Protecting business from partner filing personal bankruptcy

The bankruptcy trustee can take over the shares of the s-corp and sell them unless the shares are eligible for an exemption. If the trustee were to obtain the shares, what would s/he do with them? Well liquidating the business, as you fear, is probably not not realistic. The trustee will want to get rid of the shares as quickly as possible using as little effort as possible. Unsually, that means finding other shareholders who can & will buy out the debtor-partner for a lump sum of cash. While it is possible that the trustee may send out an auditor to value the business, a business audit can run into some change, which the trustee may not wish to spend. Your partner may wish to find a bankruptcy attorney who can help him/her in planning the exemptions to use in a bankruptcy. There are several options that could result in little or no consequences to the business. Hope this perspective helps

I agree with Ms. Bunce. When it comes to Trustees, its all about the low hanging fruit. When he lists the shares on his schedule of assets, your BK partner will probably low ball the value. The Trustee is looking for liquid or easily sold non-exempt assets. There is not a lot of exemption value attached to shares of stock. The personal bankruptcy itself will not interfere with the day to day operations, but as long as the automatic stay of bankruptcy is in effect, the corporation should not take any direct action against his shares, or their value. Richard A. Rodgers, Esq. (805) 230-2525 [email protected] www.sdresq.com

Ms. Bunce provides good comments. If San Diego trustees see the opportunity to do so, and the debtor cannot protect the shares with exemptions, a trustee may actively offer up or solicit offers from other shareholders. Usually the shares in small companies have no value to anyone except other shareholders.

As you already know, it can be a complex issue. Basically, however, the bankrupt partner's ECONOMIC interest may be in play, and his/her bankruptcy trustee may seek valuation information regarding that economic interest. The company's accountant may be able to satisfy the bankruptcy trustee on that issue; often the corporate tax returns/K1s plus the company's balance sheet and profit and loss statement will be requested. The bankruptcy estate, of course, never will succeed to a proprietary or decision-making interest under such circumstances. At the end of the day, your best bet is to seek a consultation from a qualified bankruptcy lawyer. Generally speaking, if I were that lawyer, I would ask for the information listed above in order to discuss the company's, and other shareholders' options. Preplanning on the part of the corporation might also be important, so I would do it quickly.