Expert: Christine Janklow - 6/24/2008

Question
My husband had auto repair shop & dealership under one company name (S corporation). He recently sold all equipment to someone who opened a new corporation & doing auto repair separately.
My husband kept the dealership (under the original name) thinking that he can continue doing business but now his company has $50,000 debt to the bank (for all assets & receivables of the company as collateral & also with personal responsibility) and also $20,000 to another person. This person agrees to take over the dealership for this $20,000 debt. The company currently has no assets & this person wants to get it only because of the dealers license which can remain because it was given to a corporation. Is it possible to sell the dealership & create an agreement that will not make the new owner (& company) responsible for my husband's $50,000 debt to the bank. My husband will deal with the bank coming after his personal assets himself but wants to know if the bank can come after the corporation if he makes this transfer.
Thank you for your advice

Answer
Raisa:
Thank you for your inquiry. The issues you present in your question appear to be more legal in nature than debt related. It would seem  the liability is secured (SBA?) but truly incurred as business debt under your husbands ownership. If there are no remaining assets it may be possible to have it written off as business bad debt. As for the personal loan, it may be fine to accept a transfer of the business for forgiveness of the debt but, I strongly recommend seeking the advice of a CPA and also consulting with a business attorney, specializing in mergers and acquisitions to advise on the sale and if possible precisely define your husbands liability as a result of the transaction. Forgiveness of certain debts may be a taxable event. In this case, the investment of sound legal and accounting advise could save everyone a lot of time, money and aggravation in the future.  If you need to find a good attorney in your area, you can contact your States Attorney General's office or visit www.findlaw.com. The IRS also gives a very concise definition of what constitutes "business bad debts" please visit http://www.irs.gov/publications/p535/ch10.html
Another option, in case the debt was unsecured yet was personally guaranteed by your husband; he may be a good candidate for business debt negotiation, a process that would enable him to repay a fraction of what is owed on the debt without the need for a bankruptcy. If the need arises, my company is one of several that provide such a service (see my bio). I wish you both the best in the future. If you found this advise helpful, please take a moment to provide a positive rating, so others may benefit as well.

Respectfully,

Christine Janklow