Image courtesy of Umpire's Photographer.
The business bankruptcy version of “who’s on first” is the inquiry: who is liable for this debt?
Get a clear answer or get ready for trouble.
A small business owner and his business are often indivisible in his mind.
When a bankruptcy lawyer doesn’t work to pull them apart, analytically, he should be charged with an error.
Seen at the courthouse
The debtor had been told: don’t pay this loan after filing, your liability will be discharged.
The prior bankruptcy lawyer didn’t dig deep enough to find out that the debt in question was contractually also a debt of the business entity.
The debtor dutifully didn’t pay it after the individual’s Chapter 7, and now the creditor secured by the assets of the corporation is foreclosing on the collateral essential to run the business.
Black letter law
The debtor’s discharge only protects the debtor personally from post discharge collection action: no one else. The obligations, and the exposure, of any separate business entity the debtor owns and operates, remain.
In practice
The action item from that black letter law is that you create three piles of bills when dealing with an individual and a separate business entity that expects to operate after the debtor’s filing:
- Debts for which only the individual is liable.
- Debts for which only the entity is liable.
- Debts for which both are liable.
It’s that third category that presents the problem, the intersection of the circles of liability below.
When the entity has contractual liability, failure to pay may result in unpleasant consequences to the entity.
Start by looking for
- SBA loans
- payroll taxes
- premises leases
- equipment leases
- business lines of credit
Each of those kinds of debt are likely to be guaranteed by both the owner and his entity.
Do a UCC check under the business name. Are there creditors asserting a security interest in the assets of the entity?
When you know what the obligations of the entity are, you can advise the debtor on what needs to be paid post filing to keep the entity in good standing.
Another time, we’ll talk about remedies for the debt of the entity.
