The starting point when considering business bankruptcy is to understand who is legally liable for each debt of the business.
In almost every small business, you find that some debts belong only to the corporation; for some, the debt is actually that of the business owner; and for others both the entity and the individuals may be liable.
A basic premise of bankruptcy is that the automatic stay and the discharge apply only to the debts of the person who filed bankruptcy. If the corporation files bankruptcy, and it’s actually the shareholder that signed the lease, the leasehold debt is not affected by the bankruptcy.
How to determine who is liable
The starting point is to look at every bill sent to the business. Who is the bill addressed to?
Sometimes, vendors don’t make it easy. They address the bill to an individual they know at the business, along with the business name. You may have to ask the vendor, or maybe you know, if the business was started long before it incorporated.
For bank loans and premises leases, you probably have to go to the underlying documents themselves.
See Signing for your corporation so you aren’t on the hook
Make a list
To decide whether it’s the business or the business owners who need to file bankruptcy, you need a list of every creditor and who is liable for that debt.
Examine each business bill, lease, or agreement and create a table like this:
Business Debt Responsibility
| Debt of Corporation | Debt of Corporation & Shareholder | Debt of Shareholder Only |
|---|---|---|
By doing so, you will get a handle on who is exposed if the bill isn’t paid: the corporation or the individuals or both.
Why? Because the discharge of one entity won’t eliminate the liability of any other entity. More particularly, the shareholder’s discharge in bankruptcy won’t relieve the corporation of its responsibility for that discharged debt.
For individuals
Remember, too, that an individual whose debt is primarily business and/or tax debt is not subject to the means test.
