Personally guaranteed business debt

[HHM]

I don't mean to hijack this thread, but I do have one quick question................ if one lists and discharges business debt that has a P/G - the debt itself isn't cancelled for the business is it? Does filing personal bk on business debt only protect the debtor personally? Creditors can still sue the business (if it were still solvent), correct?

Correct, if a person with true business debt, i.e. debt in the businesses name AND the business is a seperate legal entity, (but for which the individual gave a personal gaurantee), a personal BK will only discharge the debt as to the individual, the business will still owe the debt and could be sued. And even the owner of the business will still have some personal liability, despite the BK, as a "trustee in assets" of the corporation if a judgment is ever taken against the business.

[BK'd-Betty]

Thanks HHM - appreciate the response.

What if the business gets sued, well after the corporation seizes operations and closes down?

Correct, if a person with true business debt, i.e. debt in the businesses name AND the business is a seperate legal entity, (but for which the individual gave a personal gaurantee), a personal BK will only discharge the debt as to the individual, the business will still owe the debt and could be sued. And even the owner of the business will still have some personal liability, despite the BK, as a "trustee in assets" of the corporation if a judgment is ever taken against the business.

[HHM]

That is a very difficult issue to predict as it depends on many factors. Usually, the plaintiff will have done some investigation and realized that the lawsuit is not worth the time and effort. However, if a lawsuit is initiated and the corporation is basically defunct and no one shows up to defend the action, a judgment will be taken against the company. The next step would be to try an execute that judgment...this is where things get messy, either the owners will get sued at this point, or, more likley they were sued as part of the original lawsuit and will have to defend the notion that they have not taken anything of value out of the corporation. It is usually a fairly easy thing to prove, but you need to go to court to defend it.

[lisac77]

We were told to dissolve the business entities with the state (essentially UNincorporate the corpoarations) and then the debt would fall back on us, the personal guarantors. Then we will file chapter 7 and get those debts discharged.

[BK'd-Betty]

That's very interesting, our Lawyer told us basically the opposite.

We only had one business debt included in our personal BK - it was to credit card for $30,000. Actually, when we filed, we thought that the card was in our names - but it's never shown up on any of our credit reports, etc. So, I think it was actually in the name of our corporation with us as authorized users. (but that still is unclear to me)

Anyway, we included it in our personal bankruptcy - our corporation closed down before we were even discharged.

The corporation heard from the credit card once about 3 months before we were discharged (about 6 months after we filed it with our personal BK) but not another word since.

Our lawyer told us that in NY - you cannot dissolve a corporation until all business debts have been settled - but that if you seize operation and you don't file a tax return for the corporation for two consecutive years, that New York State will automatically dissolve the corporation.

The business had some very small debts that were not paid prior to shutting down - less than $1,500 (an office supply card for $600, and an invoice from the alarm company for $400 - which had already gone to collection & delivery service for about $500).

Since there were no assets left and no inventory left and all the vendors for the inventory had been paid, he said to seize operation, close the bank and merchant accounts, and just shut down the business.

It was our lawyer's opinion that the debts were not sizable enough that the creditors would pursue, and the credit card probably wouldn't because it was included in the personal BK. The (now non operational) corporation has not made payment on any of the debts above since Summer of 2005.

ETA: We actually had one attorney (which we DID NOT hire) tell us that we should sell of the inventory of our corporation - live off that money for 6 months and then file - we didn't chose that path and liquidated the inventory and paid the vendors that sold us the inventory months before we filed.

[HHM]

BK'd-Betty, that is about right. My point is a very hyper-technical issue regarding owner liability for corporate debts after the corporation ceases operation, that is a different point than personal guarantees. Personal guarantees are discharged in a BK, but the business is still liable for the debt. I was trying to explain the possible work-around a creditor "might" employ to still go after the owners regardless of the owners personal BK.

It's a good thing you listened to the attorney you did. Had you sold the inventory and taken that money for personal use, you would have exposed yourself to liability as a trustee in assets of the corporation and that type of liability is not extinguished in BK because it has to do with your status in relation to the "assets" of the business, not the debt.

Anyway, I wouldn't worry about it, looks like you did everything you needed to.

[BK'd-Betty]

Thanks HHM - as always, I so much appreciate your insight and the time you take to answer my questions

We knew what the first lawyer was telling us didn't seem right. My husband and I both agreed that it seemed "criminal" to take such action. We didn't even have to think about it for 5 minutes before we decided not to take that course of action.

This particular attorney didn't even find it necessary to show up at his own office for our consultation - he "forgot". He did our "consultation" from his car phone while we talked to him on a speaker phone in his office.

I left there crying, it was an ugly experience.

His fee was 30% of what we actually paid our attorney - but after meeting with the attorney we hired - we knew that he knew his stuff and gave him a retainer on the spot.

He did a wonderful job representing us, I was very pleased. The only thing I was disappointed about was that he has refused to take or return any calls to us since we've been discharged. (but I can live with that)

BK'd-Betty, that is about right. My point is a very hyper-technical issue regarding owner liability for corporate debts after the corporation ceases operation, that is a different point than personal guarantees. Personal guarantees are discharged in a BK, but the business is still liable for the debt. I was trying to explain the possible work-around a creditor "might" employ to still go after the owners regardless of the owners personal BK.

It's a good thing you listened to the attorney you did. Had you sold the inventory and taken that money for personal use, you would have exposed yourself to liability as a trustee in assets of the corporation and that type of liability is not extinguished in BK because it has to do with your status in relation to the "assets" of the business, not the debt.

Anyway, I wouldn't worry about it, looks like you did everything you needed to.