This is a question that comes up frequently in my practice. A person owns a closely-held business, with one or two owners, usually a Husband and Wife. They call, explaining that the business cannot pay its suppliers, lenders, landlords, lines of credit. They ask “Can I just file Bankruptcy for the Business? I don’t want to file for personal bankruptcy.”
The thought is that the debts are just for the business anyway, and I shouldn’t have to file bankruptcy myself. That’s why I set up this fancy corporation or LLC! Almost always, a bankruptcy for the Owner(s) is the best course of action.
The reasons a business owner bankruptcy is usually the one to file for Bankruptcy Protection are:
1. Most often, the small business debts are personally guaranteed by the owner(s).
a. Leases- Most small business landlords require that the business owners sign a personal guarantee. So, the business owner is now on the hook for a long-term business lease, regardless of whether the business files for bankruptcy or not.
b. SBA or other business loans- Many times, the Small Business Administration requires a business owner to sign personally, as do other lenders.
c. Credit cards- the American Express or other cards you opened for the business expenses will have provisions making the business owner sign as a guarantor.
2. A business bankruptcy opens up all of the finances to a trustee or creditor examining the records for improper payments, salary or loan paybacks to the officers. The Bankruptcy Trustee can then sue the owner(s) personally, to get the improper payments back to pay the creditors.
3. A business does not get a “discharge of debts” as a result of a corporate bankruptcy, so its effects are limited. It is really a liquidation of assets, but costs a lot more than a regular liquidation under State Law, or just dissolving the business. When a Business files for Chapter 7 Bankruptcy, the Trustee is the liquidator, if there are assets, and sells them to pay creditors, but the trustee charges are almost always more expensive than a state court liquidation, or hiring a third party to liquidate the business assets.
Contact me if your business is in trouble. With the right planning, I can develop a comprehensive financial plan to either save the business, or wind it up, and still protect your personal assets. These are complicated matters that I can help simplify for you. Act now to protect yourself!
Daniel J. Winter
BankrutpcyLawChicago.com
312-789-9999
