Expert: Christine Janklow - 7/12/2008

Question
My husband and I are sole shareholders in an S-corp that has failed. We have some debt that is personally guaranteed (credit cards) on which we are making payments. What is our best bet on the remaining unsecured debt (not guaranteed)? Should we bankrupt the corporation before we dissolve it, or "walk away"? We have had advice to do both. Thank you.

Answer
Janice:
Thank you for your inquiry. Please be advised that I can not offer any legal advice in regards to what is best for your situation. I strongly suggest you consult with an attorney to review the cause and effects of your options. However, when considering the choices, and the fact that you are choosing to act, because there are remaining liabilities of the company; here are what companies that legally dissolve business entities stress:

"Dissolution is when a legal entity informs the State of Incorporation that it no longer wishes to be a legal entity and is winding up all business affairs within that State. This is also known as a Cancellation to other business entities such as Partnerships. Dissolving or canceling an entity legally with the State of Incorporation is extremely important to both the entity and financial interest holders. When an entity pays its annual fees as the State may require, it is also paying for the protection of the state’s statues. Once the entity stops filing its annual reports it in turn has stopped paying for any protections the state’s statutes may offer. This means that if an entity or its interest holders claim that the entity is no longer functional and stops paying the annual fees, it is no longer protected by the State. If 2 years after the entity stops paying annual fees ends up in a lawsuit of business dealing, the interest holders can be held personally responsible for the lawsuit. The interest holders could also be held personally responsible for any outstanding debts owed by the corporation."
Please remember, that debt no matter who owes it is subject to a  statue of limitations (time varies for each State) for collections. If no assets remain to pay such debts owed by a corporation, it is possible that a creditor may simply "charge off" the debt as uncollectible. This however, is not a guarantee, but rather a gamble in guessing how aggressive a creditor will become in trying to recover monies owed. Again, there is no "one size fits all" answer, your situation is unique, and you should have professional advice to insure that you are doing your best to protect your remaining assets and interests. I wish you the best in resolving everything. If you found this answer helpful, please take a moment to provide a positive rating so others may benefit as well.

Respectfully,
Christine Janklow