Legal Question in Bankruptcy in Wisconsin

Personal Bankruptcy Discharging Business Debts

If one's corporate creditors are properly notified and listed in a personal bankruptcy, a personal bankruptcy can indeed discharge personal obligations to pay the debts of a defunct business entity. Personal liability occurs when the former owners either personally guarantee to pay the debts to the business’s trade creditors or when they do not fight collection proceedings which name them personally. Priority business debts, such as restitution under potential criminal fraud cases, payroll taxes and trust fund/fiduciary obligations, however, are never dischargeable for either the owners or their corporation. Such "priority" debts carry personal liability for the persons who were in control of the corporation regardless of any bankruptcy. Unlike the former owners, corporate entities (including LLC's) are never entitled to a discharge of any kind in a chapter 7 (although a form of discharge is available to successful businesses operating under chapter 11). This rule is intended to prevent the use of hollow corporate "shells" to operate a business after a chapter 7 liquidation, so long as its old debts remain unpaid. Since individuals and businesses are different legal "persons," separate bankruptcy cases are often required for any bankruptcy to have binding legal effect for either. With clients of limited means who are closing a business, however, I often recommend that they give a higher priority to first doing their personal bankruptcy, since personal creditors (who can simultaneously be corporate creditors) are the ones who are likely to garnishee wages at their new job. Since so little is accomplished by filing a voluntary bankruptcy for a defunct corporate entity (no discharge being possible), it is often not worth spending the additional money to even file the bankruptcy for the "business only" case. An exception occurs when the business owns major assets which are best liquidated of in an orderly fashion. In that situation, orderly liquidation of the business is often useful to the former owners since it can potentially pay off debts which carry concurrent personal liability (such as payroll taxes). Filing a bankruptcy in that situation creates a duty for the trustee to pay off creditors with the liquidation proceeds under the priorities existing under the bankruptcy code. Luckily for the prior owners, payroll taxes and other priority debts which tend to carry personal liability for the owners are high on the payment priority list. Time is of the essence in filing a case like this, since the trustee can actually get only back which has gone to creditors within 90 days before the filing. Recovery is possible for even longer periods for money paid to corporate insiders. Unfortunately, corporate bankruptcies under any chapter often cost tens of thousands of dollars in legal and accounting fees, since the trustee will try to meticulously to unravel every detail of the corporations final years.