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S Corps and Personal Bankruptcy

written by: Stephanie Mojica•edited by: Michele McDonough•updated: 5/25/2010

One of the advantages of having a corporate business structure is protection of personal assets. But how does this concept relate when it comes to personal bankruptcy and S corps? The answers are outlined in this article.

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    Personal bankruptcy and S corp can go together if approached with honesty. Creative Commons rights-cleared commercial image by taberandrew. 

    Personal bankruptcy and S corps can still go together as long as no fraudulent acts were committed in personal and/or business affairs.

    So, the short answer is, filing bankruptcy on your personal affairs should not affect your ability to continue running your business as an S corp. The concept behind corporate structure is to enable honest entrepreneurs to keep their personal and business assets separated and enjoy legal protections in case of problems that arise.

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    The Fate of Your S Corp Shares and Other Assets

    Most likely you own shares, or stock, in your S corp. This is an important consideration that leads many business owners to pursue Chapter 13 bankruptcy (a restructuring of debts that allows you to keep most of your assets). In a Chapter 7 case, in which you're asking for complete legal forgiveness of eligible personal debts, your actual S corp shares and other assets are at risk. Simply put, the bankruptcy court wants to really make sure you can't pay those bills before approving the profit losses the creditors will incur in a bankruptcy case.

    Dealing with highly profitable S corp shares and the ramifications of any sale or transfer of these is best handled with your accountant or bankruptcy attorney; it is impossible and illegal to give advice on the law as it applies to individual S corp share situations in this general S corp and personal bankruptcy guide.

    So, while bankruptcy itself cannot kill your S corp, you may lose the proceeds from your shares if you pursue Chapter 7. Other personal assets such as other stocks, home equity and savings accounts are also at risk.

    However, your retirement accounts are never at risk in any bankruptcy.

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    Personal Bankruptcy and S Corp Ramifications

    Personal bankruptcy should not be rushed into lightly. This is a decision that may or may not affect your business, but will definitely impact your personal financial life for 7 to 10 years.

    Sometimes corporation owners are held up to public scrutiny, especially if in a financial or political business. So while filing bankruptcy on your individual debts won't legally affect your corporation, keep in mind this is still a public record. If you opt to run for political office or deal with a lot of financial affairs, personal bankruptcy could impact your reputation with some people with which you'd like to do business.

    Another consideration is that some credit card companies require the corporation owner's Social Security number link back to the account with a personal guaranty. This is due to the fact that some people have used S corp structure to circumvent poor personal credit after events such as bankruptcy. If your business needs large lines of Visa, MasterCard or American Express credit then you may not be able to acquire or keep these after a personal bankruptcy. Specific policies depend upon the account and lender, and this is likely to have minimal, if any, impact on a small business as long as company credit cards are in the business name.

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    Overview of Personal Bankruptcy Effects

    You may choose to file Chapter 7 bankruptcy, which is a legal request to have your consumer debts absolved. But some debts can't be included in any bankruptcy case, such as most student loans, taxes less than three years old, drunk driving-related lawsuits, child support, alimony, and court fines.

    If you have significant personal assets, you'll usually forfeit them in Chapter 7. Business debts also can be a tricky area, leading many S corporation owners to pursue a Chapter 13 debt repayment plan.

    In Chapter 13, you repay part of your debts in a court-supervised bankruptcy case. You keep most, if not all, personal assets. This reports on your personal credit for 7 years as opposed to 10 years with Chapter 7.

    Personal assets you gain after Chapter 7 is finalized, including tax refunds, usually can't be touched by creditors or the U.S. Bankruptcy Court. However, if you pursue Chapter 13 the court's trustee may require you to pledge part or all of your next two or three tax refunds to the debt repayment plan. Completing this type of repayment arrangement can take up to five years, but this depends upon your personal income as well as debt load.

    Declaring personal bankruptcy while running an S Corp is certainly possible, however, speak to your accountant or attorney before you make the decision to file bankruptcy if you own a business.