In the wake of today’s downturn economy, many small business owners often ask if it’s possible to file a personal bankruptcy petition that excludes their company and business partners from the case. Unfortunately, aside from filing under Chapter 11 of the US Bankruptcy Code, it isn’t possible to separate the two.
Due to the nature of obtaining startup cash and lines of credit, virtually every small business lacks the proper capitalization to protect the business’s owners from personally guaranteeing the company’s loans and lines of credit. Although a business may be operating as a limited liability company or a corporation, these private entities only receive enough capital to operate, and the owners can quickly withdraw and liquidated the business’s assets. Even though banks lending money might hold furniture, fixtures, and equipment as collateral, they still insist of having the company’s owners agree to be personally liable for the company’s debt(s).
So when a business runs into trouble paying its debts, its owners are often worried about lenders collecting from them personally. And, conversely, if the business’s owners run into debt troubles, they’re usually worried about the effect on their company and business partners. If the partners plan to shut down the business concurrently with their bankruptcy filing, the company’s debts won’t be a problem. Unfortunately, however, the US Bankruptcy Code doesn’t distinguish between the two. A legal person, whether an individual or a corporation or other entity, has the option of entering bankruptcy, but business-related debts can’t be separated from the debtor for bankruptcy treatment.
This is why business owners, in need of personal bankruptcy protection, are required to report all their debts in a bankruptcy case — including the business’s debts and things like their personal credit cards, car loans and home mortgages. Furthermore, for many small businesses, it doesn’t make sense to file a petition for the business entity at all. Individuals usually file with the goal of receiving a discharge of debts, but corporations and limited liability companies are not eligible to receive a discharge.
So, for owners of small businesses, filing bankruptcy has many pitfalls that need to be carefully examined before the case is filed. If you own your own business and are considering filing bankruptcy, contact our knowledgeable staff for a free consultation. We’ll help you understand your options and design a path forward towards a debt-free fresh start.