Created by FindLaw's team of legal writers and editors | Last reviewed February 21, 2018
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If your company or business has been in the red for a while, and you cannot seem to be able to pay off your business debts, your creditors may start looking for money. They can do this by threatening legal action against you or your business. The way your business is set up, and whether you or your business guarantee any debts or repayments, will dictate how much your creditors will be able to get from you. In addition, whether you decide to file for bankruptcy may also change how much a creditor can obtain.
Unlike the scenario described above, the Internal Revenue Service does not care how your business is organized and holds all business owners personally liable for any unpaid payroll taxes.
The way a sole proprietorship works is that you and your business are the same entity, meaning that you are going to be personally responsible for your business debts.
If your business is organized as a general partnership, you and every other general partner can be held personally liable for all of the business debts of the partnership.
Limited liability companies (LLCs) and corporations often do not have the problems regarding personal liability in general partnerships and sole proprietors. However, you may have given up your personal asset protection at some point without realizing it. There are many ways that this happens, but some of the most common are when a bank refuses to loan you money for your business unless you make a personal guarantee, or a statement of personal liability is needed before a company will rent you premises for your business.
Bankruptcy can always be considered when your business is deep in the red and you may be facing creditors coming after you. There needs to be a lot of thought before filing for bankruptcy, but it may be able to provide you with the time you need to get everything straightened out. There is no guarantee what property you will be able to keep after a bankruptcy (save for a few exceptions), so you have to prepare yourself.
Because of the nature of a sole proprietorship, you have the option of either filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy, assuming that you meet the requirements for both. Either of these options can be used to satisfy and wipe out your personal and business debts.
However, if you are a shareholder of a corporation, a general partner, or an owner of a LLC, and you have somehow waived your limited liability (e.g. personally guaranteeing a loan for the business), having your business go through a bankruptcy proceeding will not protect you. The only way to protect your assets in this situation is to file for personal bankruptcy.
You can file for Chapter 7 bankruptcy, assuming you qualify. Under this type of bankruptcy, a bankruptcy trustee will liquidate, or sell off, all the eligible property in order to satisfy your personal debts, including those that were taken on behalf of the business. At the end of the bankruptcy process (the liquidation of your personal property), your debts may be wiped out by the discharging of your bankruptcy.
If, on the other hand, you decide to file for Chapter 13 bankruptcy, you will need to propose a repayment plan to the bankruptcy court. This plan is based off of your income and you will need to show the court how you plan on paying off your debts over a period of time. Unlike Chapter 7 bankruptcy, none of your property will be sold under a Chapter 13 bankruptcy.
One of the main advantages that can come from filing for bankruptcy is time. Once you have filed for bankruptcy, the bankruptcy court normally puts an automatic stay on all debt collection, meaning that none of your creditors can foreclose on or repossess your property.
In addition, bankruptcy can wipe out unsecured debt (debt that is not secured by property, like credit card debt). However, secured debts (e.g. home mortgages, car loans) are another story and must be considered separately. Because you put up property as a security for the loan, your creditor is still probably entitled to take it, even if you file for bankruptcy.
Chapter 13 bankruptcy is the better option for people that want to keep their property. By filing for Chapter 13 bankruptcy, you are allowed to make a repayment plan, based on your income, and still get the protection of the court. In addition, you can include missed debt payments in a Chapter 13 bankruptcy, meaning that you can pay off these debts over a longer period of time, up to 5 years.
If your business debts are large and it is possible that you will be held personally responsible for them, you should talk to an experienced bankruptcy lawyer as soon as possible to figure out the best option for you. They can help avoid critical missteps and point out options you might be unaware of. Contact a local small business attorney today and get your business back out of the red.
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