Business Bankruptcy

Is your small business struggling because of debt? Bankruptcy can be your lifeline. Most business owners who consider bankruptcy assume that they need to file bankruptcy specifically for their business. However, a personal bankruptcy in the form of a Chapter 7 or Chapter 13 often is a better solution. It will eliminate any personal liability you may have for business debts and wipe the slate clean. Once your bankruptcy is over, you can choose to move on with your life, or you can begin business again, this time free from the burden of debt.

Am I Liable for the Business Debt?

You may not be personally liable for business debts if:

• Your business is a corporation
• You are a limited partner
• Your business is an LLC

You will be liable for business debts if:

• Your business is a corporation, an LLC, or you are a limited partner AND…
  • you have cosigned on a debt
  • you have personally guaranteed a debt
  • you have personal and business liabilities that are co-mingled
• You are a sole proprietor
• You are a general partner in a partnership

If you are personally liable for your business debt, creditors can go after you and your assets when your business fails to pay its bills.

It is very common for small business owners to be liable for the debts of their business. Not only are many business owners sole proprietors or general partners, but many business owners who ordinarily would be protected from personal liability for business debts are actually unprotected because of various circumstances that can occur during the ordinary operation of a business.

Some owners of small businesses choose to file bankruptcy even when it doesn’t appear they will be personally liable for business debts. They do this to insulate themselves from potential claims by business creditors against them.

What are the Differences Between Bankruptcy Chapters?

Three chapters of bankruptcy are typically available to the business owner. Each has its advantages and disadvantages.

Chapter 7

What effect does Chapter 7 have?

• It some cases, it shuts down the business and liquidates the assets (if a business has significant assets the trustee might sell the assets or the business as a whole)
• In some cases, an individual can file Chapter 7 and keep their business, in particular, if the business is a service business and relies on the labor or expertise of the owner/ debtor or if the business has U.C.C. or other liens against it
• Both your business debts and your personal debts are completely eliminated without having to repay any money

Advantages of Chapter 7

• It is inexpensive to file
• It is over quickly
• So you can start a new business or move on with your life
• It also allows you to quickly rebuild your credit
• It eliminates any personal debts you have in addition to business debts
• You don’t have to pay any money back on the debt

Disadvantages of Chapter 7

• Not everyone qualifies
• Only certain assets can be protected

Chapter 13

What effect does Chapter 13 have?

• Both your business debts and your personal debts are eliminated, but at least a portion of both are typically paid back through a three to five year repayment plan

Advantages of Chapter 13

• It allows you to file bankruptcy even when you don’t qualify for Chapter 7
• You typically can keep most if not all of your assets, unlike in Chapter 7

Disadvantages of Chapter 13

• It is more expensive to file
• It is more complicated than Chapter 7, and you will face many extra requirements
• You pay at least a portion of your debts back
• It takes 3 to 5 years to complete
• You are under strict control of the bankruptcy court for the three to five years

Chapter 11

What effect does Chapter 11 have?

• It reorganizes your business so it can continue to operate in most cases
• Most debts will be paid back, but usually at renegotiated interest rates and balances

Advantages of Chapter 11

• You will not be required to shut down your business
• You can usually retain most business assets

Disadvantages of Chapter 11

• It is the most expensive and the most complicated chapter
• It takes a long time to complete – often more than 20 years
• It does not grant you a fresh start
• You will still be liable for most of the debt in your business
• You will end up paying most of the business debt back
• It will not eliminate any personal debts you may have

What Chapter of Bankruptcy is Right for my Business?

Although most business owners will immediately think of Chapter 11 bankruptcy, Chapter 7 and Chapter 13 are often a much better choice.

Chapter 7 – The Best Choice

A chapter 7 bankruptcy completely eliminates your business debts and your personal debts without spending a dime, and it does so very quickly. It is simple and affordable, and you can start a new business when it’s over. If you can qualify for Chapter 7, it’s usually the best option.

Chapter 13 – A Great Alternative

If you don’t qualify for Chapter 7, Chapter 13 is a great alternative because it still eliminates a significant portion of your debt, both business and personal. There will be a payment plan through the court, but it will be a manageable payment amount and for a reasonable period of time; only three to five years.

Chapter 11 – Only if You Have No Other Choice

Chapter 11 does not give you a fresh start, and you end up paying virtually all of your business debts back. It is expensive, complicated, and takes a long time (sometimes 20 years or more). Its only advantage is that it allows you to continue to operate your business. But considering all of the disadvantages, it is often much easier to file another chapter of bankruptcy and start a new business, rather than filing for Chapter 11 bankruptcy.