| When should a business bankruptcy, under either | | | | corporation could get rid of its debts in a Chapter 7 |
| Chapter 7 or chapter 11 be filed? A common scenario | | | | case, it does not/would not affect the liability of the |
| in today's society occurs when individuals own a | | | | owners. |
| corporation or are part of partnership or Limited Liability | | | | Even though they don't get a discharge of debts, there |
| Corporation (LLC) and the business fails and then they | | | | are still some good reasons at times to file a Chapter |
| have to deal with the various bankruptcy filing options. | | | | 7 bankruptcy for a corporation. For one, it allows the |
| Many questions arise, such as should either or both the | | | | assets of the corporation to be sold and the proceeds |
| corporate business and individual owners? If so, which | | | | disbursed by an independent bankruptcy trustee. This |
| chapter of bankruptcy should be filed? This article | | | | releases the owners of the burden and liability of |
| addresses a couple of the many issues involved. | | | | undertaking these tasks. Additionally, it provides notice |
| Scenario #1: | | | | to all the corporation's creditors that the only assets |
| Fred and Wilma own 100% of the shares of Dino | | | | from the now-defunct corporation will be liquidated and |
| Corporation. Dino Corp. makes gravel out of flint | | | | disbursed as part of the Chapter 7 case and, |
| stones for Slate Gravel Company. Anyway, due to | | | | therefore, there's nothing left for them to file lawsuits |
| several lawsuits, and a slow down in business, Dino | | | | to go after once the bankruptcy is completed. |
| Corp. has to close its doors and shut down. Among its | | | | Whether Fred and Wilma need to file their own |
| debts, the corporation owes money to the Internal | | | | bankruptcy can only be determined after a |
| Revenue Service for employee payroll taxes, money | | | | comprehensive consultation with a bankruptcy |
| to vendors, employees, and to credit card companies. | | | | attorney, but it may be the only way they have to deal |
| It also owes on a couple of lines of credit which are | | | | with their debts (which may include additional debts |
| personally guaranteed by Fred and Wilma. | | | | aside from those listed above, because this only lists |
| Dino Corp. has some assets, mostly machinery and | | | | their obligations that came from the corporation). Which |
| equipment, but also inventory of left over flint stone. | | | | chapter they would file depends on their personal |
| Fred and Wilma are now also being sued on some of | | | | asset situation, debts, income and expenses. |
| the personal guarantees, and the IRS is coming after | | | | Owners of a corporation have personal liability for |
| them for the employee payroll taxes. | | | | some, but not all, debts of a corporation. This includes |
| Issues: | | | | employee payroll taxes (the trust fund portion under |
| Should Dino Corp. file a business bankruptcy? Should | | | | Internal Revenue Code 6672) and any debts which |
| Fred and Wilma file bankruptcy? Or will their financial | | | | were personally guaranteed by them. |
| problems reduce their lives to a pile of Rubble? | | | | There are many other issues involved, as well as |
| (apologies) | | | | scenarios involving individual business owners (sole |
| Analysis: | | | | proprietor/dbas) and partnerships, but these will be the |
| The first thing to understand is that corporations do not | | | | subject of future articles on small business bankruptcy. |
| receive discharges of its debts in a Chapter 7 | | | | See business bankruptcies for more information on this |
| (liquidation) bankruptcy case. Moreover, even if the | | | | topic. |