Most bankruptcies are filed as Chapter 7 bankruptcies, which are often referred to as liquidations or straight bankruptcies. When an incorporated business files a chapter 7 bankruptcy, it does not have any of the exemptions that a person has, and business assets must be sold to pay the debts. The business is closed. Business debts are only collectible through the bankruptcy and are only paid from the business assets. Only a business that is incorporated can file bankruptcy. If the business is owned personally, only a personal bankruptcy is available.
Unfortunately, for most small businesses, the owner is usually personally liable for bank loans, because the lender has required them to sign personally, guaranteeing the loan. However, the owner is not usually personally liable for vendor debts and other indebtedness of the business. Owners are also personally liable for tax debts.
If the owners have personal liability, they may need to file personal bankruptcy (chapter 7 or chapter 13) to save their exempt assets and discharge as much debt as possible.
Planning is often required for a small business bankruptcy. When the business gets into financial trouble, every effort should be made to make sure that the tax withholding and other tax liabilities are paid and kept current. It is often difficult to decide when to close a business, but inability to pay its taxes is a strong indicator that the business should be winding up. It is only natural to be hopeful, hoping that things will turn around, expecting sales to improve, but when the funds to continue to operate a business run out, you have no choice. Seek advice before you reach that point.
It is important to note that an incorporated business does not receive a bankruptcy discharge. Bankruptcy provides a means of closing up and settling with the creditors. Dissolution of the business, or a receivership, are other options for an incorporated business. However, the business owner can get a personal discharge in a personal bankruptcy.
This site is intended for general information purposes and to give you some basic information about bankruptcy law. It is not legal advice. For legal advice you need to contact me and schedule an appointment so that I can determine how the law applies to you and whether there are exceptions that apply in your case.
James C. Reed P.A. is a debt relief agency. I seek debt relief for my clients and, where appropriate, file for bankruptcy relief under the U.S. Bankruptcy Code.