If I File Bankruptcy Will I Lose My NY Corporation?

The theory (but not the practice) behind bankruptcy is that someone who files for bankruptcy gives up all of their assets.  The assets are sold and the proceeds are distributed to the creditors.  The amount left unpaid is then forgiven, or discharged.  In practice, because of exemptions, which are things you get to keep even though you file bankruptcy, most people keep everything they own.

Occasionally, a debtor owns some type of property that is not exempt and it is subject to being sold.  An exemption is allowed for one car, so if you have two, one can be sold and the money used to pay something to creditors.  Of you may have a house which has more equity than is allowed by the exemption, and the excess equity is paid to the creditors.

Small Corporations

One type of asset that often comes up is a small corporation owned and operated by the debtor.  What you own is actually stock in the corporation, and these shares are listed on the bankruptcy papers in the same way shares you might own in Con Ed would be listed.

There is no specific exemption for stock.  However, there is one type of exemption called a “wild card” exemption of about $20,000 which can be used for any asset.  So if one has a small corporation, up to $20,000 in value can be exempted.  The big question that arises in the bankruptcy, though, is what is the real value of the corporation that is owned.

Valuing the Small Corporation

Most small corporations that we see have little or no value.  This is because the business is not something someone else can take over and operate.  If it is going to be sold, the buyer would want to be able to make some money from it.  If a plumbing business is incorporated, and the owner is the person the customer wants to come to their house, having someone else take over the business may not work because the customer wants the original owner to fix their pipes, not some stranger who bought the business.  The same would be true of other service companies where it is the individual whose services are wanted by the customer, not the company name.

How Many Employees?

If a corporation is successful enough that different employees provide the services, then it may be a different story.  To go back to the plumber, if he has expanded to where he has several trucks and employees, then you have a valuable business that maybe someone else can operate.  That type of business can be sold by the bankruptcy trustee.

There are, of course, exceptions to this.  A one-person locksmith business can usually be sold because the customers are not loyal to the operator.  They just know where the store is and go their to have keys made.  The same may be true of a shoe repair business.

Abandoning the Corporate Interest

In the vast majority of cases, though, the corporation has no value and the trustee does not take control of it and sell it.  What he does is abandon his interest in the corporation and it then reverts back to the debtor, who can continue to operate it if he wishes.  In most cases, though, there are debts that the corporation owes and it would be impractical to operate the business.  It is often these debts that drove the owner into bankruptcy in the first place.  But if you have a small corporation that does not have debts, you will usually be able to continue to operate it even if you have to go through a bankruptcy.