31 Oct A Corporation Will Not Protect You from the Trustee
Recently, a well-dressed, well-spoken person came to my office to discuss filing for bankruptcy. A quick review of claims by creditors revealed several lawsuits and an assortment of credit card debt. There were two mortgages and two car loans. Even though both husband and wife were working, the total monthly income was barely enough to cover the monthly expense. The house and the cars had no equity in them, the bank accounts were empty, retirement funds were dry. No assets and little income and total unsecured debt of about $150,000. It would seem to be an easy Chapter 7 bankruptcy case, right?
This individual was self-employed. When I asked what the business was worth, the response was “Why? Its a corporation, no one can touch that – it’s incorporated.” “How much of the corporation do you own?” The answer, “50%”. “What would the corporation be worth if you sold it?” The answer, “about 1.5 million dollars, but no one can touch it ’cause it’s incorporated.” “Really,……..”
What did this person miss? A corporation or limited liability company generally protects the owners from lawsuits against the corporation. But it’s a one way street, A corporation or a limited liability company does not protect the company from lawsuits against its owners. The net value of this corporation to the individual was $750,000. Since that ownership interest would not be exempt under the bankruptcy code, the Bankruptcy Trustee would gleefully sell that ownership interest and pay off all of the outstanding debt while taking a handsome commission leaving the scraps for the client. The client’s understanding of the protection of a corporation was exactly backwards.
The moral of this story? Be careful, it’s a legal jungle out there.