Debtors operating sole proprietorships can encounter disadvantages in a chapter 7 New York business bankruptcy as compared to more common no-asset, low-income, non-business debtors in the same chapter. They both face chapter 7’s income thresholds, yet non-business debtors need not worry whether a trustee will put a stop to their incomes or sell the assets that make their jobs possible. (There are options for ensuring you don’t lose a car in a New York chapter 7 bankruptcy.) Situations like these can arise for unincorporated businesses in chapter 7, so here are two reasons debtors might want to incorporate before filing.
Reason number one is liability. Many unincorporated debtors don’t worry about whether their businesses’ activities will injure someone else. Indeed self-employed businesses often include innocuous activities like selling goods on eBay. In those circumstances, debtors’ generic insurance policies for homeowners, renters, or cars protect them from accidents relating to their businesses’ activities.
The same might not be true for debtors whose businesses operate on rented premises. If someone is injured at a debtor’s site, then the debtor might be personally liable. In a chapter 7 bankruptcy, however, it’s the bankruptcy estate that’s liable, and this is not a situation a trustee wants to be in because
it increases the difficulties of the case without any offsetting benefits. The trustee’s commission won’t be any bigger, but the effort to obtain it will be greater. Thus, the trustee has an incentive to terminate the debtor’s business at the first opportunity.
Reason number two is the value of the business’ assets. Specifically, self-employed debtors may see their businesses’ assets and liabilities separately from their personal assets and liabilities. If a business owes more than it’s worth, a debtor won’t see a reason for a trustee to liquidate them. In reality, the trustee will see a business’ creditors as one of many, and whatever assets the business has are assets for all the self-employed debtor’s creditors. The trustee has every reason to terminate the business.
By incorporating before filing, the debtor changes the incentives for the trustee. Now, the self-employed, incorporated debtor owns shares in the business that just happen to be worth nothing. The trustee will not want to liquidate those. Obviously, debtors can transfer assets to the business but they can’t do so with liabilities. As a result, the trustee might be able to unwind an eleventh-hour incorporation before a bankruptcy filing. It will take time for the debtor’s business to incur the liabilities away from the debtor’s personal debts as they’re paid down.
If your business is struggling then discussing your situation with an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.