Legal Question in Bankruptcy in Wisconsin

Owner Liability and Credit Impact of S Corp Bankruptcy

Theoretically, a corporation's bankruptcy should not appear on the individual credit report of any corporate owners or principals. In practice, however, few creditors are willing to extend credit to small businesses unless the owners or principals are also willing to sign for the account and assume personal liability. These are known as "personal guarantees," and I never seen a small business which did not have a large number of them. They are often included in the fine print with invoices and can bind anyone who is unlucky enough to sign for any merchandise delivery. If these are present, or if corporate debts have otherwise been passed along to the owner personally (the most common type being unpaid taxes), the insolvency of the business is generally followed by the personal bankruptcy of its owners. Exceptions may occur if the corporation and its debts are acquired by a solvent entity or other provision is made for the corporate debts via orderly sale of assets at an auction, etc. Actually filing a bankruptcy for a defunct corporation is rarely worthwhile unless it is extremely valuable as a going concern for some reason (which usually means a chapter 11 bankruptcy). Otherwise, filing a bankruptcy for the corporation usually causes more problems than it solves personally for those in charge, since the bankruptcy trustee immediately examines all distributions of money or assets to the owners and often tries to recover them. That is why creditors often file involuntary bankruptcies, in order to recover assets which have been paid out within the 90 day "preference period" so that such funds can be fairly distributed between all creditors under the priorities set up in the bankruptcy code. For the owners, a better option than corporate bankruptcy is generally therefore a voluntary dissolution of the corporation, often followed by personal bankruptcy or other insolvency proceedings for its owners in order to discharge the personal guarantees and deal with other debt, such as taxes, which follow the owners