Can Chapter 7 Bankruptcy help you eliminate personal liability for business debts?
It is true that filing Chapter 7 bankruptcy is a way to clear all liability for business debts, but it’s important to find out if it is truly a personal responsibility. A business that is not organized on personal credit would actually need to file a different type of bankruptcy. Start by figuring out if the business is structured as a corporation, LLC, sole proprietorship, or partnership to determine liability for the debts. An individual may be responsible if any contracts were signed with a personal name or personal property was used as collateral for any reason. There is no way to change the past, but handling the current circumstances is easier to navigate by truly understanding the circumstances of the debts.
Figuring Out if You Are Liable for Business Debts
A general partnership and sole proprietorship are situations that would leave an individual responsible for all of the valid business debts. This means that creditors can pursue personal assets to repay the debts of the business. A corporation, limited partnership, or LLC are considered separate legal entities that would not make a person liable unless they made the mistake of signing their individual name to a contract or other financial agreement.
How Does Chapter 7 Bankruptcy Work?
A valid Chapter 7 declaration provides immediate relief from the majority of collection activities. All non-exempt assets are sold by a trustee to effectively have all debts discharged. In the circumstances of a business bankruptcy, no assets are exempt from being sold so that the money can be distributed to creditors.
How Chapter 7 Bankruptcy Can Help Small Business Owners
Business structure is going to determine the benefits of filing Chapter 7 bankruptcy.
- Sole proprietorship would result in debts discharged the same way as personal debts, but with the benefit of using exemptions to protect some business assets. It would be possible to keep the business running with a clean slate on the debts.
- General partnership involves at least two individuals that would all be responsible for the debts. A trustee would take care of the business liquidation process and might also acquire personal assets if there isn’t enough to satisfy the creditors. Filing personal bankruptcy is an opportunity to have the obligation to repay the debt discharged.
- Limited partnership is a more technical agreement declaring that there is a general partner with the potential for multiple limited partners. The general partner is required to take full responsibility for the debts without any liability in the partners, but they have the option of filing chapter 7 if needed.
- Corporations and limited liability companies (LLC) that file are able to make the liquidation process simplified as it becomes the responsibility of the appointed trustee, but it does not discharge the debts. Any co-signers would have to file personal bankruptcy to eliminate the liability to repay the debts.
If you need help eliminating your business debts by declaring Chapter 7 bankruptcy, give us a call so that we can guide you through the process.