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Southwest Development bankruptcy and Ms. Harper's investment

Merideth Harper has invested $25,000 in Southwest Development Company. The firm has recently declared bankruptcy and has $60,000 in unpaid debts. Explain the nature of payments, if any, by Ms. Harper in each of the following situations.

1.Southwest Development Company is a sole proprietorship owned by Ms. Harper.
2.Southwest Development Company is a 50-50 partnership of Ms. Harper and Christopher Black.
3.Southwest Development Company is a corporation.

Solution Preview

1. Since it is sole proprietorship, she is directly responsible for the debts of the company and the bankruptcy is therefore a personal bankruptcy. To the extent that Harper is totally relieved of the debts in a Chapter 7 bankruptcy, she would have to report cancellation of debt (COD) income on the other income line of the Form 1040. If Harper has other assets, they can be liquidated by the bankruptcy court and the funds can be used to retire the $60,000 of debt. Any excess funds in the bankruptcy, over and above what was necessary to retire the $60,000 in debt would come back to her. In this case, she would have no COD income because she would have ...

Solution Summary

In a 466 word solution, the comprehensive response carefully explains what Ms Harper could receive, if anything, on her investment assuming three different legal forms of a business.

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