If your small business has a large amount of debt, bankruptcy can help you reorganize that debt to save your business, get rid of your personal liability for business debts, or simply liquidate the company. Depending on what your goals are, this can be done by filing a personal bankruptcy, business bankruptcy, or both.
Who Is Liable for Business Debts?
If you are the sole proprietor or a partner in a partnership, you are personally on the hook for the debts of your company. That means that if the business doesn’t pay its debts, the business’s creditors can come after your personal assets as payment.
If you are a limited partner or the business is a limited liability corporation (LLC), you are usually not responsible for the debts of the business. Creditors will only be able to go after the assets of the business, and not y0ur personal ones. Keep in mind that you may still be on the hook if you cosigned or personally guaranteed the debt.
What Are My Bankruptcy Options?
Chapters 7, 11, and 13 bankruptcies each offer drawbacks and benefits. Which one is right for you will depend on your debts and how your business is set up.
Chapter 7
Business: If you have a partnership, corporation, or LLC, you can file for Chapter 7 bankruptcy on behalf of your business. Chapter 7 is used to shut down and liquidate a business. The business cannot use exemptions and won’t be given a discharge. In a Chapter 7, a bankruptcy trustee sells the assets and pays the creditors.
Personal: If you are the sole proprietor, your business can’t file Chapter 7 on its own because a sole proprietorship is not a separate legal entity. All the business assets and debts are also the debts of the business owner. Because of this, you must file personal bankruptcy to get rid of business debt. In addition, if you were on the hook for the debts of a partnership, corporation, or LLC, a personal Chapter 7 can get rid of your personal liability for the business debts. Several small business owners who file for Chapter 7 business also file personally.
Chapter 13
Business: You cannot file Chapter 13 for a business. However, if you are a sole proprietor, a Chapter 13 bankruptcy will automatically include all business debts because you and your business are the same entity. Chapter 13 is designed to help you keep your property and reorganize your debt through repayment.
Personal: In addition to being used by a sole proprietor, Chapter 13 lets other small business owners discharge their personal liability for business debts. Chapter 13 is normally used by small businesses with a lot of personal assets or by who do not qualify for a Chapter 7.
Chapter 11
Both individuals and businesses can file Chapter 11, but it is more complicated than both Chapter 7 and Chapter 13.
Business: Chapter 11 is known as the business reorganization bankruptcy. It is meant for businesses who wish to continue operating while reorganizing their debts with a payment plan. Usually, it is a lot more expensive and more difficult compared to a Chapter 13 reorganization. There are additional requirements and creditors usually vote on and approve a plan before it can be confirmed.
Personal: A personal Chapter 11 is rare because a better alternative is usually available under Chapter 13. But if you have more than $1,081,000 of secured debt, or more than $360,475 of unsecured debt, you are not eligible for Chapter 13 and may be forced to file a Chapter 11.