S-Corp bankruptcy impact on person credit and scores

Asked almost 4 years ago - Farmington Hills, MI

I am a 49% shareholder in a 15 year old MI S-Corp that has had no income in five years but has approx $30k in debt. Other three shareholders own 49% (wife) and two at 2% (daughters). If we file bankruptcy what affect does this have on our personal credit standings. Are we personally liable for this debt? There is about $3k in assets (cash) in the company.

Attorney answers (3)

  1. David A. Sebastian

    Contributor Level 10

    Answered . The previous response assumes that you personally guaranteed the debt, but you may not have done so. The existence, or lack thereof, of a personal guaranty will determine if you have any liability whatsoever for the corporate debt. Assuming you did not sign a personal guaranty, and you are not a co-debtor of any of the corporate debt, you should have no personal liability for the corporate debt, and a corporate bankruptcy filing should have no impact on your individual credit rating. You should not negotiate a reduction of the debt until you have answers to the questions set forth above. www.davidsebastianlaw.com. 248-758-2323.

  2. Thomas R. Morris

    Contributor Level 12

    Answered . I have read what the other two attorneys posted and have this to add:

    There are certain situations in which a person operating a corporation may have liability for a debt without having executed a personal guaranty. For example, certain taxes result in personal liability. A complete list of the possibilities is beyond the scope of this short answer.

    You should consult an attorney regarding this. My office is on Orchard Lake Road in West Bloomfield, so I am not far away.

  3. Dorothy G Bunce

    Pro

    Contributor Level 20

    Answered . Most owners of small corporations have to personally guarantee corporate debts because the corporation has no credit of its own. So much for the protection from personal liability offered by spending the money to incorporate the business, huh!

    While a Bankruptcy for the S corp might not affect your personal credit, nonpayment of the corporate debts that were personally guaranteed certainly will trash your credit scores.

    Since the corporation has some $$$, why not look into trying to settle the debts with this cash to avoid bankruptcy?

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