Bankruptcy and Your Company

bankruptcy and your limited liability companyWritten by Charleston Bankruptcy Lawyer, Russell A. DeMott

You need to file bankruptcy, but you have a corporation or limited liability company–maybe even more than one.  What happens to your company when you file?  Does the company need to file bankruptcy, too?

First, some basic concepts

To borrow a phrase my maternal grandmother was fond of, I’ve had a Dickens of a time dealing with this issue in my Charleston bankruptcy practice.  The first thing you need to understand is that your company–I’ll use that term to refer to your limited liability company (LLC) or corporation–is a different person under the law.  When I explain this to my clients, I refer to the company is “Fred.” After getting puzzled looks for a second or two, I point out that I’m just trying to drive home the point that YOU (the client) and your company are two different people under the law.  Just because you file, doesn’t mean Fred has filed bankruptcy.  So get this very basic concept down: you and your company are not the same

So do both Fred and I file?

Thank you for referring to your company as “Fred.”  We’re making progress here.  The answer is usually no, if we’re talking about Chapter 7 bankruptcy.  Chapter 7 is a “liquidation” bankruptcy.  All it does for companies is give them a decent burial.  The trustee simply evaluates the assets of the company and sells them to pay the company’s creditors.  In most instances with small “closely held” companies, there’s simply nothing for the trustee to distribute.

And then there’s the taxes and your (in)sanity…

First, in situations where there are assets and those assets are being pursued by creditors and the company owes payroll taxes, filing Fred’s bankruptcy may be very helpful.  Owners of small companies are typically liable for payroll taxes.  And for the most part, payroll tax liability is non-dischargeable in bankruptcy.  Rather than allowing the creditors (lenders, vendors, etc.) to satisfy their debts, it’s better to file bankruptcy for Fred to stop all the collection activity.  Tax claims are “priority” debt, so they’ll typically be paid right after costs of administration of the case–the trustee’s fees.

Second, filing bankruptcy allows Fred to quickly shut down and stops creditors from continuing litigation or other collection efforts.  Even though you (the owner) may not be the target of these collection efforts, creditors can still subpoena records, send nasty letters, continually call you, and depose you about Fred’s financial situation.  Sometimes it’s best to file bankruptcy for Fred so that you only deal with one person, the bankruptcy trustee, on these issues.  (For more information on this, read “Filing Chapter 7 Bankruptcy for Your Company” and note that there is a third reason for filing your bankruptcy for your company discussed in that post.)

Even if you don’t file Fred’s bankruptcy, he’s still important

Remember, when you file bankruptcy, you must list all your assets.  That means your interest in Fred.  The value is determined by compiling a basic balance sheet of assets and liabilities.  It might sound complicated, but it’s not.  In most cases, there’s no net value because Fred has far more debt than it has assets.  For more on this, see “Bankruptcy, Balance Sheets, and Fred.”  

Also, to calculate your income, you need to be able to generate profit and loss statements based on the company’s income and expenses.  Even if you file individually, you need to know about Fred’s financial health–or lack thereof.  This information will be required when you file bankruptcy.  For more information on profit and loss statements, see “Profit and Loss Statements for Bankruptcy.”

So while you generally don’t file bankruptcy for your company, it’s value, profit, and existence will still be highly relevant to your own bankruptcy case.

Post script: If your name is Fred, please substitute another name for Fred as you read this post.  Any other name will do.  It could be Richard, or Francis, or Wayne. Take your pick. And if you don’t file bankruptcy for Fred (or Richard, Francis, or Wayne), you can simply dissolve the company under state law.  (Click here for Articles of Dissolution for Corporations and here for Articles of Termination for a Limited Liability Company.)



Russell A. DeMott is a bankruptcy lawyer practicing in the Charleston, South Carolina area. He graduated from the University of South Carolina School of Law in 1993. While in law school, Russ served as a law clerk to Robert F. (“Bob”) Anderson in Columbia. Bob Anderson is a Chapter 7 bankruptcy trustee and, according to Bob, has taught Russ everything he knows.

During his clerkship with Bob Anderson, Russ also worked with fellow SC Bankruptcy Blog member Däna Wilkinson who now practices in Spartanburg, South Carolina. Russ still considers Däna a good friend and mentor. Unbeknownst to Bob Anderson, Russ also learned a lot about bankruptcy law from Däna.

Russ also served as a staff editor and the research editor for The South Carolina Law Review during law school.

For the first two years after law school, Russ clerked for the Honorable Harry A. Beach, circuit court judge in Allegan, Michigan. Russ says of Judge Beach: “Judge Beach was the epitome of an outstanding judge. He had both knowledge and wisdom. He treated lawyers and litigants with respect and always tried to be fair to both sides. It was an honor to have started my career as his law clerk. Judge Beach is now retired, and he is deeply missed on the bench. One attorney friend of mine actually cried during her last hearing before Judge Beach. And I’m sure many others have shed tears since his retirement. ”

For the next ten years, Russ practiced in Michigan in the areas of bankruptcy law, family law, criminal defense, and general litigation. As the years went on, Russ practiced more and more bankruptcy law as he gained an outstanding reputation in that area.

In 2005 Russ moved back to South Carolina to settle in the Summerville area. Russ’s wife grew up in Hanahan, South Carolina and most of his wife's family live in the Charleston area. "That can be both good and bad at the same time," Russ says. He officially declined to comment further about his relationship with his in-laws.

Russ has three daughters, three female cats, and a female dog. He is outnumbered. As Russ puts it, “to borrow a line from Jeff Foxworthy, I’m 'swimming in the estrogen ocean.'”

Russ enjoys the challenge of helping clients with their financial struggles. “I view my bankruptcy practice as a way to level the playing field between ordinary citizens—the voters—and Corporate America—the vote buyers. I’m unapologetically on the side of the little guy.”

Russ helps clients file Chapter 7 and Chapter 13 bankruptcy, as well as out-of-court solutions like negotiating with creditors.

Contact Information:
Russell DeMott, Charleston Area Bankruptcy Lawyer
DeMott Law Firm, P.A.
103 Grandview Drive, Suite B
Summerville, South Carolina 29483
(843) 695-0830
(843) 408-4443 (facsimile)
[email protected]

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