Expert: Christine Janklow - 5/19/2009

Question
I am president and majority shareholder of an S-Corp (retail sales) that is failing. I have not taken a salary in over a year, and we have already reduced our expenses as far as possible.

In one month we will no longer be able to pay our bills - we have 2 credit cards and 1 loan. How do I tell if there is a personal guarantee on any of them? They are not showing on my personal credit, but we have not defaulted so I understand that they may not show.

I have no way to pay these bills at this time and the business is showing no signs of recovering in the current economy. I would like to dissolve the corporation and move on with my life, but I don't know the first thing about how to do that. If I do find that there is a personal guarantee, is it reasonable to borrow from my husband's 401(k) (he is not a shareholder or owner of the business) to pay the cards and loan? I would then find a job to offset the repayment of that loan since the interest and repayment amount would be considerably lower than they are now.

Additionally, one of the card companies is offering a 70% settlement, but I have discovered that the 30% "forgiven" will be reported as income. Can I cancel a verbal agreement for the settlement (there is nothing in writing that I have signed)? Or is it best to just accept the settlement since I have not been able to negotiate it lower?

Thank you in advance for your help.

Answer
Melissa:
Thank you for your inquiry. Your situation although complex is not uncommon. You claim to have outstanding debt that is nearing default and you don't know if you personally guaranteed this or not. My educated guess is yes, because unless you actually established a separate credit rating for your S-Corp through a long process of opening trade lines, registering D&B and other business credit reporting agencies,etc. almost every US bank requires a personal guarantee on these products. The language is often subliminal in their applications, but probably exists. That said, if you dissolve your corp, you are still on the hook and even more so if you have made that guarantee. Verifying this is nearly impossible by way of the card companies, and if you give up your corporate "veil" you might have more exposure for personal liability. As for taking a settlement 30% off is hardly enough to make a difference to you and if you default you can probably do better, but you would need the money to pay it off then and there. Most trusted advisors recommend to keep up the corporation for another year even if you have to pay the $800 to buffer out any business liability and you might want to consult with an attorney on this. As for your retirement, I don't know how old you are or the ratio of that versus your debt interest but most financial experts don't recommend this unless you have no other choice. You may be charged penalties, fees and taxed on premature removal of such funds, all to pay down unsecured debt??? As for taxation on cancelled debt yes there often are 1099s issued so depending upon what you save, paying the tax might be well worth it. Lastly if you do owe more than $50K and want to settle these accounts out once and for all, my company specializes in business debt settlement (see my bio for more info). Lastly, there is a BK which is mostly a last choice for most. I wish you the best and if you found this helpful, please take a moment to provide a favorable rating so others may benefit as well.

Respectfully,

Christine Janklow