Dealing with a business that’s deep in debt and struggling to pay credits is a rough situation to be in, and some small business owners facing this challenge might resist bankruptcy out of fears about what it could do to your credit rating and personal assets.
If you’re considering a business bankruptcy but are worried about losing your car, home or even the business itself, it’s important to remember that bankruptcy is mainly designed for you to lose your debt and become debt-free. That eliminates the phone calls from collectors or the threats of lawsuits against you and gives you the option of starting over.
There are misconceptions about bankruptcy, which is why it’s important to speak to an experienced bankruptcy attorney who can review your situation and help you determine if you should pursue debt relief by filing Chapter 7 or Chapter 13 bankruptcy as a means of restarting your life. Let’s take a closer look at how a business bankruptcy impacts your personal assets and credit rating.
Can a Business Bankruptcy Help My Financial Situation?
Once you file for bankruptcy, an automatic stay immediately stops your creditors from taking any action against you, such as foreclosing on your house. The type of debt you have affects how you can file for bankruptcy.
Bankruptcy eliminates most unsecured debts, such as your credit card bills. If you’re running a business on a credit line, then bankruptcy can help you. If you’re a sole proprietor and personally liable for your business debt, then a business bankruptcy definitely affects your individual credit score. If you’re operating on your own, you and your business are the same under the law, and debts accumulated through your business will show up on your credit report. Filing for either Chapter 7 or Chapter 13 bankruptcy can impact your credit report for up to 10 years.
What Happens if My Business is a Partnership?
If your business is a partnership, it could make sense for each general partner to file personal bankruptcy, even though this would still affect your credit report. It’s more challenging to file a business bankruptcy on behalf of a partnership because if the debts don’t get paid from the liquidation of the company’s assets, the partners remain responsible for any unpaid debt.
If you’re a limited partner or do business as a corporation, it’s likely you’re not responsible for business debts, and if the corporation files a business bankruptcy, that likely won’t affect your credit. In that situation, the business bankruptcy and the business debts are not likely to show up on your credit report.
Your credit report would get affected if you signed a personal guarantee before your loan company was willing to extend credit to your business, making you responsible for payment of that business debt. There are also certain business taxes that, if unpaid, will become your responsibility. Trust fund taxes — for example, taxes withheld from employees’ salaries — don’t usually get discharged in bankruptcy. You’ll be held responsible if you collected these taxes but failed to send them to the proper taxing authority.
What Options Do I Have for a Business Bankruptcy?
A business bankruptcy doesn’t have to mean the end of your business. If you’re a sole proprietor liable for your business debts but you want to keep the business open, it’s important to understand that filing Chapter 7 means you’ll have to close up shop. If you want to keep your business running, you’re better off with Chapters 11 and 13.
Likewise, if you filed for personal bankruptcy and run a business, the personal bankruptcy will potentially impact your business credit score. Here are your main options:
This is a liquidation business bankruptcy. As a sole proprietor, you would be filing for personal bankruptcy, and a bankruptcy trustee gets appointed to sell your non-exempt assets and use that money to repay your creditors. Once your debts are gone, you can once again operate your business. If you’re incorporated, there are no non-exempt assets, so any business assets you have get liquidated by the bankruptcy trustee and the business gets closed.
This is a reorganizing of a business, mostly used by larger corporations. While not often used by smaller businesses, it’s definitely an option for staying in business if you’re a corporation, partnership, or LLC. A bankruptcy court would need to approve a reorganization plan you submitted that usually involves modifying your ongoing payment terms for the debt you have, and selling assets to repay some of them.
This is the best option for sole proprietors who don’t want to liquidate all their assets, especially if you’re ready to repay all or parts of your debts over an extended period. How long you get to pay back those debts, either as an individual or business, is going to depend on your monthly income, but Chapter 13 bankruptcy provides an automatic stay preventing creditors from collecting on their debts while you develop a payback plan.
Trust an Experienced Bankruptcy Attorney in Louisiana
When you’re considering this process, a good bankruptcy attorney can help you understand which approach to bankruptcy is going to work best for your situation, and how to best proceed afterward.
Orum Young Law has more than 35 years helping the people of Northeastern Louisiana file for bankruptcy and regain control of their finances. In those 35 years, we have filed more than 20,000 cases and experienced unbelievable success. We help our clients understand the basic aspects of their case, including how to determine their expenses and handle any necessary filings.
Contact us today at (318) 450-3192 to schedule your free case review and start protecting your family’s future.