It’s not uncommon for small business owners to find themselves in a position to file a business bankruptcy. My experience helping clients who are small business owners file a business bankruptcy, is that most of these individuals are able to accomplish the necessary debt relief through a personal bankruptcy (Chapter 7 or Chapter 13).
Business Bankruptcy vs. Personal Bankruptcy
The primary reason to choose a bankruptcy chapter other than Chapter 7 or Chapter 13 to eliminate debt associated with a business exists when the business has extensive assets. Specifically, assets (equipment, receivables, inventory) which are not encumbered by debt. For most clients this is not the case– the business is in trouble because the debts associated with the business are not being met with sufficient income. This leads us back to Chapter 7 and 13.
Personal Bankruptcy and Business Debt
Typically, when a small corporation or Limited Liability Company takes on debt, that debt is taken out in the company name. Additionally, the loan documents also require the individual to guarantee the debt. If you review your loan or purchase money documents, you’ll find these two signature spots: one where you signed in the capacity as an officer for the company, and another where you personally guaranteed the debt by signing “individually.” This means that if the debt goes unpaid, the creditor can come after the company assets AND your personal assets. For this reason, a business bankruptcy would not accomplish your goals– you’d still have business creditors coming after you, personally.
Managing Business Debt Through Bankruptcy
A Chapter 7 bankruptcy filing will discharge your personal liability on the debt, even if it is business debt. What remains is the obligation of the business to repay that debt. This obligation can be managed by dissolving the corporation or LLC with the Secretary of State. The result is that the personal obligation and the business obligation are both relieved.
Owning Future Businesses
There is nothing about filing a bankruptcy that precludes you from starting another business. If you have capital for the business, you’re off and running. If you need to take out loans for the business or business equipment, you will need to sign off on the new loan both in the name of the new company and individually. If you’re worried about having access to credit to do so, consider that your current credit score will most likely not make you a good candidate for business loans. Additionally, depending upon your credit score prior to filing bankruptcy, you could see significant changes for the positive to your credit score within a year. Read this article I wrote on your credit score after bankruptcy, for more information.
North Carolina LLC Documents
If you own a small business and need to consider bankruptcy, I’d be happy to answer questions and provide guidance. Additionally, if you desire to create a new business after bankruptcy, I can assist with that process. I’ve created hundreds of small businesses with the Secretary of State throughout my 13 years practicing law in Charlotte, NC.
If you’d like to speak with an attorney about bankruptcy or any other options for managing debt and recovering from debt, please call me at 704.749.7747.