Expert: Christine Janklow - 10/28/2008

Question
Christine,
My husband and I own 30% of an LLC business that is more than likely going to need to be shut down within the next month or so due to the economy. After we sell off our equipment and pay off our loans, if there is still an outstanding amount on the loans as well as monies owed to various vendors we are behind with, how will that effect us? Are we responsible for 30% of that money? If we do not have it, what happens? Will it effect our credit, taxes, etc...?

Answer
Lynn: Thank you for your inquiry. I regret that your business did not do well enough to justify its continuation. You have asked a loaded question(s) so I will attempt to break it down and give as specific an answer as I can without knowing all of your dilemma.

1.After we sell off our equipment and pay off our loans, if there is still an outstanding amount on the loans as well as monies owed to various vendors we are behind with, how will that effect us? If you pay off you loans (in full) you may not have enough to satisfy everyone. This is a decision that your husband and his partners must make together, because there is an option to doing this, which is to settle using the available assets, with each and every creditor for less than what is owed. Understanding that the business will no longer have receipts, and its liabilities are greater than the assets, may give good leverage to achieve this. You can also hire an attorney or a commercial debt settlement company (such as the one I represent) to do this for you.

2.Are we responsible for 30% of that money? If you elect to pay the debts in full and there is a deficiency, than whatever your corporate policy dictates (should have been decided by your board, or amongst partners prior to this) is what should set the protocol for liquidation or exit strategy.

3.If we do not have it, what happens? You either, work to earn it and maintain payment arrangements until satisfied, or if it is a greater amount than your share can handle, well that leaves you only a couple of options i.e. further indebtedness by "consolidating" or "servicing", settlement or bankruptcy.

4.Will it effect our credit, taxes, etc...? If a delinquency occurs due to non-payment or even in settlements, there may be some derogatory reporting if debts are personally guaranteed. But this is not about saving your credit, it could not spare your business, so this must be about securing your financial future. Taking a short term hit on FICO is a very small price to pay for the long term stability dumping the debt will allow. You should not consider carrying a failed businesses debt around for long, just to save a credit score that is subject to go up or down at anytime. That said, if you do decide on settlement, some banks when forgiving debt may issue a 1099 for savings over $600. If going this route, check with your accountant to see if you may qualify for some insolvency rules defined by IRS tax laws.

I hope this helps. If so, please take a moment to provide a positive rating so others in similar situations may benefit from this answer.

Respectfully,
Christine Janklow