Small business shares held in 401K

[tausap]

Hi All,

I am new to this forum so please excuse if this has been covered. I did a search and found nothing fitting the bill.

I left my old job a while back and formed a C-corp to start a business. All of the stock in the C-corp is held by me, but within a qualified 401K which I formed within the business. Currently I am the only employee and stockholder of the Corporation. The corp has assets and cash in the bank worth about $240K.

I am considering filing Chapter 7 personal bankruptcy as I can't afford to pay myself enough yet to cover my monthly debt obligations, and my income would be below the state median. My total debt is about $75K.

Since the shares in the corporation are held within an ERISA qualified 401K plan, can the court touch these (I think they cannot) and could the court in any way order the corporation to pay me enough out of its assets or take some of the corporations assets to pay off the personal debt?

As I understand it the corporation is a separate entity and thus would have nothing to do with my personal BK. As I hold the shares within my 401K, I think they are protected, the same as if I owned shares of any other large corporation which employed me.

Am I wrong here? Would I be making a huge mistake and putting my company in jeopardy by filing personal BK? I can live with the personal BK and going back to apartment living, but not the loss of the company as it is my retirement plan.

Thanks in advance for any advice.

[MarkM]

(1) I'd recommend making some appointments and asking this question of 3-4 attorneys in your area -- in the process of interviewing who you want to represent you (and/or your company) in that Chapter 7.

(2) The short answer is that your business should be outside your personal bankruptcy as it should be an exempt asset. However, there are a couple of potential traps.

For example, if you personally guaranteed any loans to the corporation, it is entirely likely that your personal bankruptcy will be an event of default with respect to such a loan.

Similarly, read the contracts and/or loan agreements for your company carefully. Look for a "change of control" provision and double check that your bankruptcy will not trigger that provision.

Have you made any loans or advances to the company which are still outstanding? If so, those loans would become property of your bankruptcy estate and your chapter 7 trustee would be calling upon your company to get those monies back.

Has the company made any loans or advances to you in the past year? If you repaid the loan or advance in the last year, the company probably received a preference and the chapter 7 trustee could sue to get those monies back from the company.

The bottom line is this is likely not to be a simple issue and there are a lot of ways it could go very wrong. Talk to your attorney about your options ASAP.