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My business is bankrupt. Do I need to file a personal bankruptcy?

Posted on Mar 29, 2009 in Bankruptcy, Business Bankruptcy, Chapter 7

Many small businesses face bankruptcy today.  Banks have cut off credit.  Sales have declined dramatically.  So many small businesses are closing.  People frequently ask me: “Do I have to file a personal bankruptcy if my business is bankrupt?”  All too frequently, the answer is yes.

In most cases, business debt to a bank is supported by the owner’s personal guaranty to the bank.  This means that the owner will personally be responsible to the bank for any shortfall on liquidation of the bankrupt corporation or bankrupt limited liability company.  In addition, business credit cards are almost always the personal liability of the individual shareholder of a corporation or member of a limited liability company.  Frequently, credit card debt of a corporation is significant.

In addition, key suppliers may have required personal guarantees of the owner as  a condition to extending credit to a new business.  So if the business fails, the owner may be left holding the bag as well.  The Small Business Administration often requires corporate borrowers to give a junior mortgage to their homes in order to secure a new loan. 

Finally, creditors may sue the owner of a corporation even if there is no legal basis.  They hope there will be no defense and that you will just consent to entry of a judgment against you.  So when your corporation or limited liability company fails and faces bankruptcy, be sure to get independent advice as to your own financial situation.  One saving grace – if your business fails and you are facing bankruptcy as a result, you may not have to worry about the “means test” and chapter 13 if your debt is “predominantly” business debt.  In such cases, the means test does not apply and you are eligible for relief under chapter 7.


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