Liabilities for Business Debts in a Personal Chapter 7 Filing

Many of the clients I see as an Austin bankruptcy attorney have arrived at the need to file a Chapter 7 as a result of a business failure.  You may have done your best to make your venture succeed, but sometimes markets shift quickly, competitors prevail, technologies change, and things just plain don’t work out.  You may choose to put your business through a bankruptcy proceeding, or, as is more often the case, you may just wind it down informally.  If your business has little in the way of assets to repay creditors, bearing the added expense and time of a business bankruptcy serves no good purpose. 

If you are a sole proprietor and have been reporting your business income on Schedule C on your 1040, you and the business are indistinguishable in the eyes of creditors.  You are personally liable, and if the creditors pressure you, a Chapter 7 may be your best and only resolution.

If however, you are an officer of a C Corporation or a Limited Liability Company, or if you operate as an S Corporation for its tax advantages, the law generally shields you from the debts taken on by the company itself.  But, there are exceptions:

1.  Personal Guarantees:  If your venture has taken on some debt or signed an office lease, chances are high that you (and perhaps other officers) have personally guaranteed those obligations.  When you shut down the company, you’ll still be obligated to pay those off.  Even bankrupting the company provides no shield against that exposure.  

2.  Company Liabilities:  If any funds are held in trust for government entities, like payroll tax withholdings and sales taxes collected but not remitted, you may have to cough those up out of your pocket.  Corporate regulations vary considerably by state and change from time to time, but some states have gone further and will hold you liable for unpaid payroll, particularly if you let it accumulate knowing the company was headed into insolvency and would be unable to make good the obligations.  In any event, if you are the one who keeps the books and pays the bills and fails to forward any taxes held in trust or to pay any earned wages, you can be held personably liable in Texas.  

3.  Fraudulent Transfers: If you removed assets, including intellectual property, customer lists, etc., from your company with the intention of getting a head start on a restart, you may be guilty of fraudulent transfers and be required to make those good for the benefit of the company’s creditors.  

4.  Failure to Follow Corporate Regulations:  If you cease filing annual reports and meeting other routine corporate rules and continue to operate a business, you may transfer liabilities from the company to yourself.  It is important to stay on top of these otherwise routine matters.