Business Bankruptcy FAQ

Business Bankruptcy FAQFor small business owners there are special considerations which must be carefully weighed before filing for bankruptcy. If your small business is in financial trouble, please call a San Francisco bankruptcy lawyer from JC Law Group PC to discuss your situation at (415) 963-4004.

Business Bankruptcy Options

Business Bankruptcy FAQ

My business is failing. Can bankruptcy help?

Bankruptcy may be a good solution in dealing with the debts incurred for the business. In general, if you guaranteed any of the business debt, you, the business owner will need to file for personal bankruptcy. The majority of the time, it is better for a business to simply dissolve rather than file bankruptcy.

If the business has a viable future, it may be possible to reorganize under Chapter 11 or Chapter 13.

Can I just file for bankruptcy for my business only?

If you as the business owner personally guaranteed any of the business debts, may or may not make sense simply file for a business bankruptcy (or dissolve). Assuming the business is its own separate entity (e.g., C-corp, S-corp, or LLC), and you personally guaranteed any of the debts, you will still be on the hook for the debt even if the business declares bankruptcy or you dissolve the business. This is the reason why oftentimes, it is necessary to file for personal bankruptcy in conjunction with dissolving the business.

With a personal guarantee of business loans, it is necessary to develop a comprehensive understanding of your individual income, assets, debts and overall financial situation in order to make an intelligent decision about handling a business that is in trouble.

Can I discharge SBA loans?

In general, yes. By filing for personal bankruptcy, it is possible to sever the personal liability that flows from the SBA loan. However, if you put up security for the SBA loan – such as your home as collateral – that liens will still survive the bankruptcy. It may be possible to “strip” the SBA loan lien in such a circumstance. Some liens against your home can be removed in Chapter 13 and Chapter 11. We discuss some of this in the Chapter 13 FAQ concerning the advantages of pursuing Chapter 13 bankruptcy.

What happens to the personally guaranteed business loans?

Assuming you are filing for personal bankruptcy, your liability to the business loan will be discharged, meaning you will no longer be legally responsible for the debt. The business, however, remains liable for the debt.

Can I continue to operate my business if I file personal bankruptcy?

This depends in large part on what chapter of bankruptcy you file, and the type of business. Generally, a business that is its own legal entity such as a corporation, LLC or partnership can continue to operate. The situation that tends to present the most difficulty is one who operates as a sole proprietor in Chapter 7. If your business is incorporated but failing, it may be required to dissolve the corporation and start a new one. (See: Failing Business)

What happens to the assets of the business?

If you are filing for personal bankruptcy, whether you own a LLC, corporation or sole proprietorship, you’ll have to come up with a valuation of the business and those assets will have to be exempted. Please note that with a sole prop, it’s the actual value of the business we count and exempt, whereas with a corporation and LLC, it’s the shares and membership interests, respectively, that we protect and exempt. Assets are just one part of a business’s value.

In a situation where the business is incorporated, if the debts of the business exceed the assets (and other parts of the business), exempting the assets becomes easier. If the business is held as a sole proprietorship, all of the debts associated with the business will be discharged, so it’s necessary to exempt all the assets. If the assets exceed your exemptions, you may consider filing for a Chapter 13 so that the trustee does not sell your business interests. The other alternative is to negotiate a deal with the Chapter 7 trustee where you make payment(s) to the trustee in exchange for keeping all of the business assets.

Is it better to file bankruptcy on behalf of my business or dissolve the business?

It depends, but we find dissolving the business through a wind-up is often the preferred method as it more economical. Moreover, a bankruptcy filed by a corporation does not discharge that corporation’s debt in a Chapter 7 (whereas individuals filing Chapter 7 do get a discharge). If no discharge is granted, why file a business bankruptcy? If the business has a lot of assets and creditors, filing a bankruptcy can provide an orderly distribution of the assets by the trustee.

If the business still has a future, reorganization under Chapter 11 or Chapter 13 (the only business that can file bankruptcy under Chapter 13 is sole proprietorship) may be appropriate. Discuss your options with a San Francisco bankruptcy lawyer.