Small Business Bankruptcy: Separating the Business Owner from the Business Itself

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Editor’s note: This posts comes to us from Cathy Moran, California Bankruptcy Lawyer and her story offers interesting points for the Small Business owners facing bankruptcy.

Cathy’s client operated a small corporation that wholesaled a product they had custom manufactured. When she met them, their SBA lender had sued the corporation and them as individuals for over $200,000. She and her client agreed that there was no defense to the suit for the corporation and no reason to even consider Chapter 11.

They had two meetings discussing, among other things, the need to conduct future business in a new entity. Then they talked about having a different ownership composition, to silence any complaints that the new entity was a successor to the old one.  The client had ideas and connections for the new business in the same field.

Chapter 13

The client’s individual Chapter 13 went swimmingly. They agreed to surrender their underwater house and wait out the foreclosure. The trustee had no objections and the plan was confirmed.

The levy

A month or so later, Cathy received a sheriff’s levy of the client’s old corporation’s bank account. The levy netted almost $6000!

The client call that followed shed some light: The client assumed that confirmation of his plan resolved, for all time and for all players, the suit on the SBA loan.

When an order for product came into the old corporation, he filled the order and used the old corporation’s credit card facility to accept payment. And that was the money snatched by the lender’s levy.

It is a business debt. The co-debtor with Cathy’s clients isn’t an individual, so the co-debtor stay doesn’t apply.

The lesson

According to Cathy, part of the takeaway here may go back to her long-held belief that entrepreneurs are the most devoted, optimistic, and hard working sorts around.

This client just couldn’t turn down a sale.  The tools he had to fill the order just happened to belong to a corporation with an outstanding judgment. Part of the problem is separating the business owner from the business itself.  If the owner’s problems with debt were solved, he assumed the problems of the corporation were solved.

Bottom line: Small Business Bankruptcy can be a complex process.  Cossitt Law can help you untangle your most complex debt issues while protecting your best interests.



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