Business Bankruptcy Depends On Who You Are

While knowing who you are may be central to philosophy and mental health, you wouldn’t think it poses a difficult question in a business bankruptcy.

You wouldn’t think the word “you” would be so challenging.

Yet, small business owners find it hard to separate themselves from the business, even when that business is incorporated.

After all, the owner’s financial livelihood rises and falls with the success of the corporation’s business.

You and your corporate business

Twice in the past two days, I had occasion to point out to clients who own small corporations that when the bankruptcy trustee says “you”, the trustee is talking about you, the individual, not the business that you have been immersed in.

How to sign for your corporation and not be personally on the hook

But the distinction is important.

In the law, the corporation that owns the business is a separate legal “person” from the flesh and blood human being who owns the stock in the corporation and serves as its officer and director.

The debts of the corporation are not necessarily the debts of the shareholder. The corporation can file bankruptcy without the shareholder, and conversely, the shareholder can file bankruptcy without impacting the day to day operations of the corporation.

Personal doesn’t exclude business debt

Another tricky distinction is “personal” versus “business”.

When an individual files bankruptcy, the discharge will eliminate his personal liability for the discharged debt. The creditor can no longer reach the debtor’s assets to satisfy the debt. No other entity’s liability for the debt is affected.

But the debts discharged may be “personal” or “business” debts. The distinction between the two is important for purposes of the means test. If someone filing bankruptcy has Personal debts are ones incurred for day to day living.

In analyzing a bankruptcy filing or answering questions from a bankruptcy lawyer or bankruptcy trustee, make sure you know who you are.