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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 116231
Experience:  All corporate law, including non-profits and charitable fraternal organizations.
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What happens if an S corp is sued and is held liable large

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What happens if an S corp is sued and is held liable for a large sum judgment that surpasses its current financial status? In other words, the company has no physical assets, it is a buy and sell product only and has cashflow. If the settlement is too large for the company to sustain, is bankruptcy an option?
Thank you for your question. I look forward to working with you to provide you the information you are seeking for educational purposes only.
If the S corp is sued and they cannot pay the debts are due, including a judgment, then the company is insolvent and would have to file bankruptcy or would be placed into receivership (which is where a creditor forces a company to file bankruptcy if the creditor has no assets to seize to satisfy judgment). Now, unless you have a personal guarantee of the debt the bankruptcy of the S corp would extinguish the remainder of the debt that could not be paid due to lack of assets. If you have a personal guarantee on the debt though, then if the company cannot pay they can come after you even if the company is bankrupt and in that event you may have to consider personal bankruptcy as well.
Customer: replied 1 year ago.
Ok, that makes it very clear. Now, the company has some cash value in its bank accounts, what happens with the funding? Company has over 60 employees that are paid weekly, do they just get laid off during the bankruptcy, or are those funds available to give us ample time to get things figured out. I guess you can say I am more concerned about the folks that work for me than myself at this point.
Thank you for your reply.
Unfortunately, if you cannot do a chapter 11, reorganization, your company has to shut its doors. If you can do a reorganization because you have business and income would be coming in, then you can keep money in the accounts for payroll, which has priority over the other debt and allow you to keep the doors open and earn money to pay the debt.
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