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  • Robert Weed

Do I need to file business bankruptcy?

Do I need to file business bankruptcy?

A lot of people who think they need to file business bankruptcy really don’t.   They often need to do a personal bankruptcy, instead.  And they need to just dissolve their LLC or S corporation.  Does this apply to you?

You probably don’t like to hear from me that you need to file a personal bankruptcy.  After all, Donald Trump has been through three or four business bankruptcies and NEVER filed a personal bankruptcy.  Why?

One reason is Donald Trump has business lawyers who make sure he doesn’t put a personal guarantee on his business debts.  What about you?  Did your landlord, your bank, the yellow pages, and your supplier make you sign a personal guarantee?  (Mine all did.)  If you have a personal guarantee then your biggest problem is they will come after you,  personally, for those debts.  Filing a bankruptcy for your business does not help you with that.  Not one bit.  Ouch!

If you are personally liable for business debts that you can’t pay, you need to look into a personal bankruptcy.

Do you need a business bankruptcy, too?  It depends.

Are you Donald Trump, with seven casinos?  A dentist with hundreds of thousands of dollars in equipment?  A manufacturer, with dozens of people working for you.  Then the answer is, yes.  You probably need  a Chapter 11 business bankruptcy.  (I don’t do Chapter 11.  In Northern Virginia, you might want to talk to Jason Greenwood, or Daniel Press. )

If your business is you, some tools, and your truck, then you most likely do not. Or suppose you a free lance photographer, with camera equipment.  Or a graphic designer, with expensive computers.  Again, most likely there’s no need for a business bankruptcy.

And if you have gone out of business completely, then you almost certainly do not need to file a bankruptcy for your business.

(North Carolina bankruptcy lawyer Billy Brewer, one of the smartest people I know, says a bankruptcy for an out-of-business corporation like an expensive funeral for a ghost.   Since there’s no body, no grave site, and no mourners, what’s the point?)

I saw where a well known, well respected, business lawyer charged $2500 to do a Chapter 7 for an excavating business that had been closed for over a year.  (He probably thought he was cutting them a break, because that $2500 was low for the amount of paper work required.)

On the other hand, you can close an out of business corporation in Virginia by filing two papers, each with a $10.00 filing fee.   That’s s savings of a lot of time and $2480.00.

What are those papers?   They are the “articles of dissolution” and “articles of termination of corporate existence”.  Both forms can be found here.

If your business is set up as an LLC, there’s a solution that’s even cheaper.  You can file a “statement or resignation of registered agent of a limited liability company” found here–there’s no fee!–and then if no new registered agent is appointed, you’ll get a notice after thirty days and then automatic cancellation two months later.

You can do this before or after your personal bankruptcy–but there are reasons why you might want to do it before.

Suppose your S corporation owns an F-350 truck, paid for, that you use to bring tools and materials to your job sites.  If you file a Chapter 7 bankruptcy for your business corporation, the bankruptcy trustee will take and sell your truck.  You don’t want that.

If you file a Chapter 7 personal bankruptcy, the bankruptcy trustee will take over your corporation, and then sell your truck.  Same result.  You still don’t want that.

Now suppose you file those two papers and close your corporation.  Or that one paper so they close your LLC.  Now the truck belongs to you.  That’s a lot better.

Under Virginia law, a “poor debtor”–that’s you–can protect from the bankruptcy trustee your motor vehicle, worth up to $6000 and your tools worth up to $10,000.   Your F-350 is your vehicle, and it’s also one of your tools.  Now you can protect it because it belongs to you, not your corporation or LLC.    Sweet.

And you, the person, can continue doing what you did as an S corporation or LLC.  Painting, dry wall, lawn service, whatever.

Then, if your accountant or business lawyer thinks you should, after a year or so, you can set up a new S corporation or LLC.

(You do not want to set up a new business right away after you dissolved the old one.  You should not go straight from Weed’s Lawn Service LLC to Weed’s Lawn Service, Inc.  Why not?  Under Virginia law, the new corporation or LLC would be liable for the debts of the old one, if it is a “mere continuation” of the old business.   You want the trail to grow cold, before you go back to a corporation or LLC.    But’s it’s ok to stay in business as yourself.  And you can stay in business as a dba:  Robert Weed dba Weed’s Lawn Service.  Your personal bankruptcy protects you.)

PS On Business Bankruptcies

I have some more  on all this, from a class the Northern Virginia Bankruptcy Bar had January 2017. NVBBA – Materials for 1-19-17 breakfast meeting

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