Should my corporation file bankruptcy?

Probably not. Generally speaking, our clients with single owner corporations and LLCs are better served by filing for personal bankruptcy than corporate bankruptcy.  Many consumers are not aware that personal bankruptcy will help rid them of most business debts and the personal guarantees tied to the business they are closing.

By and large filing for bankruptcy is about one thing: getting rid of your debts.  When your case is over and the discharge order is handed down, your debts (with few exceptions) will be eliminated, and you will be getting a financial “fresh start”.  But in our office what we often hear is, “should it be my company or me that is filing?”  Our clients that own their own businesses aren’t usually sure if they should be filing for corporate bankruptcy, or personal bankruptcy protection.

The answer in most cases is the latter; clients should file for personal bankruptcy.  The primary reason for this is that by law, when you do business as a corporation or LLC you are not personally liable for these business debts in a bankruptcy.  If you file for Chapter 7 protection your creditors can no longer come after you, personally, for the business debts that were personally guaranteed prior to your bankruptcy.

When a corporation files for Chapter 7 on the other hand, the bankruptcy trustee is empowered to take complete control of the company in an effort to best resolve the remaining debts.  The business owner wouldn’t typically be liable for these debts in the first place however, so filing Chapter 7 for a company is really just a way to give the company a quick death and nice funeral.  The only benefit a company usually gains from filing Chapter 7 bankruptcy is a respectable death usually at a higher cost than an alternative offering the same level of protection.   Unless the company has considerable assets that need to be liquidated, or the owner needs an orderly dissolution of the company for personal reasons, filing Chapter 7 for a corporation rarely makes sense.

So if business debt is the main trouble you face and you are ready to close shop in light of this trouble, your best option is usually filing for Chapter 7.  Sometimes it’s even easier than this as a good bankruptcy attorney may even find a way to protect your interests without having to file bankruptcy at all.  Your attorney may find you the same level of protection as a bankruptcy would by taking advantage of New York’s business dissolution laws, or laws pertaining to inactive businesses.  It may be that the combination of a business dissolution and personal bankruptcy is your best option.

Now if you are underwater, but still trying to save your company as opposed to winding it down all together, your attorney may suggest filing for Chapter 11 protection if your company is eligible.  Chapter 11 bankruptcy will re-organize the corporation in an effort to keep the company alive, but this is a complicated process.  The Chapter 11 process involves a committee of your largest creditors, the judge and the US Trustee who collectively approve a re-organization plan submitted by your attorney that outlines how your creditor debts will be addressed in the future.  If you are a large company with considerable assets that could potentially be saved if the company’s debt could be more appropriately managed then a corporate reorganization under Chapter 11 may be advisable.  Chapter 11 is an expensive process that limits its use to large corporations or very affluent petitioners in most cases.

Most single owner corporations and LLC’s are not prepared to comply with the requirements of Chapter 11, so it is not an appropriate option for many of our clients.  When all’s said and done, regardless of whether you are ready to close shop, or hoping to save your business through re-organization, having the advice of a quality bankruptcy attorney is absolutely crucial.

If you live in New York and are considering corporate or personal bankruptcy relief please contact the Law Office of William Waldner for a free bankruptcy consultation today.  We only practice Bankruptcy Law and are always here to help.

Call 212-244-2882 to arrange a free bankruptcy consultation today.  Mention this blog post when scheduling by referencing the promotional code: CRP212 to receive the required 3 bureau credit report, and required credit counseling course, both free with any signed retainer agreement.

This article is intended for educational purposes only.  By reading this article no attorney-client relationship has been created.