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Corporate chapter 7. Can a small corp. file for chapter 7 to get rid of corp credit cards and still stay in business /operate

Riverside, CA |

I am just wondering. The corp is an S-corp with really no assets. We are drowning in these corp credit cards. Want to know if something can be done but don't want to shut our doors.

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Attorney answers 6

Posted

You cannot do it in a Chapter 7 for your business. There may be other structures which you can use to do this. For example, a Chapter 11 or combining your business with your individual assets and doing a Chapter 7 or 13 that way. This is a very fact specific issue.

The above is general legal and business analysis. It is not "legal advise" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here. Please visit my web site: www.avanesianlaw.com for more information about my services.

Posted

No. A corporate Chapter 7 does not result in a discharge, just liquidation of assets. Note also that most if not all corporate credit cards are either really issued to the individuals or have individual personal guarantees, so you are likely personally liable anyway.

Posted

Corporations do not receive a discharge in Chapter, just a liquidation of assets. One option to consider might be a personal Chapter 7 to get rid of any personal liability you have for the corporate debts and forming a new corporation. This can be particularly attractive to owners of a service business where the value of the business is really the skill and reputation of the owners as opposed to the assets.

I cannot say if this would be a good option for you or not, so you should contact an attorney who has experience in business bankruptcy cases. Whether or not you can filing for personal bankruptcy and keep the business running is something that can only be addressed after gaining full knowledge of the facts surrounding your situation.

First, the firm is a debt relief agency according to the U.S. Bankruptcy Code. We help people file for bankruptcy. We also do other stuff and we do it well, but Congress wants me to post this notice. Second, nothing on this site is legal advice. You are not my client unless you enter into a written agreement signed by you and me.

Posted

Mr. Avanesian is correct, and has helped you. You must choose: liquidation in Chapter 7 (the corp existence ends) or reorganization in Chapter 11 (the corp existence continues). Focus on the BUSINESS. If it's worth saving, consider Chapter 11.

The above is meant to be valuable and not harmful, a lawyer intending to help a client or prospective client NEEDS facts. The more facts, the better. This medium, and often the question, do not promote fact gathering as well as an attorney's questions. So this answer is subject to revision based upon more facts. This response does not create an attorney client relationship and is not an attorney client communication. You should obtain advice from independent counsel of your own selection before proceeding. Visit JSCBKLAW.com for more info...

Michael Avanesian

Michael Avanesian

Posted

Avvo thinks you have 1 year of experience, you should fix that!

Posted

I agree with Mr. Cohen's advice. The idea of filing personal bankruptcy and then forming a new corporation to carry on the same business brings with it concerns of successor liability, i.e., the old creditors seeking to establish liability against the new corporation.

Carl H Starrett II

Carl H Starrett II

Posted

It depends on the individual circumstances of the debtor. I once represented a couple with a home-based printing business that gave them an annual gross income of over $100,000. It was a niche business will no value except to them, so I put them in a 7 and discharge over $500,000 in unsecured business debtor. They formed a new corproation that bought the equipment of the old corproation at FMV and we never heard a peep from the creditors of their old corporation. It isn't foolproof and has risk, but a lot more viable then paying a $20,000 to put a corporation without assets in to a Chapter 11.

William James Waters

William James Waters

Posted

I agree. I have also had similar situations in the past - In one, a small business Sub-S corp., we filed Ch.7 personal BK for the owners, listed all the corp debts as "contingent" liability, listed their ownership value in all of the corp assets (which didn't amount to much), and filed. They received a discharge and continued operating and have not heard from any of the creditors since. They are keeping up with payments on new post-petition debt and are still operating with no real negative effect. They understand that if an old pre-petition creditor tries to come after the business for whatever assets it has (which, as was disclosed in the Ch7, are virtually worthless) then if necessary they could close the business at that point, but their personal liability for that old debt would have already been discharged. So I don't think it is really always necessary to turn to a Ch11 just because there is a business involved.

Michael Avanesian

Michael Avanesian

Posted

Good advice!

Posted

Corporate debt is not discharged in chapter 7. Chapter 11 is not appropriate given these circumstances. Most companies in this situation simply shut down.

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