Question Business in heaps of trouble

[westwood]

My business partner and I have been in retail for over four years. Business has just completely stopped and we are very scared. We are now into this thing to the tune of $200k and going backwards. We are going in to talk to a professional next week. We probably should have seen the writing on the wall two years ago. But we held out hope that things would get better.

One of the biggest concerns is that my partner has personally guaranteed a little over half of the debt and he owns two homes. He is terrified that they will take one of the houses. I am a renter, so I do not have the assets that he does.

Has anybody had experience with corporate bankruptcy? Or is there a better way?

[HHM]

Not enough background to say one way or the other.

Generally, if a person personally guarantees a debt, then yes, any equity in non-exempt personal assets are vulnerable. However, the creditors would first have to sue your partner (unless these loans are secured...like SBA loans typically are).

Most small business don't file BK because filing BK is mostly pointless for a business (businesses do not receive a discharge in a chapter 7, and if you are into it to only about $200K, a chapter 11 wouldn't make much sense). The reality is, if things keep going south, your partner will have to file a PERSONAL BK.

[rfassett]

HHM, I'm not sure if I misunderstood you. A chapter 7 bankruptcy for a corporation, according to my understanding, is a liquidating bankruptcy where all of the unsecured assets would be sold, the secured creditors would take back their collaterol, the monies from the unsecured assets sold would go to pay secured creditors first, the priority creditors second and the unsecured last, if there was anything left. If nothing left, the unsecured are discharged. If nothing left for the priority debt, it is, in essence, assessed against the responsible parties. And if not enough to satisfy the secured debtors, the personal guarantors will be on the hook. That said, any debt personally guaranteed is pretty much a secured debt, even if the underlying debt was otherwise an unsecured debt. I agree, the guarantor may have to look to the bankruptcy code for personal protection. If his personal assets can survive bankruptcy, it might be wise to file the personal bankruptcy first, because I believe the guarantees are discharged in a personal Chapter 7, are they not? Tell me if I am all wet here.

[HHM]

A chapter 7 bankruptcy for a corporation, according to my understanding, is a liquidating bankruptcy where all of the unsecured assets would be sold, the secured creditors would take back their collateral, the monies from the unsecured assets sold would go to pay secured creditors first, the priority creditors second and the unsecured last, if there was anything left. If nothing left, the unsecured are discharged.

All that is true except "the unsecured debts are discharged". Business cannot be "discharged" in a chapter 7. HOWEVER, as a practical matter, if the liability only extends to the corporation, then any remaining corporate debt is moot because no assets exist for the creditors and the corporation has ceased operating. But, the corporation does not receive a legal discharge.

The thing with small corporate chapter 7 is, there is usually no need...you are just as capable of selling the assets as is a chapter 7 trustee.

In any event, the personal guarantee is the sticking point. If any of the corporate debt is personally guaranteed, then that person is on the hook for the debt. Once the business defaults, the creditor has full right to pursue the guarantor. At that point, what that person needs to do depends on the aggressiveness of the creditor. If the creditor gets aggressive and the guarantor has non-exempt assets, then a personal BK may be in the cards (or some sort of settlement and payment to the creditors).

[1.6Million]

writin on the walls

I feel your pain, I am in BK ch 7 due to a failed business in the retail world. We had 7 stores, huge rent and a market that was shrinking. Wireless Agents! I had a lot of the same issues. Its life, after a while of learning from these experiences you will be ready to get back on the saddle and start a new business.

[rfassett]

OK, HHM, thanks for the clarification. You are absolutely correct, there is no "legal" discharge. I stand corrected. But a rose is a rose, and by anyother name, it is still a rose. The legal liquidating of the corporation does serve as a defacto discharge for any remainng unpaid unsecured debt. Not a legal discharge, there is just nothing left to pursue - and it dies a quiet death.