The answer to this question depends a lot on how you set up the business, and how you got financing for the business. Most small business owners set out to create their dream, to follow their passion, or just to be their own boss. If it were a perfect world, the business owner would be able to just go to the bank and get a loan in the business name only. So, if the business is incorporated (a separate legal entity, set up according to the state laws), then the business would be the only party that is responsible to pay the loan. Banks can get a security interest in the business equipment and accounts receivables also. But, most banks require small business owners to give them some guarantee that they will pay. This is because banks don’t want to just lose all of the loan when the business fails. They want to have something to fall back on, so they can still collect the money. Most people can only borrow money this way for a small business.
So, in setting up the business, and running it, if you borrow money, most of the time, you had to sign a personal guarantee. Sometimes, the small business owner has to give extra assurance that they will pay the loan back. So some small business owners end up putting their house up for collateral. When you do that, it acts as another mortgage on your home. So, if you don’t pay the loan, not only can the bank sue you personally, but they could also foreclose on your home.
Some business owners can’t get loans from a bank to start their business, or to keep it running when times are tough. So they end up using credit cards to make up the difference. Of course, the credit card interest rate is very high, and it ends up being very hard for the business owner to pay it back. And, don’t be fooled that the card and statement has the business name on it. Almost all of the time, you can only get the credit by signing PERSONALLY on the card. This means, again, that the small business owner is responsible for the debt, even if the business fails.
This brings us to the decision to do a corporate or personal bankruptcy. In most cases, the business does not need to file for bankruptcy protection, because it doesn’t own much in the way of equipment or assets, or accounts receivables. The purpose of a business bankruptcy is to “liquidate” or sell off the business assets to pay its debts.
Most small business owners have “signed on” and guaranteed so much of the debt, that they have to file a personal bankruptcy to get out from under the debt. But, it is important to review all of your options with an experienced bankruptcy attorney. You want to make sure that the attorney has dealt with these issues before and knows how to handle your situation.
The first step is to call to review your specific situation, because these matters are very complex. We can untangle the situation and review your options to get the best results possible for the business owner.
Daniel J. Winter
Law Offices of Daniel J Winter
