Young client seeks chapter 7 relief for $$70K credit card debt
Business owner files chapter 7 as losses mount
CLIENTS are spouses who own and run a business together. They own an S-corporation that has been in business for 20 years. They have 10 employees. An S-corporation, as distinguished from a C-corporation, is one where the profits of the business “flows through” to the 1040 of the individuals, unlike a C-corporation that pays its own income tax based on corporate profits. For instance, if the S-corporation business makes a net profit of $100K for 2015, that net profit is added to the gross income of the stockholders of the S-corporation. If you own 20% of that S-corporation, you will have to add $20K to your gross income for 2015 in addition to your income from all other sources. Whereas if that were a C-corporation, the corporation would pay income tax by itself on the $100K profit for 2015, and either keep the net profit after tax in the coffers of the corporation as retained earnings, or distribute the net profit to the stockholders, in which case, the profit distribution becomes a dividend to the stockholder which the stockholders declares as dividend income in his individual tax return. Other than this differentiation in the treatment of corporate profit, both S and C-corporations have all the same benefits that a corporation provides.
Both S and C corporations are legally separate entities from their stockholders. Liabilities of the S and C corporations and deemed liabilities of the corporations themselves and do not transfer to the individual stockholders. This is called the “corporate shield” given to stockholders. For all intents and purposes by law, the corporation is treated as a separate and distinct “legal person” from the individual stockholders. For example, Volkswagen was recently found cheating on emissions. The company programmed the computers in their diesel cars to act in a way that it appeared that emission standards were being complied with. In fact, they were not. In other words, Volkswagen, the corporation told a bold face lie. When it was found out, there was a big scandal and its stock tanked. Massive penalties for fraud soon followed levied by the Feds in the billions. There were multiple lawsuits filed against Volkswagen. Buyers wanted to return what they bought. If you were a stockholder of Volkswagen, can you be sued for this corporate fraud with millions of victims worldwide? If you were a stockholder of Volkswagen, do you have to worry about being sued by the victims because you own shares in Volkswagen, certainly not. Because the fact that Volkswagen is a corporation means that the company is legally a separate and distinct entity from you as a shareholder. Therefore, you cannot be sued as a stockholder of Volkswagen for the corporate wrongdoing of the company. This is called ‘corporate legal fiction’ which is actually quite a brilliant idea that allows free enterprise to prosper. Without this ‘corporate shield and legal fiction’ people will be afraid to invest in businesses for fear of having their individual assets exposed to liability for anything that goes wrong with the corporation that causes damage to anyone.
In clients’ case, their business was doing well for 17 years. But the last 3 years was bad. Clients had to refinance their house to put in another $80K in the corporation to finance the loss of the last 3 years. Refinancing their house was actually making a bad situation worse. Why suck out the equity in your house causing you to pay a higher mortgage to keep a business that is hemorrhaging to keep it afloat? You’re letting the business loss drag your house down too. The corporation is supposed to be separate from your personal assets, but by refinancing your house, you combine the two together. In other words, if the business is sinking, why let your house sink with it too? You business can sink and die, that happens many, many times in the world of business. But to link your house to the business, that’s the same as getting a gun and shooting yourself in the leg.
Clients’ S-corporation owes $120K of bank loans and suppliers credit, which it can no longer pay. Clients decided to discontinue the business because of mounting losses. I ask them if they want to continue the business with a Chapter 11 and perhaps get away without paying any of the $120K. They decide for a Chapter 7 because too much competition has made the future of the business very bleak. Will the S-corporation Chapter 7 affect the stockholders as individuals, of course it will not. The stockholders keep their good credit and everything else. They are not affected by the bankruptcy of the S-corporation, because after all, even an S-corporation is a legally separate and distinct entity under the law, therefore, it can file a bankruptcy by itself without affecting the individual stockholders.
Young client seeks chapter 7 relief for $70K credit cards
Client is 33, and recently married. He also dabbled into business, using his credit cards to fund the business. The business never turned a profit. He maxed out his credit cards at $70K. One credit card sued him to collect $14K of credit card debt. At that time, he was still optimistic that his business would turn around and become profitable. But that was not to be. He entered into a stipulated judgment agreeing to pay $200 a month until the $14K was fully paid off. He just got married and wants a fresh start without debt, and opts for Chapter 7 relief. This will wipe out the $70K of credit card debt including the $14K stipulated judgment. Without debilitating debt, client can look forward to a fresh, new and productive life, and can even start another business that has a better chance of being successful from all the mistakes he learned from his failed business. This is what happened to Mr. Walt Disney who also sought Chapter 7 relief twice before his Disneyland business became successful. From two bankruptcies, Disney is now a global multi-billion dollar business with the new $6.0 billion theme park opening in Shanghai this June. Who knows, my young client may be another Disney in the making, learning from his previous mistakes. Maybe 10 years from now, client may become a business tycoon. Further, client’s decision to seek chapter 7 relief is completely confidential. Nobody needs to know unless he discloses it himself. His new wife is totally not affected even if she has her own assets. Those are her sole and separate assets.
“A faith and knowledge resting on the hope of eternal life, which God (Adonai/Yahweh), who does not lie, promised before, the beginning of time.” — Titus 1:2
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803.
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