Expert: Michael Fay - 1/8/2010

Question
Hello Michael,

I am a 50% shareholder in a Subchapter S Corp.  My business partner, who owns the other 50% is walking away from the business and signing their shares over to me.  The business has a huge amount of debt (mostly credit cards) relative to its current sales revenue (thank the wonderful economy).  I have personally guaranteed the debt (credit cards, loans, leases, etc.) throughout the partnership, as my business partner was and is not credit worthy.  I am considering dissolution of the Corp and personal bankruptcy now due to the fact that I fear the business will not be able to meet its financial obligations in the VERY NEAR FUTURE.  

I have been a silent partner in the business for the past eight years.  I am disabled and collect SSI.  I am also gay and legally married in the state of California (pre Prop 8 marriage).  Is it possible that this action will affect my SSI and/or my spouse in any way?  I would be hesitant to take any action that might adversely affect his credit or my SSI (which I depend on for sustenance) and would be interested in your suggestions for alternatives to bankruptcy if this is, in fact, the case.  Please, what are my options?????

Answer
Hopefully the other partner has not yet left the business or if (s)he has, that it happened very recently.  You should discuss responsibilities what that partner has in this situation.  Signing over shares in a business that is having difficulties means that they are walking away free and clear and leaving you to hold the bag - they should not be able to do that.

My suggestion in the meantime is to notify all those for whom you have provided a personal guarantee that the terms and conditions under which that guarantee were provided have changed – namely that the partner has left the business and that as a result you will rescind the guarantee.  That is not likely to relieve you completely, because the benefits have already been received by the business and they will look to enforce the guarantee for what has already been provided – but at least it puts them on notice.  They might look to add another guarantor?  I also suggest that you read the language included in the guarantee(s) to see what options are available.  Also read the contracts that go with those guarantees to see what steps you can expect them to take; there could be additional options outlined in those contracts for you as well.

Wait, because the bad news continues.  A Personal Guarantee means just that – that your personal life is now open to claims.  In a marriage, that binds your partner as well.  If you own property together, it is also fair game.  So you might want to examine any such joint assets and change who holds title.

Here is where the other side gets their bad news.  The creditors will need to enforce those claims, and that usually means court.  The size of the debt will determine the court in question (small claims, etc).  The courts cannot touch the SSI and when they look at the big bad corporation trying to put the screws to the disabled person, you will usually get some sympathy in the decision.  But you are usually responsible for court costs as well, so the bad news there goes both ways.  Please note that if the business will owe taxes, that SSI CAN be attached for past due taxes.

Bottom Line:
Brian, you need professional legal assistance in your situation.  The above is an attempt to outline what you can expect but it is by no means a complete framework.  Each contract will be different and each company’s approach to the contract and the guarantee will be different.  The evaluation of bankruptcy is something to discuss with your partner and your legal counsel.  This is also something that will have an impact on your SSI.  Under the current bankruptcy law, Social Security benefits are NOT countable for means test purposes but they MAY be countable for budget purposes.  But every State has its own exemption rules and every bankruptcy jurisdiction has most likely reached a consensus about this issue.

Best of luck, you are approaching this directly and deserve credit for how you are looking to handle things.
Michael