It depends. As an individual, you cannot own the corporation itself because it exists as a separate legal entity. Instead, you hold your ownership interest in the form of shares, which is a type of property.
When you file for personal bankruptcy, you must disclose all of your property—including your corporate stock. Additionally, you’ll tell the court how much the stock is currently worth by assigning each share a value.
What will happen next will depend on the following:
- the type of bankruptcy that you file
- the value of your shares, and
- whether your state’s exemption laws will allow you to exempt (keep) them.
Specifically, each state allows its residents to keep a certain amount of property. If the property isn’t needed to maintain a household and employment, it’s unlikely that your state will have a specific exemption that covers it—and corporate shares aren’t assets that most states believe are necessary for everyday life. However, you might have a wildcard exemption that allows you to keep a certain amount of property of your choosing. In that case, you can use your wildcard exemption to protect your interest in the company.
(To learn more, read How to Find Your State Bankruptcy Exemptions.)
If you can exempt the shares, then the answer to this question is simple—nothing happens to your corporation. Your ownership interest and corporate participation will not change.
If you can’t exempt the shares, then the analysis becomes more complicated.
Filing for Chapter 7 bankruptcy. The bankruptcy trustee—the official tasked with overseeing your case—will be able to sell the nonexempt shares and distribute the proceeds to your creditors. If that happens, the corporation will continue to exist. However, you’ll lose all ownership interest in the company.
Keep in mind that just because the trustee has the right to sell your shares doesn’t mean that someone will want to buy them. The outcome depends primarily on how necessary you are to the profitability of the company.
For instance, it’s likely that the shares will sell if the company will remain operational (and profitable) without you. However, the situation will be entirely different if you own all or a majority of the shares and it isn’t practical for someone else to manage the business in your absence. For instance, if you’re the only plumber in a plumbing enterprise and you aren’t willing to stay on as an employee, then it will be unlikely that the trustee will be able to find a buyer. Without you, the corporation would be worthless. In that case, the trustee will abandon the property (the shares), and you’ll retain your ownership interest.
(For a general Chapter 7 overview, see Chapter 7 Bankruptcy Basics.)
Filing for Chapter 13 bankruptcy. In this case, you’ll be able to hold on to the shares even if you can’t exempt them. Instead, you’ll pay your creditors the value of the nonexempt stock over the course of your three- to five-year repayment plan.
(Find out more about this chapter by reading Chapter 13 Wage Earner Bankruptcy Basics.)
Go to the main business bankruptcy FAQ page.