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We Were Forced to Close Our S Corp Business. – Jean


“Dear Steve,

Greetings,and thank you for your time and efforts…My husband and my self were forced to close our business of twelve years,OCT 2008 we are sole owners and a S Corp.

Two years previous we noticed a significant decline in the economic spending habits, this decline forced us to use all our equity line of credit in our home. We were in good standing with our bank and had excellent credit. We were firm believers of not using credit for the obvious reasons. However,strongly believed this slump would pass and we would resume the profitable business status if we could keep afloat we worked so hard to get where we owned no debt on the business.

We made the decision to opt for the equity loan the interest rate was much lower and less complicated then a business loan. MY question SIR ,IS If we FILE bankruptcy, A grim yet real possibility due to the fact that we are still unemployed and our home in preforecloser, Is it possible to use the 2nd mortage (equity loan) that was used to pay off business creditors, taxes, invoices, payroll, building lease etc….would that loan be stripped? under a S CORP STATUS? money was borrowed and used for business expenses We used this loan with the intentions of paying it back when the business picked up.

This much higher mortage payment is why we are losing our home. We can manage the original mortage payment of $159,000 with selling family antiques off and odd jobs however, the 2nd mortage on our home is around $195000 The estimated value on our home is maybe $295000 We have incured a visa debt of $30,000 $8000 was used for mortage payments what would be our best options? Thank you so much for your generous time.




Dear Jean,

First, let’s get off the notion that you were forced to do anything. Right or wrong, you made conscious decisions to borrow against the house to fund the business. Nobody put a gun to your head. You are not a victim here and I’m glad to see you using the same proactive efforts that you used to wind up here, to get yourself out of this jam.

If I read your question correctly, you took a personal loan against your property and then injected the money into the S corporation. The loan is not by the S corporation, but in your name and your responsibility.

Since this is a personal loan and if you did lose your home to foreclosure and then subsequently filed bankruptcy, both mortgages would be stripped with your other debts. For details I urge you to schedule a free bankruptcy consultation with a bankruptcy attorney licensed in your state. Without the loss of the home, the second mortgage will not be stripped.

The S corporation should be allowed to continue since it is a separate legal entity and not obligated for the loan directly from the lender. However, what you will need to check with the bankruptcy attorney about is if there is paperwork of you injecting or lending the money from you to the business. If so, that might create a bit of an issue that will need to be looked at.

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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • Steve Rhode


    Sorry if it came across wrong. I guess it is a byproduct of reading the “forced” statement so many times and your question just happened to be the Nth one.


  • JEAN

    Dear Steve,
    Thank you for your quick response.I believe there was a misunderstanding with the word forced.I was very grateful we were in the postion to have access to a line of credit that kept the business afloat for a while.We have never blamed anyone for our decisions good or bad.The “We were forced to close the business statement” was simply stating,we ran out of funds and capitol and had no other option but to close the business.I trusted a less presumptous comment would have been more helpful in these all ready confusing times. Best Regards,JEAN

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