Chapter 7 Risk For Wholly Owned Professional Corporation

A successful, licensed professional who operates his practice through a wholly-owned corporation decides to file Chapter 7 bankruptcy pro-se (on his own and without an attorney). The debtor fills out his own bankruptcy schedules and values his professional business as worth $0. He tells the bankruptcy trustee that the stock in the business is worthless even though he generates substantial professional fees through the business because the business depends totally on his own work. He argues that if  anyone else owned his stock he would stop working in which case the value would be $0. The bankruptcy trustee in this case didn’t accept the debtor’s position; the trustee demanded turnover of all the debtor’s stock in his own company and accused the debtor of trying to hide the value of the business’ current receivables and cash in bank.

This example- a condensed version of a case I’m involved in- illustrates the risk involved when an owner of a successful service business files a Chapter 7 bankruptcy. The Chapter 7 trustee may not accept a zero business value for a service business. If the trustee sees value in the business the trustee, by taking the stock, can effectively shut down the business ; the debtor is not going to work for the bankruptcy trustee. Goodwill and reputation are put in jeopardy by subjecting a service business to Chapter 7 bankruptcy. A debtor operating a successful service business will usually find a better result through Chapter 13 bankruptcy. In Chapter 13 the debtor stays in possession and control of his business; creditors are held at bay while the debtor’s business can generate income to pay his creditors.

This example also is useful to show the risk of do-it-yourself bankruptcy filings under the new bankruptcy law. Under the old bankruptcy law successful pro-se Chapter 7 bankruptcy was difficult, but possible. The new law has made it extremely risky for anyone other than a bankruptcy attorney to navigate through the choices and pitfalls of bankruptcy. A Chapter 7 bankruptcy is equivalent to a major financial surgery where all your assets are exposed, examined, and made subject to forfeiture. Doing your own bankruptcy to save some legal fees is usually the most expensive option.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida