Business or personal bankruptcy

Should you file business or personal bankruptcy?

Many businesses are legal entities separate from their owners, and include include Limited Liability Companies, S Corporations, C Corporations, and certain partnerships.

It is possible to file a bankruptcy for the business entity itself, or for the owner, or both.

Most small business owners wondering whether to file a business or personal bankruptcy, however, find that it is best to file a personal bankruptcy and allow the business to stop operating.

Why file for personal bankruptcy?

Personal bankruptcy:

Protects the owner from having his or her personal assets taken to pay the business debts
Allows the owner to quickly start business again with a new business entity that won’t have debt

Why not file for business bankruptcy?

Most types of business entity give their owners limited liability for business debts.

Limited liability means that the owner cannot be made to pay the debts of the business, only the business entity can be made to pay for its debts

This is true unless the owner has agreed to personally guarantee the loan.

However:

Most creditors now require owners to give personal guarantees of business debts so that if the business loses money, the creditor can still collect from the owner
Because creditors often insist on personal guarantees, many business owners now choose to file a personal bankruptcy

What happens before filing for bankruptcy?

In the time before filing for bankruptcy, a person’s business usually doesn’t have any money or assets for creditors (this is why you are considering Chapter 7 bankruptcy or Chapter 13 bankruptcy).

So, if the owner has personally guaranteed the business debts, the creditor will collect from the owner

If the owner has not personally guaranteed the debt:

The creditor must collect from the business
The business has no assets, so the creditor can get nothing

So if the owner has not personally guaranteed the debt, then the creditor can’t collect from the owner.

If the owner has personally guaranteed the debt:

The creditor will levy the owner’s bank accounts and wages to try and collect the debt

How does filing for bankruptcy help?

Filing a bankruptcy will stop forever the levying and garnishment of the business owner’s wages and bank accounts.

It discharges all personal liability of the owner for the business debts

If the owner wants to keep doing the business, it is usually best to file a personal bankruptcy to discharge his personal liability, and then to create a new business entity to start fresh without any debts.