, each partner can be named as being responsible for the debt.

Corporations and Limited Liability Companies

In the even that your business is a corporation, or a limited liability company (LLC) then your personal assets should be safe if the business goes under. There is one exception to this though, and it is a very common one: If you have personally guaranteed the debt by giving out your social security number, or by using personal property as collateral, then you are still liable for the debt. Even if you own a corporation or LLC.

Personal Guarantee:

In your question you stated that you did give your personal guarantee for most of your business debt. That means that even if you declare corporate bankruptcy, your personal assets will still be at risk.

So, what do you do?

Find a lawyer in your state. Sit down with them and take along all of your paperwork. By paperwork I mean, the total amount that you owe, both personally and as a part of your company. Have a separate total for the amount of your business debt that you believe you will be personally liable for.

Ask the lawyer about your personal liability, and find out whether a corporate bankruptcy is right for you, or whether or not you would need to file for personal bankruptcy to protect you assets as well.

Only someone who can sit down with you, and take into account every part of your financial situation should advise you – so you should definitely meet with a lawyer close to you and get their opinion.

I can go over your options a little though, so that you are more prepared when you meet with them.

Chapter 7 Bankruptcy:

Companies, and people can declare Chapter 7 Bankruptcy.

In a Chapter 7 bankruptcy, you business would close it’s doors completely and liquidate it’s assets.

In a personal Chapter 7 bankruptcy, there are income requirements that you must meet in order to qualify. (You can’t make over a certain amount, and that amount varies by state.)

Personal chapter 7 bankruptcy is usually not a good option for people who have assets that they want to keep, like a home, vehicles, etc. It doesn’t always mean that you will lose your home, there are exemptions by law, so you will need to talk to a lawyer in your state about this too. If your income is completely uncertain, Chapter 7 may be your only option. If you have any way at all to make payments (even reduced ones) then Chapter 13 is probably a better option for you.

Chapter 13 bankruptcy:

A Chapter 13 bankruptcy is essentially a court-ordered repayment plan.

Whether you declare Chapter 13 as a business, or personally, you will sit down and work out a repayment plan for your debt. A judge will approve your plan, and you will be considered “in bankruptcy” until your debts are repaid.

There are two major benefits to a Chapter 13 bankruptcy.

The biggest benefit is that your business can continue to operate while you pay back your debt. The second biggest benefit is that you get to keep your personal assets, home, car, everything.

In your situation:

I would call the debt negotiation associates first. See if you can get them to negotiate on all, or part of your debt. Particularly the part of your business debt that you are personally liable for. Yes it will hurt your credit score a little, but you could actually end up repaying far less than you would under a Chapter 13 bankruptcy.

You should also speak with a lawyer in your state and go over your options. If you are ok with closing your business, then a Chapter 7 business bankruptcy, coupled with a chapter 13 personal bankruptcy could be an option for you. Otherwise you could consider Chapter 13 for both your business and yourself.

As I said though, don’t be afraid to bring in the professionals. Get in there and really tackle this situation, because there is light at the end of the tunnel. It’s not impossible to work this out, it just takes effort and time.

I definitely commend your efforts to continue paying your employees, even past when your business could afford it. There are going to be quite a few tough decisions from this point on. Just speak with a couple of experts in the field, and see what they can really do for you.

Most importantly, ask the debt negotiator, and your lawyer, about the long term impact for you financially. Which methods will get your debt paid off fastest? How soon can you recover from each of these options?
Once you’ve talked to both of those experts, you should have enough information to know which decisions are going to work best for you.

This entry was posted on Friday, March 20th, 2009 at 16:43 and is filed under Bankruptcy FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.