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Advice if Business Partner Filed for Chapter 7

I found out that my business partner is filing for Chapter 7, are the funds in our company vulnerable to his bankruptcy?

I was co-chair of a fund raising organization. (Unincorporated Association). Then I found out the other co-chair was in Chapter 7 process. I became alarmed that all the funds are in a bank account under his SSN. Are all of our funds vulnerable to his Bankruptcy?

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You need to consult with an attorney in your area as soon as possible to discuss this situation and determine the risk created by your partner’s bankruptcy. Only an attorney in your state who is familiar with bankruptcy law can tell you how the bankruptcy court will treat your organization’s assets, and whether or not those assets are potentially subject to seizure as part of the bankruptcy estate. If the funds are in a non-corporate account which lists him as the owner of the account, then in all likelihood, the court will treat the money in the account as if it were your partner’s personal property. The funds may therefore be subject to inclusion in the bankruptcy estate, which means that the court would take them and distribute them to his creditors as part of his bankruptcy case. The exemptions allowed for personal property vary significantly from state to state, so it is possible that these funds would fall within your state’s exemptions, meaning that the money would not be taken by the bankruptcy court. Again, I strongly encourage you to consult with a bankruptcy attorney in your state to discuss this situation and determine what, if anything, you and your partner need to do to protect your partnership’s assets. To learn more about bankruptcy, I invite you to visit the Bills.com bankruptcy resources page.

If the bankruptcy court does take control of any of your organization’s funds, you may be able to petition the court to release those funds back to the partnership; however, you would need to prove that the money which was in the account in question did not actually belong to your partner and that he was only holding the funds. In order to substantiate such a claim, you could show, for example, that all deposits made into the account were made payable to the organization and not to your partner personally. Again, I strongly encourage you to consult with an attorney in your area to discuss this situation and determine the best way to address it.

If the funds in your partner’s account have not yet been taken by the bankruptcy trustee, you may want to remove the funds from any account listing him as an account holder and put them into an account in your name only. The best thing to do, in my view, would be to incorporate your organization so that you and your partner could open a corporate endowment account; incorporating your organization would likely shield the assets of the company from any personal liability of the partners. Filing articles of incorporation is a relatively easy process in most states; if you visit your state Secretary of State’s Web site you can probably find the forms necessary to file articles of incorporation, as well as instructions on how to complete the documents. Once again, you should consult with an attorney to determine how filing articles of incorporation will affect your organization’s exposure under your partner’s Chapter 7 filing. An attorney should also be able to guide you through the incorporation process to make sure that you complete all requirements under state law.

I wish you the best of luck in resolving this problem, and hope that the information I have provided helps you Find. Learn. Save.

Best,

Bill

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  • BA
    Aug, 2009
    Bill
    The shares a stockholder owns in either a C or S corporation are considered assets. Depending on the value of the stock, the other stockholders may find themselves with a fellow stockholder that is a bank or creditor of the stockholder in question. However, as a practical matter, most banks or creditors do not want to own stock -- they want cash. It is likely that the bankruptcy trustee will approach the other shareholders and ask if they will buy-out the shareholder in question. However, that's pure speculation, and trustees act according to the facts of each case.
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  • LD
    Aug, 2009
    Lynn
    My two business partners and I have an S-corp. One of the partners has filed Chapter 11. How does this affect our business accounts?
    0 Votes

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