Bankruptcy

Are You Responsible for Debt Incurred by Your Failed Business

By Jonathan

In difficult economic times, I regularly hear from small business owners who have been forced to shut down because of low sales. I recently heard from a blog reader named Evan who writes as follows:

Hello Jonathan! Of all the info I have found on line yours is the best. I have 2 questions if you don't mind answering. I live in CA and have a judgment against me already for 24K for not paying the remainder of a commercial building lease after I went out of business. 1)Will bankruptcy stop them from getting this money? 2) I don't mind paying them some of the money to be fair. If I paid them 10K and then filed bankruptcy for numerous other bad business debt would the bankruptcy then ask for the 10K back from them?

Here is my response: First of all, thanks for the kind words about my blog. I am glad you found my info helpful.

Secondly, I can only speak to how Georgia law works. California may have different rules. My California based colleagues from the Bankruptcy Law Network - Cathy Moran or Michael Doan - would be better resources for California bankruptcy questions.   While I am gratified to have blog readers from all over the country, I cannot speak to bankruptcy or state law substance and procedure in any state other than Georgia.  In addition, no one should confuse general legal commentary that appears on a blog like this with personal legal advice from a lawyer who has the time to sit down with you to discuss your personal situation.

If Evan was in Georgia, I would respond by saying that, in general, he might be personally responsible for the remainder due on a business lease if :

• the lease was in his name and not in a corporate name
• he personally guaranteed a corporate obligation
• he engaged in fraudulent conduct that would permit the plaintiff lessor to "pierce the corporate veil"

In most of these cases, commercial landlords do require the individual business owner to personally guarantee the lease.  Assuming  that is the case here, a personal bankruptcy would create an automatic stay that would prevent the plaintiff landlord from garnishing wages or bank accounts.

Evan's second point raises the possibility of a settlement negotiation.  Assuming that there is not a judgment in place that could be immediately turned into a garnishment, Evan may want to approach the landlord with a settlement offer - for example he might propose a settlement of $10,000 in cash with the express or implied threat that if the landlord does not settle, he will file bankruptcy and the landlord will get nothing.

If he did settle for $10,000, then file bankruptcy, that $10,000 might very well be recoverable by the trustee as a preferential payment.

Evan has raised a number of issues, which lead me to the conclusion that his type of situation is one that calls for competent legal advice based on an thorough review of his situation.  Ultimately Evan and his counsel have to decide what are the best possible outcomes here and move in that direction.

Full post as published by The BK Blawg on March 31, 2009 (boomark / email).