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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 39039
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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Bankruptcy. California. Client has significant personal credit

Customer Question

Bankruptcy. California. Client has significant personal credit card debt and is upside down on his home. He owns a corporation. The corporation owes its creditors a significant amount of money, more than the value of its computers and other misc. equipment. The client personally guaranteed some of the corporate debt. The corporation is starting to bring in new clients, but not enough to save the company or the client's personal finances. Client wants to file ch. 7 and list the personal guarantees. Should he just walk away from the old corporation, start a new one with the new clients and let the creditors of the old corporation take the existing corporation's computers and equipment, if they want them? If not, what might be alternative approaches?
Submitted: 8 years ago.
Category: Bankruptcy Law
Expert:  Maverick replied 8 years ago.
Did you get an answer to this question that I posted. I am not sure what happened to it or if you rejected the answer.
Customer: replied 8 years ago.
Rejected. I'd like a second opinion. Corps rarely file 7 since all it is would be a trustee supervised liquidation with no discharge. My concern is the successor liability or if there are rules automatically tagging the successor. My client can liquidate and negotiate on his own the existing corp.
Expert:  Maverick replied 8 years ago.

Maybe I am missing something, but it would appear to me that if the corp defaults on its loans that were cosigned by the individual, then those creditors are going to come after the individual to collect the oustanding balance. At this point, your individual client is probably going to be rendered insolvent unless he has a enough money to actually cover the default. Assuming that he does not, he can do a couple of things: 1) do nothing and let the creditors eventually report the matter to his credit and obtain judgments against him which they can then attach to his real and personal property; or 2) file chapter 7, if he qualifies under the means test; or 3) file chapter 13.


Having said that, I will opt-out of the question so you can get a second opinion.

Expert:  socrateaser replied 8 years ago.

If the debtor is the sole owner of the corporation, and he files personal Ch. 7, then the trustee will own the corporation. Trustee could then decide whether or not to liquidate corporate assets in order to pay debtor's creditors. In the end, the corporation would remain and the debtor could buy the shares back from the trustee, assuming no third party wanted them.


Meanwhile, the debtor would no longer have any personal guarantee on the corporate debt -- but also probably no creditors. So, the corporation would just be an empty shell, waiting to be dissolved.


I'm not sure what the goal is here, but I don't see any reason to put the corporation into bankruptcy. That's just a waste of money.


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Customer: replied 8 years ago.

Alright. Trustee owns. But the client has business to do now and can't wait on the trustee or creditors to decide if the old company should go on. Seems that the old company is still "radio active" even if the client buys the shares back because buying the shares means he's buying the liabilities, as well. So future income could be sued for by the same old creditors. It seems that the only safe move is to file, stop business in the one corporation and start up a new one. Then the creditors would have to come after the new corporation on a successor liability theory. But if the client continues with the old corporation then his personal guarantees are dead but the creditors can still go after the corporation, and its assets.



Expert:  socrateaser replied 8 years ago.

My point is that corporate bankruptcy is a waste of money. Even a dissolution is unnecesary, because there are no assets. It's just an empty shell.