When it comes to incorporating your business, you are creating a legal entity that is separate from yourself. The corporation has debts, and you have personal liabilities. Neither one is responsible for the bills of the other. This means that if you ever file for personal bankruptcy, it should not have any effect on the corporation’s assets. However, you should keep in mind that you cannot quickly incorporate your business just before you decide to declare bankruptcy.
Types of Bankruptcy
There are two forms of bankruptcy: Chapter 7 and Chapter 13. If you’re trying to safeguard your business, the one you choose is very important. Filing for Chapter 13 puts you into a multi-year payment plan that is approved by the court. Every month, you pay the trustee what you have left after paying your reasonable and necessary living expenses. The trustee divides up your money and pays your creditors. Since your debt is getting paid down, your business is not at risk for being liquidated.
However, if you file Chapter 7, the trustee will have control of your assets that are not exempt and will sell them off to pay your debts.
Your unsecured creditors will not get 100 percent of what you owe them with either Chapter 7 or 13, the balances will be discharged so that you will not be responsible for paying them.
If you have incorporated your business and you file for Chapter 7, the trustee is unable to liquidate your business’ assets. After all, the assets are not yours- they belong to your business. Therefore, they’re not considered to be part of your estate. However, the problem comes up when you’re a shareholder.
If you own stock in your business, those are your personal property. Therefore, the bankruptcy trustee can sell them off- which could have an effect on your business. The person who purchases the stock will now own the business- or a portion of it, instead of you. While it’s possible that the trustee could do this, it’s not likely if you have a small business and selling the shares would bring in very little money for your creditors.