Disputes and Litigation Against Your Business Not Stopped by Your Personal Bankruptcy Filing

Posted by Kevin on December 13, 2014 under Bankruptcy Blog | Comments are off for this article

Careful: if your business is not a sole proprietorship, legal disputes against your business are not “stayed” by your personal bankruptcy’s “automatic stay.”

This series of blogs has been about the benefits of filing a bankruptcy case when closing down your business. Through the power of the “automatic stay”— any ongoing lawsuit against you or your property must stop.  But there are some important exceptions to this, situations in which the automatic stay would not apply

Bankruptcy and its automatic stay protect the “person” filing bankruptcy and his, her, or its assets. Other “persons” are generally NOT protected. The issue is whether you and your business are considered to be the same or separate “persons” for this purpose.

If your business is a sole proprietorship, the law considers you and your business to be the same “person.” So a lawsuit against the business would be stopped by your personal bankruptcy filing. But what if your business was set up as a corporation, a limited liability company (LLC), or a partnership, and you are dealing with a lawsuit against both you and the business?

Disputes Against Your Corporation, LLC, or Partnership

• If your business was set up as a corporation or LLC and it is still operating when you file a personal bankruptcy, that filing does not “stay” any litigation against the corporation because it is a separate legal entity, a separate “person.” To the extent the dispute and/or lawsuit is against you personally, that portion would be stayed. But this may not help much if the lawsuit continues to disrupt and threaten your business.

• Even if your business in the form of a corporation or LLC is no longer operating, but itself still owns some assets, those assets are not protected by your personal bankruptcy filing. This includes assets that the business might own outright—such as receivables that it was waiting to receive, or business assets that are the collateral on business loans—such as vehicles or equipment.

• If your business is or was a formal or informal partnership, the partnership’s creditors or adversaries would very likely be able to continue pursuing the partnership and its assets, as well as pursuing your partner and his or her assets, regardless of your personal bankruptcy filing. That’s because partners are generally jointly liable for the obligations of a partnership, and your partner and the partnership itself are both “persons” separate from you. So you have the same problem just outlined above as to partnership assets.

That leads to the main lesson here. If your business legally qualifies as a separate “person,” and has assets that need to be protected, it may need to file its own separate bankruptcy.  Since we are focusing on closing down your business in this series of blogs, the filing would be under Chapter 7.

You should really consult with a bankruptcy lawyer on these issues.