Business Bankruptcy in Colorado
February 12, 2014
By: David M. Serafin
As one of the few Bankruptcy and Tax lawyers in the Denver metro area and in Colorado, I’m frequently requested to opine as to whether a business should file for Bankruptcy. A few choices are apparent: a corporation can only file for Chapter 7 or Chapter 11 relief but not Chapter 13, which is statutorily reserved solely for persons. A corporation may file a Chapter 11 to reorganize and keep its door opens with the owner simultaneously filing for Chapter 7 to eliminate personal guarantees on the business debt.
Unless the corporation has considerable assets and debts with numerous creditors making claims against the Bankruptcy Estate (so as to require the appointment of a Trustee to administer assets and pay creditors) and/or unless the IRS has assessed a large Trust Fund Recovery Penalty (TFRP) personally against an officer or director of the business, the most common situation is for the owner to wind up or dissolve the corporation with the owner filing for a personal Chapter 7 Bankruptcy. The corporate assets can then be liquidated to pay creditors of the business and, to the extent anything remains after business creditors are paid, the Bankruptcy Trustee can make claim to such assets.
A factor discouraging an insolvent business from seeking relief under the Bankruptcy Code is that a corporation (in Chapter 7 or 11) is not entitled to discharge debt. So, if a business owner personally guaranteed business debt (and, in today’s lending climate, what bank lends to a business without a personal guarantee?), usually in the form of credit cards, a line of credit or property lease, only the personal bankruptcy will get rid of the debt.
For business owners with a massive amount of personally guaranteed business debt, Chapter 7 relief is often preferable because it doesn’t involve a 3 to 5 year re-payment plan like Chapter 13 does. (Comparatively, Chapter 13 is advantageous for those who want to keep and pay back the value of business assets over an amortized payment schedule and not worry about seizure by a trustee, or who opt to pay down non-dischargeable income or payroll tax debt without further interest and penalties accruing.) If the business debt exceeds total consumer debt (such as from a mortgage, medical bills or student loans), a Chapter 7 filer is not required to complete the Means Test and will qualify regardless of high income. But, some debtors may have significant business debt which (particularly with interest accruing) can never be paid back but that which is still exceeded by a mortgage or other consumer debt. These individuals ultimately might fail the Means Test and be pushed into Chapter 13. On the other hand, the unsecured debt limits outlined in the Bankruptcy Code only apply in Chapter 13 ($383,175 in 2014) meaning that those with mostly consumer debt who have overall unsecured debt exceeding this threshold are instead pushed into a Chapter 11 reorganization. Confused yet by the technicalities?
But, the entrepreneur who owns a valuable business and who personally qualifies for Chapter 7 will still often need to pay the Chapter 7 Trustee the value of any non-exempt assets not already claimed (by a lien or UCC filing) by business creditors. A non-service based business may own hard assets, liquid assets (cash or bank accounts) and accounts receivable that the Trustee can seize. This process provides for partial payment to personal creditors who timely file claims and delays the closing of the debtor’s case but it still may save significantly more money than having to pay a Chapter 13 Trustee over at least 3 years. (But, again, to the extent that keeping the business property is vital, Chapter 13 allows a debtor to pay back – interest free – the value of all assets over a much longer period free of creditor harassment.)
Last, a personal Chapter 7 or 13 Bankruptcy eliminates any taxable income ramifications stemming from debt forgiveness, which would otherwise impose a massive tax hit for those discharging large personal guarantees on business debt.
Contact the Law Office of David M. Serafin at (303) 862-9124 for a free consult if you want to learn more about how the distinction between personal and business Bankruptcy (and the accompanying tax implications) applies to you and your business.