Juristdiction: USA. A small S corp is insolvent and being liquidated. Main bank account now has $0, say $2000 owed on corporate credit card account (for which I am the guarantor), $1000 in wages owed (to the other 50% owner of firm if that makes any difference).

If $1000 comes in from a payment due to the company, I believe we have to decide per Section 507 of the bankruptcy code priority if the money goes to the credit card or due wages. It has not actually declared bankruptcy in any formal way as yet, but is agreed to be insolvent and ceased trading.

What is unclear to me is if the credit card is treated as an unsecured loan, or it is permissible to treat the sum of the credit card + current account as net assets of the company that were -$2000, and are now -$1000 but still less than zero, so the credit card can be paid down before the wages.

1 Answer 1


This is a slight oversimplification.

The credit card debt is a general unsecured debt of the company. Unused access to credit is not treated as an asset of the company.

The wages (along with various other claims) are priority debts of the company.

If a third-party general creditor is paid before a priority debt of the company within 90 days before bankruptcy (maybe it's 91 days, I didn't check), then the transfer to the third-party general creditor to pay its debt is a "preference" and can be called back into the bankruptcy estate to the extent that it would have gotten in a Chapter 7 bankruptcy without the preference payment.

The existence of the personal guarantee is not considered in this analysis.

These rules do not apply to payment made to a third-party creditor more than 90/91 days before the bankruptcy is filed, or in the event that a bankruptcy is never filed (e.g. in an assignment for benefit of creditors).

  • 2
    Now reading through this you make it much clearer to me that the key is maybe liquidation without actual bankruptcy, there seems to be little advantage to me to going through that step. Most helpful - thank you.
    – lunix
    Commented Nov 21, 2023 at 4:28

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .