1. If my corporation files for bankruptcy, what will happen to the personal guarantees which I gave to my company's bank and certain of its other creditors?
The bankruptcy filing of a corporation does not discharge or extinguish the liability of any personal guarantors. It is important to address any personal liabilities separately from the corporate bankruptcy case. In certain cases, you may be able to negotiate with creditors to settle for a certain amount from the company in full satisfaction of the entire debt owed. Also, business owners always remain personally liable for certain tax debts such as withholding and sales taxes.
2. If I file for bankruptcy, will I lose all of my assets?
In a chapter 7 case, a trustee is appointed to liquidate the petitioner's assets for the benefit of creditors. However, certain exemptions apply which may allow individuals to keep some or all of their assets. Further, in a chapter 11 case, the debtor remains a debtor in possession of its assets and can manage the bankruptcy process and propose a plan to address the assets of the company.
An exemption allows a debtor to keep property up to a certain amount. In some instances, the exemption is unlimited, such as with retirement funds held within a qualified account such as a 401(k) or IRA.
Debtors may keep their exempt assets. Any assets that are not fully exempt may be turned over to the bankruptcy trustee to liquidate and distribute to creditors. The exemptions are applied to the equity of an asset. Equity refers to the market value of a certain asset after all liens against it have been paid. Because a debtor is entitled to a fixed amount of certain exemptions, it is important to know the value of your assets.
For assets that are only partially covered by a debtor's allowable exemptions (i.e., the equity exceeds the amount of the exemption(s) used), the bankruptcy trustee may seize the entire asset and sell it. The trustee will return, and the debtor will be allowed to keep, the amount of equity covered by the exemption. The remaining proceeds of the sale will be distributed to the debtor's creditors.
3. How will a bankruptcy filing affect my credit?
If you file for bankruptcy, it will appear on your credit report for 10 years if you filed Chapter 7 or Chapter 11 and for 7 years if you filed Chapter 13. Having this information on your credit report has the potential to affect your ability to receive credit in the future. While finding future credit is not impossible, it is often provided at a higher interest rate and unavailable unless the credit is secured. For example, a credit card company may not offer you credit without an annual fee and a high interest rate.
It is important to understand that bankruptcy provides you with an opportunity to rebuild your credit. It does not provide you with a clean slate. What bankruptcy will do is give you the opportunity to start over as your past debts will be discharged and you will have the opportunity to live a debt free life. While it will appear on your credit report for up to 10 years, many people seeking to buy a home are eligible for a mortgage within two years of filing bankruptcy. All creditors view bankruptcy differently and if you maintain a consistent pattern of paying off debt after you file, some lenders may reward new credit behavior. Bankruptcy can also affect your ability to lease property and find employment.
