Is Business Debt Discharged In A Bankruptcy?

Many of my bankruptcy clients are small business owners, and typically operate their business as a sole proprietorship, partnership or LLC. While these clients are currently facing financial hardship, the business represents a great potential for future income and a lot of hard work went into creating it. A common question when considering bankruptcy is whether business debt will be discharged as part of the bankruptcy. Ideally, clients would like to be able to file a personal bankruptcy and save the small business.

Personal Debts Are Discharged

When you file a Chapter 7 bankruptcy, debts you are personally liable for are discharged. For the typical small business owner who has taken on debt to operate a business, at the time the obligation was created, that individual was required to sign both for the business AND individually. An example would be a lease for a copier, or a loan for purchasing computers. The filing of a Chapter 7 would discharge that debt as to the individual. The debt would remain an obligation of the business entity.

Continuing to Operate Your Business

You can often continue to operate your small business after filing a Chapter 7, however there are circumstances where the bankruptcy court wants to see the business closed in conjunction with the owner being personally discharged of the debt. While businesses that are service-oriented can typically remain in operation, businesses with large assets and substantial income may need to dissolve. Regardless, business owners can usually re-establish the business under a new entity after the bankruptcy.

Discharging Company Debt

If you want debt discharged as to the company, then the company needs to file its own bankruptcy. Practically speaking, a company owner who has been personally discharged of the debt by a Chapter 7 simply files articles of dissolution with the Secretary of State—a much easier and cheaper way for the business owner to move on.

Reorganizing The Debt

If you have valuable business assets, income from the business or both, you’ll most likely want to continue to operate the business. In that event, filing a Chapter 13 bankruptcy is typically ideal, and involves working out a repayment plan with creditors that discharges most debt over time, while creating a monthly payment plan that is significantly more favorable than the current payments you are having trouble maintaining.

If you are having trouble with your finances, finding out your options is empowering. Call me if you’d like to speak to an attorney about your situation. The call is free and it will help you clarify your next steps. You can email me HERE or call 704.749.7747 to talk to me today.