Dealing With Business Debt

Dealing with business debt can be stressful, particularly if you are a small business owner. Our attorneys at discuss some steps that may assist you and help safeguard your company in the long run.

If you find yourself in the unfortunate situation in which your company or business has defaulted on debt, and you cannot seem to be able to pay off your business debts, your creditors may start seeking relief.  One of the ways through which they can do this by threatening legal action against you or your business. How much creditors will be able to get from you depends largely on your business structure. Furthermore, filing a business bankruptcy may change how much a creditor can hold you liable for.

Taxes on Payroll

It is important to note that unlike the scenario described above, the Internal Revenue Service does not take into consideration how your business is set up and holds all business owners liable in their personal capacity for any unpaid payroll taxes.

General Partnerships and Sole Proprietors

The way a sole proprietorship operates is that you and your business are the same entity, meaning that you are going to be personally liable for your business debts. In the event that you default on a business debt, creditors and others that have a claim for money against your business will be able attach your personal assets, like your personal checking and savings account to recover outstanding debt.

In the case of a general partnership, you and every other general partner can be held personally responsible for all of the business debts incurred. This is especially complicated and risky because, in general, any partner can legally bind the partnership to a business deal that may put the business into severe debt. If the business does not generate sufficient profit to satisfy its debts, the creditors can go after you or any of the other general partners and seize personal assets to business debt.

Limited Liability Companies and Corporations

In most cases corporations and Limited Liability companies (LLCs) and do not have the problems pertaining personal liability as opposed to general partnerships and sole proprietors. Your personal assets are most likely protected from creditors and others making claims about your business if your business has been structured as a LLC or a corporation. Be mindful that even if you organized your business in one of these ways, you may have given up your personal asset protection at some point without realizing it. This can happen by signing a personal guarantee when a bank refuses to lend you money or if a statement of personal liability is required in order for you to rent space for your business. By signing away your limited liability that comes from LLCs and corporations, you make yourself personally vulnerable for the business debts of your organization.

Dealing with Business Debt: Filing Bankruptcy

Filing a business bankruptcy may be a viable option when dealing with business debt.  Filing a business bankruptcy may be able to provide you with the time you need to get everything straightened out. However, there is no guarantee what property you will be able to keep after a bankruptcy (save for a few exceptions), so you have to prepare yourself.

Your Options for Bankruptcy

Due to the nature of a sole proprietorship, may either file a Chapter 7 bankruptcy or Chapter 13 bankruptcy, as long as you fulfill the eligibility requirements for each.  These options can be used to satisfy and wipe out both personal and business debts.

However, if you a general partner, a shareholder or an owner of a LLC, and you have somehow given up your limited liability (e.g. personally guaranteeing a loan for the business), a bankruptcy proceeding will not protect you in your personable capacity. This is because you have relinquished your limited liability and have become personally liable for a portion, if not all, of the business debts. In this case, the only way to protect your assets in this situation is to file for personal bankruptcy.

Assuming that you qualify, a Chapter 7 bankruptcy may help you liquidate or sell off assets to pay back debt. At the end of the bankruptcy process (the liquidation of your personal property), your debts may be completely eliminated by the discharging of your bankruptcy. This may be a very effective way of dealing with business debt if you are willing to forego certain assets.

For those debtors who wish to keep property that may be liquidated in a Chapter 7, have the option to file a Chapter 13 when dealing with business debt.  If you are eligible, you have to indicated to the Court how you will repay your debt overtime. Essentially, you will be given an opportunity to pay off debt to keep your assets.

Dealing with Business Debt Without Filing Bankruptcy

Filing bankruptcy is not your only option when dealing with business debt. Our experienced business debt relief lawyers have helped many small business owners who prefer not to file bankruptcy. Also see: