If you’re a business owner with an LLC or corporation and you decide to file bankruptcy, your interests in your business may be in jeopardy; but there are ways to protect yourself.
Here’s what you need to know:
- When an individual debtor files bankruptcy, the stock they own in a business becomes part of the bankruptcy estate. Even if your business does not officially sell stock, any share of the business you own will become part of the bankruptcy estate just like other assets.
- When an individual debtor’s business interests become part of the bankruptcy estate that business may be protected by clauses in their operating agreement if they own an LLC or by the bylaws of a corporation. Many rules governing a company determine what will happen if one of its owners file bankruptcy. These rules are designed to protect the company from damage in the case of an owner’s bankruptcy. When a debtor files bankruptcy they need to review these rules to determine what mechanisms have been put in place to protect the business.
- If the bankruptcy trustee determines that selling the debtor’s business interest is a good deal for the estate and creditors, the debtor may have an opportunity to “buy-back” the stock. If the bylaws or operating agreement governing the business allow for it, the other owners of the business may have the first option to buy out the bankruptcy debtor’s stock. But the bankruptcy trustee will only allow a “buy-back” if the price is at least comparable to what he could get for the stock if he sold it to someone else.
- The good news is that if there are bylaws or an operating agreement which gives the other owners the first option to buy the debtor’s stock, the bankruptcy trustee is obligated to honor the contract. However, the bankruptcy trustee is not required to sell the stock to the other owners at discount prices. As mentioned earlier it must be sold at a price comparable to what the bankruptcy trustee could sell the stock for on the open market.
- One mistake that some debtors make is selling or transferring their business interests before filing bankruptcy. If a debtor transfers their business interests within 2 years of filing bankruptcy, they could face legal problems. The bankruptcy trustee could demand that the business interest is returned to the bankruptcy estate and if the transfer was done with the intent to manipulate the bankruptcy system, the debtor could face bankruptcy fraud charges.
Debtors who want to protect their business interests during bankruptcy need to speak with their Dallas bankruptcy attorney about the most effective strategies.