All too often business owners are forced to file personal bankruptcies when their corporation or LLC fails. This often comes as a shock to them as they thought they had shielded themselves from being personally liable for their business debts when they created their corporation or LLC.
There are many bankruptcy options for people with personal business debt. Which option is right for you depends on whether your business is a sole proprietorship, LLC or corporation; whether you are personally liable for your business’ debts; and what your goal is for your business moving forward.
The scenario we will address today is one in which you have a corporation that is liable for a few business loans as well as a couple of commercial leases. You no longer wish to continue operating the corporation, the corporation has no assets, and you want to make sure you cannot be sued personally for these debts. Unfortunately you personally guaranteed each debt, because you quickly found out that as a small business it is impossible to obtain a loan or lease without personally guaranteeing them.
Chapter 7 Bankruptcy
If your income is low enough to qualify for a Chapter 7 Bankruptcy, and most of your assets can be protected, a Chapter 7 is the easiest and fastest option for you. A Chapter 7 will absolve you of all personal liability for all of the corporation’s loans and leases as well as any personal credit card or medical debts you may have. However, the corporation will remain liable for the business debts, so it may make sense to also file a business Chapter 7 for your corporation. In addition, you may also want to speak with a CPA regarding the advantages of revoking your S-Election to become a C-Corporation prior to filing as you may trap forgiveness of debt income inside the business.
Chapter 13 Bankruptcy
If your income is too high to qualify for a Chapter 7 and/or all your of assets cannot be protected in a Chapter 7, and your debt is under $1 million, then a Chapter 13 Bankruptcy will be your best option. A Chapter 13 will also absolve you of all personal liability for the corporation’s loans and leases, but you will first have to complete a 5 year payment plan. Unlike a Chapter 7, which is a strict liquidation of your debts, a Chapter 13 is a reorganization of your debt and you will have to pay back a portion of your debt through the payment plan. In addition, you may also want to speak with a CPA regarding the advantages of revoking your S-Election to become a C-Corporation prior to filing as you may trap forgiveness of debt income inside the business.
Chapter 11 Bankruptcy
If your income is too high for a Chapter 7 Bankruptcy and your debt is over $1 million, your only option will be to file a Chapter 11 Bankruptcy. You will still be relieved of your corporation’s debts and will have to pay back a portion of the debt through a Chapter 11 Plan.
If you have business debt and wish to protect yourself from being personally responsible for your business’ debts, contact the Law Office of David M. Goldman, PLLC today. By engaging the assistance of an attorney not only experienced in bankruptcy law, but in asset protection as well, it may help you decide which type of bankruptcy is best suited for you.