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Can I file bankruptcy while owning an S-Corporation?

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I would like to file...

I would like to file for personal bankruptcy for my personal debts to include my short sale balance of $500k, credit lines and credit cards, IRS balances, etc. Totaling almost$800k, however I own an S Corporation and want to protect assets of the S-Corp. My Question is: Can I file personal bankruptcy while owning an S-Corporation, and if so, will the S-Corp be impacted in anyway? If I cannot, can I transfer ownership of the S-Corp to another, and then file bk. What help can be offered to get relief of the debt? Also, can the debtors come after belongings in my home?

Submitted: 9 years ago.Category: Bankruptcy Law
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11/3/2008
Bankruptcy Lawyer: TJ, Esq., Attorney replied 9 years ago
TJ, Esq.
TJ, Esq., Attorney
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Hello and thank you for allowing me the opportunity to assist you.

Question: “Can I file personal bankruptcy while owning an S Corporation, and if so, will the S Corp be impacted in anyway? if I cannot, can I transfer ownership of the S Corp to another, and then file bk. What help can be offered to get relief of the debt? Also, can the debtors come after belongings in my home?”

Answer: Yes, you can file for personal bankruptcy while owning an S Corp. The S Corp is one of your assets, so it will be viewed in that light. Depending on its value, the chapter of bankruptcy you file under, etc., it could be sold, or the income could be used to pay unsecured creditors.

Unfortunately, you cannot transfer ownership of the S Corp in order to avoid it being used to repay creditors. That is called a fraudulent transfer (or sometimes called a fraudulent conveyance), and can be reversed by the court so that it can be used to repay creditors.

When you file for bankruptcy, some of your assets will be “exempt.” This means that such assets cannot be used to repay creditors. You can find an entire list of exempt assets HERE. If an asset is not exempt, then that means it can be used to repay creditors, and therefore, depending on the chapter of bankruptcy you file under, it can be sold.

Have I satisfactorily addressed your concerns? If not, then please feel free to ask for clarification.

Thank you and good luck!

TJ, Esq.
TJ, Esq., Attorney
Category: Bankruptcy Law
Satisfied Customers: 12,559
Experience: JD, MBA
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Customer reply replied 9 years ago

I have an additional question. If I were to transfer ownership of the of the S-Corp and then wait two years to file BK what could or would happen? What can the creditors do to me? I do not own any real estate and don't have any much money in my checking account and my credit has been destroyed already.

Bankruptcy Lawyer: TJ, Esq., Attorney replied 9 years ago

Question: “I have an additional question, if I were to transfer ownership of the of the S Corp and then wait 2 years to file BK what could or would happen? What can the creditors do to me? I do not own any real estate and don't have any much money in my checking account and my credit has been destroyed already.”

Answer: There are two ways the transfer could be voided. As you alluded, the bankruptcy trustee could void the transfer if it occurs within two years of filing for bankruptcy protection.

However, California law also governs fraudulent transfers, and there is no time limit. Therefore, even if you waited longer than 2 years (to avoid trouble with the bankruptcy trustee), the creditors could still force a reversal of the transfer. Here is a portion of the relevant California law:

3439.04. (a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:

(1) With actual intent to hinder, delay, or defraud any creditor of the debtor.

(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:

(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.

(B) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.

3439.07. (a) In an action for relief against a transfer or obligation under this chapter, a creditor, subject to the limitations in Section 3439.08, may obtain:

(1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim.

(2) An attachment or other provisional remedy against the asset transferred or its proceeds in accordance with the procedures described in Title 6.5 (commencing with Section 481.010) of Part 2 of the Code of Civil Procedure.

(3) Subject to applicable principles of equity and in accordance with applicable rules of civil procedure, the following:

(A) An injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or its proceeds.

(B) Appointment of a receiver to take charge of the asset transferred or its proceeds.

(C) Any other relief the circumstances may require.

So, the creditors may still have an argument to go after the S Corp. Assuming they didn’t, however, and you are discharged in bankruptcy, then there is nothing your creditors can do to you. As you mentioned, your credit is already destroyed, and that’s about it. At that point you can just move on and begin rebuilding your credit.

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