With our recent economy, I’ve gotten many calls from business owners who are struggling to keep the doors open. Much like individuals, business sometimes find themselves in a position where bankruptcy is their best option.
What is Business Bankruptcy?
For businesses organized as a corporation or LLC for the purposes of shielding the owners from liability, a Chapter 7 Bankruptcy essentially closes the doors to the business, ending its operation. If the entity was properly organized, the debts should then stop with the close of the company, continuing to shield the owners.
Why file a Business Bankruptcy?
Unlike a personal Bankruptcy, a Chapter 7 business Bankruptcy does not Discharge the debts. They are still out there (meaning if the same business ever re-opened with the same tax identification number, the debts would still be there. So, why file?
What a business bankruptcy does is protect the owners of the business. It essentially sends notice to the world that the business is closed and no longer operating. That is a big message to creditors who were in the middle of or considering litigation against the company, and more importantly, its owners.
What about owners who have personally guaranteed debt?
Oftentimes, owners of small businesses are forced to personally guarantee the debt of the business. Especially on SBA loans and leases. This becomes a bit trickier.
The business Bankruptcy does not relieve the owner from personally guaranteed debt. But again, the Bankruptcy is notice to the creditors that the business is closed. Of course, the creditors can come after the owners if there is a personal guarantee, but the big question is will they. If they know the owner of the business is willing to close the business through Bankruptcy, the reality that the owner can later file personal Bankruptcy, if necessary, becomes a very powerful tool in negotiating the personal debt.
Privacy
The good news is that a business Bankruptcy does not affect the credit of the business owner or managers. This allows them to cleanly close this particular chapter in their life and cleanly move forward, often with the start of a new business.
Life after a business Bankruptcy
A smart business owner knows when it’s time to close the doors. However, this can be a painfully hard decision to make. The business is often the realization of their dreams for self-employment and independence.
The good news is that it doesn’t have to be the end. The owners are free to start a new business having the experience learned from the first business.
A business Bankruptcy is not a sign of failure. It should not be taken personally. Most often it is just a sign of the times or a particular economy. The important thing is to know when it’s time to close, instead of continuing to sink personal money into a business that is not going to correct itself. A well-planned business Bankruptcy allows the owner the freedom to move forward to success with a new venture.