I am the co-owner of a Type S corporation incorporated in Pierce County, WA. – 2 people total. What are our bankruuptcy options and ramifications?

We have a loan payment of $3,425/mo to the man we bought the business from and are about to run out of savings to tap to stay current on the loan. We need to know how this can be handled. There are no employees left to cut, no expenses to reduce of consequence. Is Chapter 11 reorganization possible?

Asked on June 1, 2009 under Bankruptcy Law, Washington


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

It sounds like liquidation is a better option. A reorganization-type bankruptcy makes sense when the company and the debt can be restructured in such a way as to allow the company to continue as a going concern while paying creditors most of what they're owed. However, you say there are no employees left to cut and no meaningful expense reductions to be had. Therefore, if you can't make the $3,425 per month payment now, there's no restructuring or "fat trimming" to be had that will enable you to make it. Therefore, there is no reorganization you can do that will allow you to continue as a going concern while paying at least most of your debt.

That said, there's no reason to first talk to your creditor and see if you can't negotiate some kind of reduction. After all, you going bankrupt is not in your creditor's interest, either. Perhaps he'll allow you to stretch the payments out further, or accept a reduction in the amount owed; maybe he'll convert some of the debt into either a piece of the company (so an equity interest or ownership stake) or even some percentage of the gross revenues (for example, would he reduce the payments in exchange for getting 10% of your gross sales)?

Another question: is the payment personally guaranteed by you, or is it an obligation of the company? If it's an obligation of the company, the company can go bankrupt. If it's personally guaranteed by you, *you* would have to look to bankruptcy, which would have an enormous impact on your credit rating and ability to borrow for many years. You'd want to explore other options before that. One other option is, could you sell the business back to the creditor, in exchange for him or her cancelling the note and declaring it paid?

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