While Chapter 7 is commonly thought of as consumer bankruptcy, debtors often have business debt as well. Many people operate small businesses full-time or have “side hustle” businesses they run on a part-time basis. When entrepreneurs face overwhelming debt associated with the business, they may look to bankruptcy as a remedy. A common question is whether Chapter 7 can protect their assets and discharge the debts.
If you are liable for business debts that make up more than your personal debts, you can pursue Chapter 7 without having to satisfy the “means test.” In other words, you don’t have to demonstrate that your income is at such a low level that you can’t afford to repay your debts. This makes Chapter 7 a valuable form of relief for owners of businesses facing insolvency.
If you are liable for a business debt, your personal assets may be sold by the Chapter 7 bankruptcy trustee to pay off the creditor, but many of those assets may be ruled exempt from liquidation. That means your home and much of your personal property can be protected.
Your personal liability for the debts of your business depends on a number of factors. Among them are the legal structure of the company and whether you personally guaranteed any business debt. The following summarizes how Chapter 7 applies to the debts of business entities:
- Sole proprietor — In this ownership structure, there is no distinction between the individual and the company. The individual is responsible for all business debts.
- Partnership — A general partnership can file for bankruptcy in its own name. Note, however, that the general partners are liable for the debts. Even limited partners will be liable if they personally guaranteed the business debts.
- Corporation — A corporation has a wholly independent legal existence from its shareholders. These individuals are not liable for corporate obligations unless they personally guaranteed some of the debt.
- Limited liability company (LLC) — Like a corporation, an LLC has an independent legal existence. Its investors, known as members, are only liable for debts they personally guarantee.
There are various exceptions to these general rules. Corporate shareholder and LLC members can sometimes be held personally liable for debts incurred by the business entity. This can happen, for example, when there is fraud or gross negligence in the financial operations of the business.
Bankruptcy can be complex where business debt liability is involved. A business owner who is facing such liability should seek the advice and counsel of a qualified Chapter 7 attorney to review the available options.
Jeff Field & Associates is one of Georgia’s premier bankruptcy and debt relief law firms. With six offices in the Atlanta, Marietta and Athens areas, we serve individuals and businesses throughout the region. If you have a personal or business debt problem, feel free to contact us online or call 404-381-1278 for a consultation.